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Mar312010

I'm robbing the bank, you should too: earning 13.59% through peer-to-peer lending

These days, it's easy to hate the banks. The government has managed them with bailouts and now special taxes, policies that you and I may agree or disagree with but likely have no impact upon. But there is a micro, market-based way to fight the problem: steal their business.

Traditional banks charge exorbitant rates for personal loans, as high as 29%. In the peer-to-peer marketplace, I can undercut the banks by funding loans at far more reasonable rates and still make a nice profit. My current expected returns? 13.59%. After kicking off my $1,000 p2p lending portfolio on Lending Club in early December, I've slowly built up my portfolio over the past few months, periodically adding $500 every couple of weeks until this week when I felt comfortable enough with the platform to drop in the final $2k. My portfolio at a glance:

Through these first few months, there are a few things I've learned....

  1. The process gets faster as you do it more often. The UX of the Lending Club site is pretty great, but takes some getting used to. I started off individually reviewing most of the loans so my first $1k took me several hours to put together. This last $2k took 20 minutes.
  2. That said, the experience all depends on how much time you want to put into it. My approach is fairly hands off. I never ask borrowers questions. In fact, most of the time I find the questions asked by other investors to be too intrusive. It makes no difference to me if the loan is going to finance a surgery or pay for a high-end wedding or consolidate credit cards. Debt-to-income ratio is generally what matters to me as well as the ability of the borrower to compose a sentence. I rely heavily on the titles of the loans, so "Credit Card Consolidation" I'll generally let fly without further review while "sayonara credit!!!" requires a glance at the loan details (and usually a deletion). The investor engagement range from some who tend to ask every potential borrower a litany of questions to my colleague who dropped $15k based solely on clicking the "moderate" button and letting Lending Club compose the portfolio (<1 minute process).
  3. Invest in $25 increments. It is the simplest of diversification options and the basic LC default (unless you try to invest too much money in too few loans). If you invest in phases and end up putting in money more than once in a 2 week period, don't forget to check the box of "Exclude Loans Already Invested In" when you filter the options because otherwise you may end up re-investing in loans. I have $5,000 across 189 loans, averaging nearly exactly $25 per.
  4. Reinvest. Your returns depend on you reinvesting the payments you receive. This does not happen automatically. BUT it is extremely painless thanks to LC's optional notification system:
  5. Don't expect the high end of returns to last. Expect defaults. I do not expect a 13.59% return at the end of this. I understand that most of that is currently projected and that I need to account for defaults. Already, I have 2 loans that are over 60 days late. That said, I still expect over 10%.

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Reader Comments (2)

This is cool, but still requires the work of actively investing. What if I just want to give my money to the bank robber to invest for me? The bank robber could become the middleman banker himself.

April 1, 2010 | Unregistered CommenterTim

Thank you for this report. I have heard of places like this, and it seemed like a good idea, but you are the first reputable writer whose comments I have read. I hope you'll keep us posted in future entries about Lending Club's progress and the outcome of your own investments. It would also be cool if you could profile their competitors to start to give us an industry wide sense of this movement.

April 15, 2010 | Unregistered CommenterJack
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