I wanted to write on a new topic we have not covered before on my blog. This topic is Peer to Peer (P2P) lending. In a nutshell, P2P lending is when you borrow money from many different people on the internet, instead of using a bank, or you invest money to other people who need it and enjoy higher returns than normal in other investment vehicles.
Back in January 2010, I finally dove in and invested $1,000 of my own money in a site called Lending Club. Lending Club seems to be the first company in the P2P lending space who understands all aspects of P2P Lending, from both the borrowing and investing side, and brings them seemlessly together in a simple yet powerful, user friendly way. In this article I want to talk about the way lending club can be used as both a way to earn incredible returns with much less risk than other methods, as well as a way to borrow at lower rates than traditional banks to consolidate debt.
Investing with Lending Club was very simple. I used PayPal for my initial deposit, so it was quick & easy. Within a few minutes I had the money in my Lending Club account and began looking at loans to invest in. I knew I wanted to diversify my risk among as many loans as possible, so if a particular borrower defaulted (did not pay back) their loan then it would not ruin my portfolio return. I invested $50 with some and $25 with others who needed debt consolidation loans to pay off high interest credit card debt. I looked at their profiles first to see if I felt they would be good risks lend my money too. My criteria was to look for people with good credit, at least 680 FICO scores, good jobs with at least 2+ years, preferably 5+ years, and low debt to income ratio below 40% ( ratio of the amount of their payments to the amount of income they report). Over several days I invested in 29 different loans. That was back in January 2010. It is now mid-April and my portfolio is performing great, with a net annualized return of 13.97%. I am very happy and just put more money into Lending Club. If this return can continue I believe this may be one of the most important financial innovations of our lifetime. I believe this because returns on Lending Club are not related to the stock market, real estate, or other asset classes that are volatile and uncertain.
My experience is on the investing side, so I personally have not borrowed from lending club. However, I have several clients and friends who have borrowed using the P2P method on Lending Club and had success. It works great to implement your own “Debt Melt Down” strategy using the Lending Club loan as a consolidation tool to create a margin which then you can use to accelerate pre-payments on the lending club loan and eliminate your debt much quicker. Unfortunately, as of right now Lending Club does not offer debt consolidation loans which include a mortgage, but if they do in the future this will be a huge market for them.
So here’s my reccommendation: If you are an investor and have some cash, even $1,000, go ahead and put it in Lending Club, and prove to yourself that it is a good place to stash a lot of your cash. Over time, if the returns continue, and I believe they will, you will see your money grow and compound, and lets not forget, it’s helping others reach their financial goals the entire time its invested.
The way I see Lending Club most beneficial for a borrower, in relation to my area of expertise which is debt restructuring and consolidation, is for those with high interest debt. You can take credit cards or personal loans that are currently at 18, 20, 25, or 30 percent and get a loan on lending club for 9, 10, 13 percent if you are a good credit borrower with a strong borrowing profile. Once your debt is paid off (the credit cards are paid to a 0 balance) do not close the cards, as that will hurt your credit. Keep the credit cards open and active, but with a $0 or very low balance, and then take all the money you were spending on the credit card debt and throw it all at your Lending Club loan. This is how to Melt Down your debt using a Lending Club loan! Your credit scores will go to through the roof and you will be debt free (at least of your credit cards/high interest debt) in 3 years or less (the maximum term of a Lending Club loan is 3 years or 36 payments). ***Note as of July 2010 the maximum term is now 60 months (5 years)
I hope this article was a help to you and good luck investing or borrowing from Lending Club! I think you will see it is one of the best financial tools available to us in the current economic environment.
Robert Weinberg is one of the nation’s leading experts on debt elimination and credit management. Robert can be reached at 888-456-5635 or by email at RW@YourDebtResource.com. Be sure to check out Robert’s blog at YourDebtResource.com. Don’t forget to sign up for our weekly Debt & Credit Strategies newsletter. Looking for help with your current debt situation? You are encouraged to take part in our Free Debt Analysis.