Earn Above Average Returns with Lending Club

by Kevin on February 23, 2009

I’ll be the first to admit that I was extremely skeptical of Lending Club and Prosper back in the day. These are two giants of the peer-to-peer lending industry.

Peer-to-peer lending is where a large group of people each lend a small amount of money to someone and hope to be paid back. The group essentially acts as a bank for the person.

Why You Might Use Peer-to-Peer Lending

So why would someone skip going to the bank and go straight to a group of strangers? I thought bankers were professionals. (I did too until the credit crisis!)

Here are a few reasons you might want to consider social lending.

You are Interested in Earning High Investment Returns

Let me say up front that this isn’t a risk-free return. You’ve got to stop and think here. “Hmmm, if the real banks won’t lend them money…”

But, earning a high return even after defaults, can be done. Invest wisely in specific loans and watch the money and interest roll in.

After the market crashed last year (and well let’s be honest, has continued to crash this year), some individuals are looking for an alternative to stocks and bonds. And since you will be lending money to prime borrowers (rather than subprime), and stated interest rates up go up to 19.37%… why not give it a shot?

You Can’t Get a Loan Through Traditional Means

For one reason or another your banker friends aren’t willing to extend any funds to you. Your debt-to-income might be too high. You may have bad credit. You don’t have a down payment. The reasons a bank won’t work with you could be numerous. Unfortunately, most of them aren’t very good signs of your credit worthiness. Either way they aren’t interested in helping you out right now.

You Can Get a Lower Rate with Peer-to-Peer Lending

Let’s say you have three maxed out credit cards. Each credit card is charging you between 18-25%. You are unable to make much progress of paying down your debt with a rate that high.

Social lending may be the lifeboat that gets you off your sinking credit ship. Applying and receiving an honest loan, even for a portion of the debt, would result in lower monthly costs for you. If you landed a loan that would knock out all three credit cards, and it was a rate of 12%, you’re still coming out far ahead. Sure you still have debt to pay, but your interest costs are a lot lower. That means more of your payment is going to principle than when you were paying the credit card companies.

You Have a Distinct Interest in Social Lending

You may just be a social lending nut and want to try this new idea out. I’ve read of people with great credit taking out a loan, turning around, and reinvesting that loan in other loans with interest rates higher than the funding loan. This type of arbitrage is very risky in my eyes, but if you pulled it off without any defaults you would end up with a decent return.

My Experience with Lending Club

I opened up a Lending Club account last year after a little prodding from one of the founders. I put $50 into the account and watched for what I considered high quality loans. I wasn’t interested in poor credit situations with high interest rates. I figured I would get burned on that deal long before getting my money back. No thanks.

Instead I waited and found two loans. Coincidentally they are both at 9.76%. I put $25 into each loan and waited for the community to fund the rest of the loan.

Thankfully neither of my loans has missed a payment. As of today I’ve received $14.62 in principle and $3.56 in interest. There is still quite a ways to go to get the rest of my money back — the payments I receive equate to $1.60 per month — but it is positive momentum.

Take Economic Conditions into Consideration

If you haven’t noticed yet, let me fill you in: we’re in a bad economy right now. There are a lot of people losing their homes to foreclosure, a lot of people on unemployment, and a lot of people about to be laid off. There isn’t a lot of rosy economic news out there.

Should you take this information into consideration when you consider peer-to-peer lending? Absolutely. And we’ll talk about that tomorrow.

But for now, go check out Lending Club and let me know what you think. Would you ever consider loaning your money to complete strangers?

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