Lending Club Strategy: 7 Tips for Solid Returns

A lack of strategy is one of the most common problems investors face on Lending Club. Once someone has opened an account and transferred funds over from their bank account, it can be confusing to figure out what to do next. This problem is easy to see in the variety of success that different people experience on Lending Club. Some lenders thrive while others lose money. So what is the difference between the two?

Today we will examine seven important strategies the average investor can use to achieve solid returns on Lending Club.

#1 Diversify Your Account

I know this is mentioned a lot on LendingMemo, but it cannot be emphasized enough. The most important thing you can do to get a great return at Lending Club is to diversify your account in at least 200 notes. In a study I did in February of people invested in 200+ notes, only four out of 3800 lenders lost money. See this chart from Lending Club (source):

LendingClub Returns - All Lenders

As seen above, it is (currently) difficult to lose money in peer to peer lending when we are well diversified.

Already diversified? Another Lending Club strategy is to become further diversified by lending through Prosper as well. I have accounts on both platforms and earn a healthy return on each (see: my 2013 Q4 p2p returns).

#2 Reinvest Your Returns

As our loans get paid back, available cash will begin to build up in our account. Uninvested cash earns no interest, so we have to keep reinvesting it. Lending Club says they should have an automated investment feature by the end of the year, but until that happens it is very important that we establish a rhythm to log into our accounts and reinvest any available cash that has accumulated from loan payments. This rhythm will be different for everybody, but once a week should work fine for most.

Additionally, it helps to do this when Lending Club adds new loans to their platform: 6am, 10am, 2pm, and 6pm PST (pacific standard time). This way you will have the most variety of notes to choose from.

Read more: Cash Drag in Peer to Peer Lending

#3 Open a Lending Club IRA

Roth IRARight up there with the miracle of compound interest is the benefit of tax-free accounts. While peer to peer lenders can lose a good portion of their investment to taxes, Lending Club helpfully offers their lenders the ability to open a self-directed IRA (regular or Roth) or roll over a 401k. Michael over at NickelSteamroller has a great IRA calculator you can use to see the magic in action.

The benefits of a peer to peer IRA are stunning. Say you are 35 years old and open a Lending Club IRA with $5,000, adding just $500 per month that grows at 10% and closing it when you retire at age 65. You would earn $1,074,000. If you used a taxable account all those years and were in a 25% tax bracket, you would only have $664,000.

Read more: Retire Well with a Lending Club IRA.

#4 Filter the Available Loans

Lending Club does a great job denying the riskiest borrowers access to a loan, but we can really help our returns by doing a bit of extra filtering ourselves. Filtering loans is probably the most complicated part of peer to peer lending, but it can easily be worth the extra work. For instance, borrowers with a public record (like a bankruptcy) are generally less likely to pay their loans.

Solid Lending Club filters include:

  • High income
  • Long employment history
  • No public records (bankruptcies)
  • No inquiries
  • Many, many others

Filtering your loans is a skill that we get better at with time. You can learn more through this introduction to filtering, this series on filtering, or by downloading my free p2p lending eBook (15 pages devoted to filtering loans).

#5 Include Low-Grade Loans

Most lenders, including myself, started out safe by investing in A-grade or B-grade loans. However, we eventually realized the benefits of adding riskier low-grade loans to our account. An A-grade loan earns us only 6-9%. Compare this to D through G-grade loans which earn 17-25%. The default rate is certainly higher, but the high interest rate can more than make up for it, especially if we filter the loans beforehand. Of course, the added risk should not be taken on if your investment style needs more safety. For instance, if you are approaching retirement you may want to minimize the number of riskier loans you invest in.

low grade loans

I only invest in E through G-grade loans because I am younger and can take on that risk. So far, that approach has worked well for me (see my portfolio).

Read more: Adding Low-Grace Loans

#6 Resell Your Grace-Period Loans on FOLIOfn

Using a service called FOLIOfn, another solid Lending Club strategy is to resell your loans on a secondary market. Find this option under the Trading Account link.

lending club trading account

We can use the secondary market to get rid of loans that have gone into grace period but are not yet classified as late. Almost all grace period notes resume their payments, so buyers on FOLIOfn are eager to find them if they are discounted enough. If one of your invested notes goes into grace period, try discounting it by 10-15% and listing it on FOLIOfn. While you would lose a portion of your investment, it is much less of a blow to your account than the loan defaulting, whereupon you would lose the note’s entire value.

Read more: Selling Grade-Period Loans on Foliofn

Many active lenders even sell their loans that are 16-30+ days late by listing them at an even steeper discount. Other more passive lenders take a “buy and hold” approach because it is less work. Active versus passive, use whatever approach you find works best.

#7. Stay Updated

Peer to peer lending is still in its infancy. It is amazing how much has happened at Lending Club in the past three months (crossed $3 billion total loans), not to mention the past three years. As a result, this avenue of investment will almost certainly experience some major changes that will impact retail investors like you and me. It is helpful to subscribe to industry sites like Lending Club’s blog and lender sites like LendingMemo.

While the future of p2p lending is unknown, the changes will take us less by surprise if we remain active in the conversation.

[image credit: Stefan Erschwendner "Strategy"/Philip Taylor "Roth IRA" CC-BY 2.0]


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  1. says

    Simon, I started doing all this you are recommending. My main goal was to get rid of any note which turned into a Grace Period. None of the banks want late paying customers neither do I, so when a note changed back to current, I sold it. However, later I found a way to get rid of a note before it turns into a Grace period and thus avoiding a large deal of frustration.
    Thanks a lot for stopping by to my blog too!! Appreciate it!!!

  2. Ajhmom says

    One big negative I discovered AFTER opening my Lending Club IRA is that the bank that holds the actual IRA account charges $150 (!!!!) to close the account, so if I decide to withdraw the money in five years when the loans are all finished, I lose a big chunk of the earnings. Ouch!

  3. Jeff C. says

    Martin wrote, “… later I found a way to get rid of a note before it turns into a Grace period and thus avoiding a large deal of frustration.” Simon, any ideas what he means? Do you mean selling it the note on the 8th or 9th month?

    • says

      Hi Jeff. Martin is referencing what some lenders call “pre-Grace Period” notes. Basically they cruise their holdings for notes that have failed/missed a payment, but are still “Current”. Considering the majority of these notes go into Grace Period soon after, lenders like Martin sell them off for a decent markup because many buyers on the secondary market do not read the descriptions.

      I personally think doing this is unethical and deceptive (plus a lot of work!). If I was Lending Club, I would get rid of the Grace Period status altogether, and simply mark them as Missed Payment or something to that regard.

      • Anthony says

        What is unethical or deceptive about that? It’s using information about the note (also available to the buyer) to make smart investment decisions. If you put the time in to do the research you deserve the reward.

        • says

          This loophole has been closed by Lending Club. Essentially, you used to be able to fake buyers into buying “Current” notes that were actually going late. It was deceptive insofar as the ROI depended upon misleading less aware investors. Perhaps you sleep well at night by garnering income through a practice, but I think it lacks integrity.

          • Anthony says

            In that case I am glad the loophole was closed. In fact, I am sure I fell victim to it more than once when I first began trading on LC. Thanks for explaining.

  4. EB-NC says

    Great post. Especially for beginners like myself. Im a little disappointed to see they don’t allow NC (North Carolina) residents to invest :( — 0r did I misread this. Can you shed some light on this matter or do you have any suggestions. Thank you very much.

  5. Jin says

    I have emergency fund (25k) sitting in savings acct earning very little interest.

    What do you think about using this for P2P lending? My only concern is liquidity but seems there’s trading platform that I can sell my notes if required. Only need emergency fund if I get laid off. I have money set aside for car repair and other smaller emergency and a fat investment account somewhere else.

    • says

      Hi Jin,
      I can’t give tailored advice to your situation, but personally I have invested some of my savings account into peer to peer loans, and have experienced a great return.

    • dw says

      I would recommend NOT putting your emergency fund in LC. While it is a good idea to keep your emergency fund in an account that takes a little effort to access, it would be very difficult to pull funds from LC should you ever have an emergency as it is not a liquid account.

      • says

        Absolutely. Insofar as an emergency fund is concerned, it’s best to not touch that since peer to peer lending is not nearly as liquid as a savings account. However, if the emergency fund is adequate, many investors have preferred to put extra savings to work within a Lending Club investor account.

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