Over the past couple of years, I’ve been talking about peer-to-peer lending. I’ve shared my returns each quarter (see last quarters’), and shared how I go about selecting the loans that I invest in via FolioFN. One thing I haven’t talked about in detail is how to get started with Lending Club. So let’s do that. Let’s talk about how the strategies that you can use to get started with Lending Club.
What is Lending Club
Before we talk about strategy for investing with Lending Club, we need to briefly discuss what Lending Club and other peer-to-peer lenders are. They act as a service for both borrowers and lenders. As an individual, you can apply to get a loan, or you can invest in a loan. If you’re getting a loan, the peer-to- peer lender will vet the loan for risk, and then provide that information, anonymously, to the prospective investors. As an individual, you can also invest in the loans that have been vetted. The borrower then repays their loan just like they would if it were borrowed from a traditional lender (banks, credit unions, etc) and each payment (with interest included) is split out to each of the investors. In short, they make you and the other investor/lenders into the bank. There’s a lot more too it, but that’s the basic rundown. Now, lets talk about three strategies that you can use to get started with Lending Club.
Go Big or Go Home Strategy
There are some people who refuse to do anything on a small scale. You know who you are. If this describes you, this is likely the strategy that you will use. Decide on the percentage of your overall portfolio that peer-to-peer lending will be, then calculate how much of an investment that means you’ll be making. Deposit that amount into your Lending Club account and start investing it into loans. Depending on the size of your deposit, it might still take a little time to get it 100% invested into loans, but you’ve got the full amount in the account and ready to go. As you progress, you’ll also want to make regular deposits that match the % of portfolio that you’ve set for your investment accounts.
Slow and Steady Strategy
Some people really like systems. They like to decide on a path, set the system that will take them down that path and rarely deviate from that system. In this strategy, you still decide what the percentage of your portfolio that your Lending Club account will occupy. But, instead of making one large deposit to assign it, you make several smaller, timed deposits to bring it up to the % of portfolio that you’ve decided on. Each deposit will be invested as you go. Ongoing deposits will likely be larger than they would be with the above strategy because you’ll be increasing the account balance to match the % of portfolio as well as including your amount of new investments.
Get Your Feet Wet Strategy
Some of you are still a bit leery of peer-to-peer investing. You’ve heard that it’s risky. You aren’t sure if it has a future, or, more specifically, if it has a future in your portfolio. Maybe you like investing in high-value stocks and bonds and playing it safe. But, still, you’re tempted. Tempted by the rate of return that I and others are claiming to receive. This is the strategy for you. Instead of selecting a percentage of portfolio like the above two strategies, you want to just get your feet wet a little and test the water. Decide, instead, on an amount of money that you want to use to test the waters. At a minimum, it should probably be something like $125-$250 minimum. That amount will allow you to invest in $25 increments and reduce your risk by having at least 5-10 loans in your account. Using this strategy lets you feel the system out with a minimal amount to lose. Even if you lose it all, it’s not a large percentage of your investments.
Get Started with Lending Club
As investors and stewards of our money, it’s important to find the best way to handle our money. For many of us, that means finding ways to eliminate our debt, earn more, and invest smartly. I’m not a financial adviser. I’m just some guy that likes learning things about money. I share those things, and my thoughts on them here. One of the things that I’ve been using to grow my investment portfolio is Lending Club. I’ve been very happy with the service, and I recommend it.
Which strategy do I use? At this point, I still have significant debt. I happen to believe that investing while you are in debt is not all that smart. So, I’m more focused on my debt than I am on investing. I’m still firmly in the get your feet wet strategy with my investments. In the time I’ve been testing the waters, my portfolio has grown to quite a bit more than the minimum investment I suggest above, but that’s where I started, and that’s the strategy that most closely resembles my usage of Lending Club today.
If you’re thinking about getting started with Lending Club, be smart, know that there are risks, but I don’t think they are as bad as some would claim. Know that, just like stocks, there is a chance that you will lose your entire investment. Just like investing in stocks, that chance is pretty small. I’m not an adviser (that hasn’t changed in the last two paragraphs) so if you’ve still got questions, and want professional advice, I suggest you talk to your adviser first.
I’ve consistently been getting returns on my money of 13-14%. Even in the boom times of online savings accounts, the interest rates weren’t that high. Heck, even if you believe Dave Ramsey and his 12% returns on stock investments claim, it isn’t that high. Getting you feet wet in Lending Club offers a potentially good rate and, I think, is worth a try.
Original Image Credit: Feet by lukasberg, on Flickr