Peer to peer lending has been a hot topic on personal finance blogs for the last year or so. Lots of people are promoting it as a good way to make decent returns on your money – even in a tough economy like we're in (Some might argue that it's because of the hard times we're in that it's becoming a better way to make good interest on your money).
I have stayed out of the social lending market because up until recently my wife and I were still building up 3-6 months of expenses in our emergency fund (actually we're closer to 8 months, we're a bit more conservative than some), and we didn't really have a lot of extra money to put into things Lending Club or Prosper.
We've finally completed our 8 months of expenses, and since we now have a little bit extra discretionary income, I thought I would sign up to use one of the more popular person to person lending services, Lending Club.
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The Idea Behind Peer-To-Peer Lending
For those of you who aren't familiar with P-2-P lending, here is a quick primer of how it works. Sites like Lending Club bring together a large network of borrowers and investors. As an investor/lender you can choose to invest as little as $25 with one borrower, or if you want to invest a larger sum you can spread out your money between a larger number of loans. (You can lend a large amount to one borrower, but it isn't suggested. Better to diversify your holdings. ) As a borrower you can get a loan for up to $25,000 and have that amount lent to you from many different sources. P-2-P lending may allow people who might otherwise not be able to get a traditional bank loan to still fund their business, consolidate debt, or fund a wedding – all while getting a lower interest rate than they might have at a bank or on their credit card.
Peer-to-peer lending isn't without it's downside – and as with many traditional loans there are going to be plenty of people that default on their loans, and don't repay. So you need to take that into account when choosing the loans you want to fund, and looking at the higher interest rates on riskier loans. The higher the interest rate that you'll receive, the more risk you'll take on. Also, Lending Club and other P-2-P sites are not available in all states.
Signing Up For Lending Club
I chose to sign up for Lending Club as my first foray into P-2-P lending because it has a pretty good reputation in the blogosphere, and elsewhere. They also successfully registered with the SEC in 2008, which has given them even more credibility.
Signing up for the Lending Club was a simple process, although it will take you a few days from signing up until you can actually begin lending. Here are the steps to sign up.
- Go to Lending Club web site
- Click on Join Now link at the top right of the screen and complete the application to be a borrower or investor on the screen that comes up. If signing up as an investor don't forget to use the referral code below for $50 free!
- You should receive a confirmation email, in which you'll need to click on a link to confirm your registration.
- Go back to the Lending Club website and login with your new login info.
- Click on the Invest button. Fill in your profile information in order to verify who you are, and to link your bank account to Lending Club. (Lending Club will make two small deposits into your account to verify that you have access to the account).
- Once your bank account is verified, go to the My Account tab, and then choose Add Funds. You'll need to transfer at least $25 to your Lending Club account in order to get started. This may take a few days.
- From My Account tab, click on Invest to start lending money
Once you've finished to process above, you'll be ready to start lending money. This is the fun part – lending money, and making a bit of money in return.
Lending Money With Lending Club
Lending money using Lending Club is actually kind of fun. You get to read about people's situation, find out why they're taking out a loan, and then see if they are in fact a good credit risk. I decided to look mainly at loans that were from borrowers with good credit scores, verified income, and what I considered good reasons for taking out a loan (I'm usually against taking on new debt of most kinds, so I didn't want to fund loans unless they were for people bettering their debt situation, and trying to get out of debt). Since I'm just testing the waters, I decided to invest $100 for now. If I'm happy with the returns and borrower repayment I'll consider investing more in the future.
Originally I was planning on investing my money with my friend Matt over at DebtFreeAdventure.com who is currently repaying a Lending Club loan to consolidate a couple of higher interest credit cards and an auto loan. Unfortunately (for me) his loan was completely funded before my deposit was credited to my LC account. So I had to find other loans to fund. To find borrowers to fund just do the following:
- Click on the Invest tab at the top of the page.
- Enter how much you would like to invest with each loan.
- Hit the Run LendingMatch button to match your lending amount to borrowers.
- If you would like you can increase the amount of risky loans you are willing to take on (and the interest you can make) using the slider on the page.
- When you are done hit the Next button and it will bring back a list of matching loans for you to invest in, based upon your risk tolerance that you've selected.
- If you prefer to select loans manually, you can also do that by selecting the Browse Notes link at the top of the page (this is what I chose to do).
Since I was investing with Lending Club for the first time I decided to manually select the notes that I would be investing in. I didn't want to invest in anything that sounded overly risky, or to invest with anyone that sounded like they weren't very responsible. Since I am only investing $100 to start, it didn't take me very long to find 4 notes to invest $25 in, with people who had good credit scores, and who were either in the A or B credit rating.
Once you have your notes selected you just click on the Invest button, and then confirm your purchase order for those loans, and those amounts. Piece of cake.
Now, I just have to sit back and watch the interest pile up!
Sign Up For Lending Club
I'm going to be charting my experience with Lending Club here on the blog, so stay tuned. If you've been thinking about signing up for an account, now is the perfect time. If you register for a new investor account and click on our link, for a limited time you'll get $25 in your lender account – for free!
OK. Ready to sign Up For Lending Club And Start Investing?
(yes, that is an affiliate link. thanks for signing up through me!)
- Lending Club: My Review of Social Lending (From A Borrower's Perspective)
- Lending Club Peer To Peer Lending (From A Borrower's Perspective Again)
- Intro to Peer To Peer Lending
- How Is Your Lending Club Account Doing?
- P2P Lending Update
- 3 Years of Peer-2-Peer Lending
Have you entered into the peer-to-peer lending arena as a borrower or investor? What has been your experience?