I’m committed to trying several new ways to make money investing in 2015. One way, new to me at least, is Lending Club.
This is a way to make direct loans to individuals by pooling my money with hundreds of other investors – the industry term is Peer to Peer (p2p) lending. This allows me to diversify my private lending portfolio since I have a very small amount invested with any one loan. By small, I mean $25 – $50.
Lending Club isn’t the only direct private lending vehicle but it is one of the biggest and longest running. In addition to making new loans, they are affiliated with a loan trading service (FOLIOfn) that allows me to cash out of any or all of my loans at any time. Prosper is the other major vendor in the direct, pooled loan market. I may experiment with adding a Prosper account later, when I’ve got Lending Club figured out.
I’ve created a custom portfolio mix that (almost) satisfies my purpose for engaging in this activity – double digit annual returns – while allowing their automated portfolio builder to chose loans that fit my allocation.
My first portfolio looks like this:
But, I’m also creating a portfolio of loans I chose myself.
My first experiment is with loans that the borrower says are for business growth or other capital projects instead of debt consolidation (which constitute a very large portion of Lending Club loans). I’m funding those for borrowers with FICOs in the high 600s and 700s who are willing to pay over 15% for the money. I figure these are economically productive ventures that conventional bankers can’t fund. Still, they’re higher risk so I get the higher returns.
I’m legging in – making small, $50 – $100 transfers into the account each week until I get to my first $1,000 invested. Basically, doing it the slow way allows me to see how their system works and see if I want to make any major adjustments before I get in any deeper.
My first loan funded this week and three others are processing. I’m also waiting on my second fund transfer to process – this seems to take a long time – a request made on Monday isn’t available to use until Friday. I’m thinking maybe I should put a weekly transfer on automatic since I don’t want to have to remember to sign-in and do that every week.
Lending Club can also set you up for investing in notes in an IRA account. I’m not sure if I’ll transfer some of my IRA money or not. On the plus-side, you don’t have to mess with the extra tax reporting a p2p account entails but, if it’s in a standard IRA I’ll pay regular income taxes on the earnings when I withdraw (no offset for writ-offs). If I use some of my Roth IRA money, the earnings will be tax-free and I won’t have to do any extra tax forms. Unfortunately, I’m limited in the amount of new money I can put in IRAs so I’d need to sell my current holdings to get cash to invest in LC.
I did quite a bit of research before starting this program, so, if you’d like to find out more, I recommend these sites:
Thanks first to MrMoneyMustache.com for introducing me to this opportunity. MMM is a 40ish “retired” guy who focuses on living solely off his investment returns. His LC results tracking is at: http://www.mrmoneymustache.com/the-lending-club-experiment/
Peter Renton at LendAcademy.com has several years worth of personal experience documented along with thousands of comments from other lenders (he covers borrowing too). A good place to start (and find links to other useful p2p sites) is his write up on the risks of p2p lending at:
I’ll be making some periodic updates in blog posts as I get rolling with p2p lending – if you’ve got any experiences or questions about peer-to-peer lending, please post a comment below!
Live Long and Prosper,
Leah, the MoneyDiva.com
APRIL 2105 update:
So far, so good! I stalled out after putting in an initial $300 and investing in 12 loans at $25 each. If my 17.6% ROI holds up, I’ll want to put a whole lot more in!
My biggest concern is the tax related accounting – I hear it’s convoluted. I could avoid that by making this a ROTH IRA account and never pay taxes on the earnings! Since I’m only a few years away from being able to withdraw money from my IRAs without paying the 10% penalty, that’s a viable option for me.