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):
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
Right 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.
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.
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.