Inspired by this Bloomberg article, I’ve decided to give peer-to-peer lending a try. For those who don’t know, peer-to-peer lending connects borrowers with investors who lend money at a lower interest rates, allowing people to bypass financial institutions.
If you think about it, peer-to-peer lending is a great tool for middle-class to help other middle-class households (or upper-middle helping others since investors are required to have a above average income or at least $200,000 – $250,000 in savings). Anyway, it’s a win-win situation. You cut out the middle man. The borrower can use the money to fund anything from medical procedures to loan consolidations and benefits from a lower interest rate, especially if they have good credit. A regular person has the opportunity to make money as a lender if the borrower does not default on the loan.
I figure I could start small ($2,000) and consider it “fun” money with a good chance to make more than the measly 1% interest from my savings account.
There are two ways to invest — automatic or manual. Automatic is easier but I want to try my hand at manually selecting loans to finance. Lending Club (and Prosper) gives each loan a grade based on the borrower’s credit score and other indicators of credit risk from their credit report and loan application. All loans have either a 36- or 60-month term, with fixed interest rates and equal payments.
I’m exposing my naivete when I say that I did very little research before signing up for Lending Club. Maybe I should have read this article first? For example, I thought there would be a lot more information about the borrower and their needs, sort of like a Go Fund Me Page with pictures and back story. I’m also not sure how taxes will affect my returns.
It will take a while to see if this type of investing will pay off but it’s an interesting gamble.