I‘ve been investing in Lending Club for a couple of years now, and so far I’ve been extremely happy with the returns that I've seen. I’ve bee getting a good return on my money, more than I would get in a high yield savings account, while at the same time helping others to get loans at lower rates than they might have otherwise been able to obtain. It's a great way to consolidate higher interest debt. If you were to ask me, I think peer-to-peer lending is here for the long haul.
I haven’t done an update for a few months to talk about how my investments at Lending Club are doing, so today I thought I would do an update on the returns I’m now seeing since I've started taking on riskier loans (non A or B grade loans).
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Lending Club Returns Improving
So here’s a quick look at my numbers that I'm seeing.
- My Net Annualized Return is 9.64%: Up from 9.57% last month, that number puts me in the 42nd percentile. That means my return is higher than 42% and lower than 58% of all investors. I’m slowly improving on this by diversifying into some higher rate loans.
- Zero defaults: I do currently have one loan in 31-120 day grace period, and it is the second time for this loan. The loan originally started out as an A grade investor with a credit score over 750. If you look at the borrower’s credit score now, it has dropped drastically. This late loan may end up being my first default in 2 years, but the borrower does seem to be making an effort to stay in touch.
- Five loans have been paid off early over the last year: Three were A grade loans, and the other two were C grade loans.
- My account balance has continued to increase as I become more comfortable with using Lending Club as part of my investing strategy. I currently have $1787.35 in my account, and I’m slowly adding more most months.
- I’m still diversified by investing across a large number of loans with no more than $25 in each loan. That way if I do have defaults, while my return may go down, my risk will be minimized.
While my returns thus far have been pretty decent, I know I can do better. If you look at where I land, I'm squarely in the middle of the pack for the returns I'm seeing, so there is plenty of room for improvement. How you might ask? By investing in lower graded loans, but only ones that don't seem to be as much risk as you might think based on their grade.
Investing In Low Grade Loans
I recently read several posts by Matt at steadfastfinances.com who had started investing in lower grade borrowers who he deemed to be acceptable risks. The loans he chose were Grade C or D for the most part, and while their credit scores weren't necessarily the best, Matt felt that they were acceptable investment risks because they all had good professions, solid job history and security, and good payment histories. On a recent post he discussed his strategy.
Over the past two to three months, I’ve shifted my risk to Grade C notes and higher. This is perceived to be higher risk based on the borrowers FICO score, however, I would argue the risk of many of these higher credit risk loan applicants is less than or equal to Grade A & B loan applicants simply based on their profession, job history, job security, payment histories, etc. My theory is those who keep their jobs, and have a solid history of repaying their debts, will repay their Lending Club loan.
So far the strategy has worked well for him.
Over the last couple of months I've been testing the waters with this strategy to see if I can get my net annualized return up above 11-12% based off of his suggestions in his Lending Club investing club. So far I've chosen another 10-15 loans based off of his suggestions, and my returns are slowly rising. Nowhere near the 11-12 pecent I am aiming for, but they are going up. Who knows, maybe one day I'll be near the 15.03% Matt is currently seeing.
Here’s where my NAR stands now, slightly below average. I hope to move up a couple of columns there:
Lending Club Strategy
My strategy I used in the past for Lending Club, and the strategy I’ll still be using to some degree:
- Less than $10,000: I believe I’ll still be sticking with mostly loans below $10,000. Lower amounts mean higher likelihood of payback of the loan.
- A & B credit rating: This is where I'm straying a bit, accepting loans for borrowers with poor FICO scores, but otherwise good histories and employment situations.
- Zero delinquencies: Again, I may fudge slightly on this one, but I still want it to be very few or zero delinquencies.
- Debt to income ratio below 20-25%: I like to invest in loans where the borrowers have a lower DTI ratio. I’ll try to keep this as is.
- Loans over 60% funded: When other people have invested in the loan, a lot of the times that means that they’re a better risk because others have done their due diligence and agreed to invest. Not always the case though so be careful.
- Borrower answers to investor questions: I like to ask questions from potential borrowers. You can tell a lot about someone, and about how they’ll do repaying the loan, by how they answer the questions.
So that's the basic strategy that I'm using to invest in Lending Club right now. What strategy are you using to invest? I'm curious to know what is and isn't working for all of my readers.
Not ready to invest, but looking to consolidate debt or pay off a high interest credit card? You might want to consider borrowing from Lending Club. Check out my post on borrowing from Lending Club.
So where do you think my new Lending Club investing philosophy will take me? Will it lead to better returns, or will it mean more defaults and higher risk? Tell me your thoughts in the comments -and tell us about your own experience with Lending Club!