I've had my eye on peer to peer lending site www.lendingclub.com for a while and decided to start an account after reading a recent post at the Mr. Money Mustache blog. I'm sure most of you guys have heard of this before so I'm not going to get into the details of what it is. If not check out the website, it's quite a novel idea. I'm starting with the bare minimum $250 to open the account and might deposit more if it turns out to be a good investment.
The biggest risks I see at Lending Club:
-Risk of individual notes defaulting.
-LC itself going into bankruptcy.
To try to minimize these risks I'm going to only have a small sum in the account which will be spread out between as many loans as possible. The smallest loan amount is $25 so I'll start with 10 notes and see how that goes. The risk of individual notes defaulting is probably not as bad as it seems. For starters you can screen for certain characteristics that should help to weed out potential deadbeats. It's like using a stock screener. Not only that, but when you receive payments you are getting interest plus part of the principal back. Assuming the borrower makes at least one payment, the loss won't be 100%. The average default rate for the types of loans I'm looking at is 3-4%. I'm hoping my screens will give me better results.
I like the way LC is setup and the yield potential is very high. I'm going to concentrate on the "B-D" rated loans where I should be able to collect at least a 10% yield if everything goes as planned. My screen is pretty strict and consequently I wasn't able to immediately find 10 notes that fit my criteria. That's okay, I don't mind checking back every few days to see if something new is available. So far I have the following notes: B5 (14.09% interest) / C1 (14.33%) / C2 (15.31%).
I'll cross my fingers and see how this plays out. If nothing else I'm helping real people and it's entertaining!