After much wasted time, I have kicked my butt into gear to accomplish one of my 2013 goals by creating a Lending Club account and deploying my initial investment capital to a variety of U.S. borrowers. I have been very intrigued by the business model of Peer-to-Peer lending where individual investors have the ability to loan directly to borrowers while having an abundance of tools and data to sort and filter which ones provide the best fit based on extensive criteria. Or, for the less hands-on approach, investors may select a loan portfolio based upon their risk tolerance and desire for yield and have Lending Club automatically select and generate a portfolio. Essentially, in P2P lending, investors cut out the credit card companies from their lucrative cash cow business.
For investors, this provides an investment vehicle with the potential for attractive returns and the ability to diversify portfolios from the standard investment instruments available. Borrowers can obtain lower rates than those offered by the credit card companies to consolidate debt, borrow money for a Jaguar, pay for a swimming pool home improvement, or fund an extravagant wedding. I tend to focus on the credit card and debt consolidation folks over those looking to add an infinity pool at their highly leveraged beach house, but to each his own. Lending club takes a commission from both the investors and borrowers to fund their operation.
I sought to create a Lending Club account for one of my 2013 investment goals due to the current economic environment. For savers such as myself, the current economic climate stinks; savers are punished with zero yield available for traditional stable investments such as CD’s, money markets, and treasury bonds. Meanwhile the bond market looks like a sucker’s bet right now with. Record low interest rates loom like icebergs in the dark Arctic Sea as interest rates will inevitably rise from their rock bottom current rates. As the rates rise, the par value of these bonds will plummet as investors flee to the newer bonds issued with higher interest rates. I prefer to avoid that trap as the guy trying to stomp out the flaming brown bag of dog turds from their certain smelly fate.
In light of these challenging circumstances created by Bernake and company’s maneuvering, my eyes have been opened to the wonderful world of the Lending Club. Currently, I have around 20-25% of my net worth tied up in stagnant savings and money market accounts. I like to maintain ample dry powder in the form of cash savings to deploy onto juicy bargain shopping investing opportunities when Mr. Market provides them. Also, maintaining a cash stockpile is helpful in managing portfolio and net worth volatility. However, the prospect of earning $100 yearly interest on $60,000 savings is depressing. In years past, I would create CD ladders with these funds to obtain 3-5% interest rates while still maintaining liquidity. Given the current environment, Lending Club provides a great option to both boost the yield on my savings and diversify my investment portfolio which is mainly just stocks and cash at this juncture
I have been excited about LC after reading about the experiences of personal finance bloggers, Mr. Money Mustache and Mr. 1500 over at 1500 days to Freedom. Here is my current LC plan:
- Start small with a 3k investment and add incrementally to about 5% of my net worth (~15k)
- Eventually reach the 800 note threshold where LC advocates as the golden mark for the number of loans where the fluctuations of defaults smooth out and small sample size is eliminated. This leads to >95% chance of positive returns
- Filter and select my loans based upon past LC data. Thanks to Mr. 1500’s informative post and recommendation to use the Nickel Steamroller site to mine the past history of LC loans to establish my criteria for selecting loans.
- Hand select the notes individually at the $25 minimum loan increments to diversify and minimize chance of default
- Re-invest both capital and interest payments until my account reaches the 10% of net worth cap that LC advises investors to stay below.
There is a caveat in that the language on LC’s website looks foreboding in case of LC bankruptcy. But, from what I’ve read, LC has loads of venture capital funding, and the business is booming exponentially. As this format grows more popular, LC will receive more lucrative commissions and hopefully be able to use their existing infrastructure and keep their costs down while the revenues skyrocket to minimize this chance. But, just wanted to throw it out there as a buyer beware. I am thrilled with this opportunity thus far and have enjoyed the ease of use and interface on the LC website. I will post periodic updates on the status and performance of this new investment option.