While thousands of investors continue to earn great returns at Lending Club and Prosper, the bulk of the country has yet to even hear about it. This is slowly changing as seen in the greater frequency of peer to peer lending being mentioned (Forbes) in major news outlets. And the potential Lending Club IPO (FT.com) may also bring greater awareness. It seems more and more people each day are becoming curious about this new and exciting way to invest.
That said, there is a definite “leap of faith” involved when going from being interested in peer to peer lending to actually investing in it with your own money. For most Americans (typically people in their later years), registering personal information on an unfamiliar website and portioning it with thousands of dollars in trial cash is a fairly large pill to swallow.
To help these prospective investors, I have broken down the average registration and investment process below. Keep in mind that these are simply the basic steps to get a feel for this investment. If you are trying to understand peer to peer lending for the first time, you should instead watch LendingMemo’s video course or read my ebook. On the other hand, if you already have a good feel for peer to peer lending, you may want to forego the 80 A-grade notes and instead invest $5,000 within 200+ loans of your liking.
Note: this article shows the process via Lending Club. However, the process is generally the same on the other equally-deserving platform, Prosper. On Prosper, you would invest $2,000 in their safest grade: AA loans.
5 Steps for a P2P Lending Trial Investment
Step 1: Open an account (free)
The first step is simply to open an investor account with Lending Club (link).
Overall, the application form is very simple and easy to fill out, requiring you to provide typical information like your name, address, and social security number.
You have to provide a few extra pieces of information, including:
- Your state of residence: many states are not yet open to peer to peer lending (like Ohio or Texas).
- Regular or retirement account: retirement accounts (like a Roth IRA) have a different application than regular/taxable accounts. Read: the benefits of a p2p IRA. That said, most people only commit to something like an IRA once they have gotten a feel for this asset class via a regular account.
Step 2: Log in to your account
Once you have completed the application, you can log in using your email address and password. Once logged in, you will see the Account Summary screen below. Next it’s time to connect your bank through the Bank Account link.
Step 3: Connect bank account and add funds to invest
On the Bank Account page you can connect your checking or savings account to Lending Club. Once this is complete, go to the Transfer link and move some money into your account.
Important: the amount you choose to invest will vary by individual, but should be at least $2,000. This will allow you to diversify in 80 lower-risk A-grade notes (80+ notes at $25 per note = $2K). If you want to make a trial investment across all the grades, you will need to transfer over at least $5,000. This will allow diversification across the entire risk spectrum (200+ notes at $25 per note). Further reading: my simple and advanced article on diversifying your p2p account.
Step 4: Invest $25 in 80+ A-grade notes (AA-grade on Prosper)
Now comes the big moment. If you have at least $2,000 in available cash, click the link for Browse Notes. A large list of available loans will appear on your screen. You are going to invest in a $25 note (or portion) within 80 of these loans.
To find A-grade loans, you will need to sort the available loans by clicking the Rate column. This will cause all the safest A-grade notes (dark blue in color) to appear on your screen. You may want to click the dragdown menu (see right) and select for 250 loans to appear on your screen. Now simply check 80 of these A-grade notes (making sure to invest just $25 in each) and click the blue Add to Order button above. You will now be able to review your order on the View Order page.
If everything is to your liking, you can click Continue to come to the Place Order screen.
Clicking the Place Order button will invest your funds into these loans.
Investing Note 1 – This may take a few days: There may not be 80 A-grade loans available on the platform. When writing this article, there were actually just 58 available. If you do not find 80 A-grade loans (likely), you may need to log back in across a few different days until all your cash is put to work.
Investing Note 2 – Ignore loan descriptions: You can see each loan’s description (borrower profile, credit history, etc.) by clicking on it.
These descriptions, while interesting to read, are unimportant for most beginner investors. This is because all the loans at sites like Lending Club and Prosper are underwritten, meaning each loan has already been filtered by the platforms themselves, so every loan is already likely to be a good investment (particularly A-grade loans). Sometime in the future, you may want to try increasing your returns through filtering your invested loans by different criteria for a marginal performance bump (IE: lending to borrowers with a large annual income). But for now, consider all A-grade loans to be exactly what Lending Club says they are: safer, lower-risk, top-grade investments that can be counted on for a consistent return.
That said, it is a great idea for beginners to read these loan specifics, not to increase returns, but to get a feel for the asset class, to get a feel for these borrowers and for peer to peer lending in general.
Investing Note 3 – With $5,000 or more you can invest in lots of grades: This article emphasizes that you need 80 A-grade notes for a diversified peer to peer lending account. This means a minimum of $2,000 (80*$25=$2K). However, with $5,000+ you can invest in 200 notes (200*$25=$5K) across lots of grades – the safer A-grades through the riskier G-grade loans. Read my article on the relationship of diversification and risk. With $10K, you can bump your note value up to $50 (200*$50=$10K) or $100 notes with $20K. In summary, the most important thing here is diversifying in 200 notes, no matter how large they are.
Step 5 – Reinvest returns
Once this initial deposit is completely invested and 30 days has passed, your borrowers will begin making payments on their loans. These repayments will begin to flow into your account as available cash, and it is your responsibility to invest this cash into additional notes. You can do this by (1) logging in a few times throughout the month to put your cash to work in more A-grade loans, or (2) setting up Automated Investing to do this for you (minimum account $2,500; see picture below). Note: in Automated Investing, be sure to place 100% of your investment in A-grade loans.
Alternatively, you could simply move repayments back into your bank account through the Transfer link. Whatever the case, try and keep available cash as low as possible. Cash drag can be a major factor in lowering your overall return (read more here).
Feel Comfortable with Peer to Peer Lending
The goal of putting a smaller amount like $2,000 to work at a place like Lending Club or Prosper is that this trial investment will allow you to experience 90% of the p2p investor process. You will not interact with loan grades or IRA investing, but you will get a feel for what this entire investment is all about – the large scale lending of money to people over the internet. In short, it will simply help you get acquainted (and even earn you a respectable return in the meantime).
Once you feel comfortable with the safer loan grades, you may want to explore adding additional risk (lower loan grades) so as to boost your overall return. For instance, Jack’s reader story shows an investor who began with safer loans, but eventually added additional risk and found these investments to be even more appealing:
“After one year I switched my strategy to loan grades of C and below, since it seemed people were getting better returns in these riskier loans without a large increase in defaults. On Lending Club I went from an 8% to almost a 10% return in the past 18 months by switching to this strategy.” – Jack (source)
There are actually a lot of ways for investors to increase their returns (see six of them), but many first need to just feel comfortable with this entire thing. If this is the case for you, investing in 80+ A-grade notes should do the trick.
My hope is that you will discover this overall investment to be a peaceful and lucrative way to put your extra money to work, that you will make it part of your life as it has become a part of mine.
[image credit: Felix Montino “Backflip into 4°” CC-BY 2.0]