As an investor, I prefer to invest in assets that have some kind of income potential. For this reason I am what most would call a “buy and hold forever” investor. As a result, I am always interested in assets that produce returns above the minimum benchmark set by 30 year government bonds (which today is pretty darn low at around 3% to 4%). Recently I was introduce to Lending Club, a peer-to-peer lending service that matches borrowers with investors. According to the site, average returns are between 6% and 20%! I’ve been investing with LendingClub for over 3 months now and I can personally tell you that I am getting around 16.5% returns.

Reduce Your Risk by Sharing Loans With Other Investors

LendingClub works by enabling the investor to spread their risk across literally thousands of loans. Instead of lending all of your money to a single person, the investor contributes a minimum of $25 to a loan along with potentially hundreds (even thousands) of other investors. If that borrower defaults, the investor has only $25 of principal at risk.

Using Grade to Assess Risk vs. Return

To further manage risk, LendingClub does an excellent job of pre-qualifying borrowers and providing the investor with key metrics to help them assess the level of risk for a particular borrower. Based on their credit score each loan application (or note as it is called by LendingClub) is rated A through G. This gives the investor a quick indicator of the risk of the loan as it is determined by LendingClub as well as an indicator of the interest rate for the note. “A” rated loans are considered to be the least risky and correspondingly have the lowest interest rates (a little over 6%). Conversely, “G” rated notes are the most risky and can return over 20% in interest.

My Investment Strategy

My "Low Risk" Portfolio

My strategy has been to create two portfolios each with a different investment strategy.  The first portfolio is creatively called “Low Risk Portfolio” and focuses primarily on “C” rated notes (see graph on right).

I originally invested $2,875 in this portfolio; spread across 115 notes.  Of these notes, all are current and have had no late payments.  In fact, 3 of the notes have already been fully paid back early (not great from an investment POV, but better than to experience a default).  The weighted average interest rate for this portfolio is 11.86% and I am seeing an actual return of around 10%.

The best part, is that I’ve already reinvested proceeds from current notes to add two new notes to this portfolio effectively creating what I hope to be a compounding effect over time, thereby increasing my overall Return on Investment (ROI).

My "High Risk" Portfolio

My second portfolio is for my “High Risk” notes (e.g. D through G).  The weighted average interest rate for this portfolio is 19.85% and I’m seeing an actual return of about 19.35%.  The returns are much better in this portfolio, but I’ve also started to see 2 notes move into a “Late” status.  A “Late” status isn’t a guarantee of default but I’d be surprised if this isn’t because in both cases, the borrower has yet to make even a single payment!

How I Select A Note to Invest In …

To get the most risk protection, you will need to spread your investments across as many loans as possible. Given that the minimum amount you can invest is $25, putting as little as $5,000 means that you need to select over 200 notes!

Luckily LendingClub makes this process as easy as possible with its search criteria and screening tools. Here is how I use them:

First off I decide which portfolio I want to select a note for. If its my “Low Risk” Portfolio, for example I will select to only include “B” and “C” grade notes. I then sort the results based on the “% Funded”. The reason for this is that I want my investment put to work as soon as possible; and funds that have higher percentages funded will get start producing returns sooner. I tend to prefer smaller loan amounts (around $15,000) over larger loans ($25,000+) but I’ll invest in a larger loan pool if the credit score is good and the borrower doesn’t have a large existing DTI (Debt-to-Income) ratio (under 15%).

The Final Word …

I am very pleased with my results so far using LendingClub. I have only put $5,000 into the experiment but if returns prove to be steady for the rest of this year, I would easily consider putting more of my money to work with LendingClub. In particular, if this year works out well, I may create an IRA next year with LendingClub and invest in notes “tax free”.