In this video we will discuss the pros and cons of different ways to invest with Lending Club.
This is video 5 of a 6 video p2p Lending Series. Click here for the other free videos.
There are three basic ways to invest with Lending Club
1) You can choose to research and purchase individual notes. A note is a piece of a loan. Loans are broken up into notes of $25 increments. This method will be the subject of another video.
2) You can use the Portfolio Builder Tool to invest in notes with a certain “credit ratings”.
3) You can use Lending Club’s “Prime” service to invest in loans. This is similar to the peer to peer investing portfolio builder tool, accept that it reinvests your funds as existing notes are paid.
For most investors, using the Portfolio Builder Tool or the Prime Service to investing in peer loans will be the best option from a time and effort standpoint.
Why you should use Lending Club’s portfolio builder tool or “prime” service?
One of the major problems with investing in peer loans is diversification. You should minimize peer to peer lending risks by diversifying among at least 40 loans, ideally 200. The less loans that you have, the more likely you will have a terrible return because of one default. For example, if you invest in 10 loans and one defaults immediately, then you would have a 10% loss. While, having more loans will not protect you from some borrowers not paying their loans, it does provide protection against “bad luck”.
Putting together a peer 2 peer lending portfolio is very time consuming. However, the Lending Club has a portfolio builder tool that allows you to do this with a couple of clicks. You can use this option for any amount of money in $25 increments.
Lending Club’s Portfolio Builder Tool
To use this feature you must be logged into an account, click on the “Invest” navigation In the upper right hand corner there will be a box which you should type in the amount that you wish to invest.
You have three default options, “Conservative”, “Moderate” and “Aggressive”:
- Conservative, option 1, will focus on notes with an average credit rating of B.
- Moderate, option 2, will focus on notes with with an average credit rating of C
- Aggressive, option 3, will focus on notes with an average credit rating of E.
The portfolio builder feature is free. However, its not automatic. As you receive payments, you will need to manually use the portfolio builder feature to re-invest. To avoid having idle funds, you should use the Portfolio Builder tool at least once per month. If you only use it once per year, your expected peer to peer returns could be 15% lower.
The portfolio builder service will show you a variety of loans that meet your criteria. You will have need to approve the selected loans and the investment amount. However, to accept the selection only takes a couple of clicks.
The Prime Service has the follow three important characteristics:
- Prime Automatically Reinvests Funds As Borrowers Pay Back Loans
- Provides Tremendous Control Over The Type Of Notes You Purchase
- Has Fee of 0.80% annual and $25,000 Account Minimum
If you do not want idle cash to pile your your account and earn zero interest, this tool is very helpful. You are able to give detailed instructions about the type of notes that you want to buy. For example, I could given an instruction to buy notes from borrowers that have no recent delinquencies paying bills. The only downside to this service is that there is a service charge of just under 1% and the minimum account size is $25,000. However, if you may be able to get Lending Club to provide this service for free when you have account with more than $100,000.
Portfolio Builder Or Prime?
Both the Portfolio Builder and the Prime service are excellent tools that enable you to diversify your lending among multiple borrowers.
If you are able to spend 20 minutes once per month, I would recommend that you use the Portfolio builder tool.
If not and you plan to have $25,000 to invest, the prime program is a good choice.
To open an account with Lending Club please click on the link below.