Lending Club Investing

Many novice investors are just trying to understand the basics, so I have put together this post on the fundamentals of Lending Club investing.

 

Let's start by looking at what Lending Club does. Lending Club lends money to individuals for personal loans. Most of these loans are used by the borrower to pay off credit cards or refinance other debt. Other reasons include a major purchase, buying a home, starting a small business or taking a vacation. Personal loans are different that home and auto loans because there is no collateral. This means that, if the loan is not paid back, there is no car or property that the lender can take. This fact makes personal loans riskier than home or auto loans.

 

Lending Club does all of the work when it comes to attracting borrowers, processing loan applications,  providing the money to approved borrowers, and receiving payments. Investors simply supply the money that Lending Club gives to the borrowers.

 

Investors are provided with information about every loan and they select the loans they want to invest in. The minimum investment is $25 and it is recommended that investors spread their money out over at least 100 different loans. This helps minimize losses of a larger than expected number of loans are not repaid.

 

There is a lot of information provided to investors. In fact, over 75 different pieces of information are available for review. This includes credit score, annual income, mortgage/renter, late payments on other debt, debt to income ratio, bankruptcies, reason for taking the loan, length of employment and much more. It can be overwhelming, so it is important that new investors research peer to peer lending investing and educate themselves before they start buying loans. Find out how much you can make with peer lending. 

 

Investors can pick loans by looking at all of the information for each loan, or they can use the auto-invest feature. This feature allows the investor to set specific criteria and then let Lending Club automatically find loans that meet those criteria and make the investment. The auto-invest tool is very popular; however, there is a limited number of data elements that can be applied in the criteria. Therefore, professional investors review loans individually, or have computer programs that do extensive analysis.

 

The goal of every investor is to pick loans that will be paid in full. This is hard to do, in part because the best loans (in the opinion of the professional investors) get sold out very quickly. At any given time, the loans available to investors will include a lot that have been picked over and rejected. New investors need to understand that not all loans have the same likelihood of being repaid, so knowing how to select loans (or set criteria for automated investing) is vital to making money.

 

When borrowers make payments on their loans, the individual investors each receive a portion of that payment in their accounts. This includes interest, as well as a small portion of the loan principle. Investors can withdrawal this money from their account, or use it to invest in more loans.

 

That is the basics of what it means to invest in peer to peer loans. This can be a worthwhile (and fun) experience although it does require some knowledge and education. The old saying "Look before you leap" certainly applies here!

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