Since the closing of Pertuity Direct, I made my first move back into the domestic p2p lending market this weekend, opening a Lending Club account with a friend. Our goal is to earn a healthy and stable return of around 10% with minimum monitoring required and full transparency of the status of our investments at all times.
My approach was first to use LendingMatch, their automated tool, to give me a decent, diversified base portfolio. [On a design note, the user interface of LendingMatch is extraordinary; it ranks up there with Etsy as among the most fun and intuitive browsing and selecting tools]
I selected three filters:
- $1,000 total investment
- Target return (after accounting for expected default and the service fee) of 11%
- No delinquencies in previous 2 years
There were certain other filters that I wanted to choose—notes that were both approved by the Lending Club credit team and where the individuals had their income verified—but they too restricted the portfolio, bringing me down to only a handful of notes, so I let them go.
This search gave me 32 notes to compare. I went through them individually to eliminate certain notes that failed in certain less scientific ways:
- Inability to spell (especially in the case of the two word loan title, e.g. “Debt Consoalidaton”)
- Bad business ideas (e.g., fixing up and flipping houses in a depressed housing market)
- Failure to adequately answer questions asked by other lenders
At this point, my portfolio was a bit more aggressive than expected. Lending Club rates their notes from A (less risky) to G (more risky) and I had no A or B loans and an excessive number of F and G loans. I filled in with more A and B loans, filtering for verified income, which obviously brought my expected return down a bit, but I was more comfortable with the final result, summarized here:
The historical default for this blend is about 3.5%, plus the fee of about 0.7%, so my final expected rate of return is between 10 and 11%. My plan is to continue to expand this portfolio to $5,000. I was actually prepared to invest all that at once, but there are simply not enough notes on the site to create my desired portfolio at that scale. Rob at Lending Club indicated to me last month that the company is focusing on attracting additional borrowers. Now I fully understand why a sufficient number of borrowers is so crucial to taking p2p lending mainstream; while it remains hard to invest a significant amount of money, Lending Club’s reach is limited.
The company’s customer service remains stellar. When I experienced a technical issue, I Twitter DMed @RobGarciaSJ, their Senior Product Strategist, who wrote back nearly immediately. A colleague who is also looking at opening an account shared with me several e-mail exchanges he had with one of their VPs, all answered in great detail within a few hours. Through those emails I learned that Lending Club is allowing accounts to be opened on behalf of dependents. My colleague is looking for a way for his kids’ savings accounts to earn more than 0.5% interest and thinks Lending Club may be a good option.
I’m looking forward to expanding my Lending Club portfolio as the company grows and tracking how it is going here. With expectations of a 10% return, warnings of “if it sounds too good to be true, it is” ring in my ears, but I remain optimistic that p2p lending is simply offering a simpler, better investment opportunity. It’s one I’m willing to bet on.