Would I Lend To You?

I’m having fun playing banker at Lending Club. It’s early in the game but I enjoy seeing the tiny returns I’m getting via interest. Right now, my Adjusted Net Annualized Return is 7.97%.  I only lend to borrowers with A or B ratings, and this is definitely better than the measly interest in my savings account.

I don’t use the automatic investing option because I have my own quirky set of criteria for choosing lenders, that may change depending on my mood.

1) Borrower Rating: A or B only. I’m not looking for double digit gains so I’m staying safe with lower-risk borrowers

2) Reason for Loan: Credit card or Loan consolidation, maybe Medical. I do not lend to people who want money for a big purchase, home purchase, or vacation. You should know better than to borrow money for a vacation!  I will fund for medical because I’m soft-hearted.

3) Years on the Job: At least 5. I know that in this day/age/economy, staying on a job for 5 years isn’t necessarily a measure of financial stability. However, I still feel more comfortable lending to someone who has job security.

4) Term: 36 months. I prefer borrowers who intend to pay off their loans in 36 months, vs. 60 months.  My unqualified and financially unsound reason is that I feel that someone who wants to pay off in 36 months is more determined.

5) Debt To Income Ratio: I haven’t quite decided on a criteria but lower is better.

6) Loan Amount: Up to $25,000

7) Geography: Preferably NOT in the South, which I read has a higher loan default rate. I’m also careful about California.

8) Profession: I do not fund people who are owners, self-employed, or president/CEO. It’s very easy to give yourself a title while running a bad business. I have a slight preference for people who work in engineering/I.T.

9) Number of Delinquencies – no more than 1, preferably 0

We’ll see how my unscientifically proven lending criteria does in the long run. If you’re doing peer-to-peer lending, care to share your winning formula?

Lend You My Money

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.

Lending-Club-NYSEIf 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.