Steadfast FinancesMy Plan to Beat the Lending Club, Peer-to-Peer Investing Average

My Plan to Beat the Lending Club, Peer-to-Peer Investing Average

Filed in Investing 101 , Peer to Peer Lending 62 comments

~ ~ ~ April 2011 Update: Shutting Down My Lending Club Investments over Q&A Change ~ ~ ~

~ ~ ~ December 2010 Update: Earning 15.6% NAR on Lending Club investment portfolio ~ ~ ~


Growing up, most kids I knew wanted to be an astronaut or play in the NFL. Always being one to go against the flow, as well as being a killer Monopoly player, I always wanted to be a banker.

I’m aware it’s an odd admission, but for some reason, the idea of using money as a means of making more money always seemed to appeal to me. When most people think about making money (at least in my experience), they think about starting their own small business or maybe making widgets out of their garage in their spare time. Not me. I always wanted to be a landlord and/or loan people money.

Over the years, I’ve made a few financial moves to make that happen (e.g. owned a rental property, became an active investor, etc), but there really wasn’t a viable (or legal) way for the Everyday Joe to receive the same ROI as traditional lending institutions like Bank of America or JP Morgan. Until now!

I’ve been flirting with the idea of Peer-to-Peer Lending for a while now, but due to the recession, I held off for fear of having too many loans go into default and lose a substantial percentage of my capital. After watching Beat the Average (a webinar with Scott Langmack of and Patrick Gannon of Lending Club), I decided to push ahead and slowly begin investing in a small number of P2P loans since only 4% of prime borrowers (credit score >650) defaulted on their loans during the 2008-2009 recession.

Beating Lending Club’s Average Return of 9.6%

Being the novice P2P investor, I realize I could be setting myself up for a huge disappointment here. However, I’ve put some serious thought and time into this plan, so I’m fairly confident I’ve put together a strategy to get double digit returns or more. Hopefully, I’ll hit the 12% to 13% ROI mark.

Here’s my plan:

  1. Diversification. I’m investing no more than $25 per loan. The more notes you buy, the more you are reducing your risk of loan defaults. The same basic principle in index fund investing applies here: the more diversified you become, the lower the risk of one (or a small few) bad apples spoiling the bunch.
  2. Loan Purpose. Obviously, a borrower has to have a viable reason for requesting a loan. If the borrower wants to improve their home, refinance existing debt, or consolidate a few outstanding loans, then they are viable candidates. If they are applying for a loan because they can’t get financing elsewhere or they want to “jump on a new business opportunity”, then I will have to pass. Since this is my money, I want to loan it to someone who has an extremely good chance of paying it back with interest.
  3. Credit Score above 679. Lending Club gives you the ability to search for borrowers within a wide range of above average FICO scores. The current system of credit scoring might not be the best indicator of an individuals ability to repay a loan, but for now, it’s the best metric available and has many years of backtesting to support its validity. I’ll be lending to borrowers with a FICO score as low as 679, but will be giving preference to borrowers with a 720 and above.
  4. Job Security. I’m giving preference to government employees (state or federal) and seasoned professionals who have been in their current profession for more than five years. Since we’re still in a recession, and job losses are floating around the 10% mark, lending money to job hoppers or new college grads with lots of student loan debt seems like an unnecessary risk at this time.
  5. Past Delinquencies. Since the goal of investing in P2P notes is to get repaid every month, I’m only going to lend to borrowers who pay their bills. That means I’m excluding anyone who has had a past delinquency in the last three years. Perhaps an exception can be made to a borrower with an exceptional credit score who had a reasonable excuse (e.g. computer glitch, banking error, etc) for one delinquency, but no more than one.
  6. Debt to Income (DTI) Ratio. Preference will be given to borrowers with as low of a Debt to Income Ratio as possible. Lending Club gives you the option of searching for borrowers with varying DTIs, but I will likely give preference to borrowers with a DTI < 20%. The better the borrower’s monthly cash flow, the lower the risk of default.
  7. Loan Amount. Obviously, the monthly payments for a $5,000 loan are easier to repay than a $20,000 loan. When given the choice between buying two notes of equal credit worthiness, I would choose the borrower with the lower loan amount.
  8. Revolving Credit & Revolving Credit Line Utilization. I don’t get a warm and fuzzy feeling lending money to someone who has maxed out, or nearly maxed out, their existing lines of credit. Perhaps if a borrower wants to refinance their current credit card debt to a lower Lending Club interest rate (which is a smart move considering some creditors boosted their rates on prime borrowers), or consolidate multiple outstanding balances into one lower monthly payment, then I might consider them a viable candidate.
  9. Attention to Detail. If the borrower has more than one typo or consistently uses poor grammar throughout their application, I’m likely going to look elsewhere. We’re all human, and even the best of us make mistakes when it comes to writing an electronic document, but a loan application should not be one of those times. It is their one and only chance to show they are a creditworthy borrower. Period. If they can’t fill out a loan request accurately and put their best foot forward, there are plenty other borrowers who will. And those will get my business.
  10. Questions & Answers section. Since investors have the option to ask the borrower specific questions, their responses are probably the best chance within the Lending Club system to peek into the mind of the borrower. The web may be a cold and impersonal compared to the traditional image of shaking a man’s hand prior to giving him a loan, but it is still no reason to brush off a question or answer questions in a snide, jester like tone. I’ve already passed on several loans where the borrower seemed to have a poor attitude, answered rudely, or failed to adequately answer the posed questions.

Again, this may not be the best way to invest in P2P loans with Lending Club, or for that matter, with (Lending Club’s prime competitor). This list is just my own personal method of selecting and weeding out the best possible loans with a higher rate of return and, hopefully, a lower risk of default.

How about you? Are you a Lending Club investor? Have you implemented a strategy similar to this? Would you do something completely different or only modify one or two specific line items in this list? Please share in the comments section below.

Quarterly Lending Club Investment Portfolio Updates

April 2011 Update: Shutting Down My Lending Club Investments over Q&A Change

December 2010 Update: Currently earning 15.6% NAR on Lending Club investment portfolio.

September 2010 Update: Currently earning 15% ROI on my Lending Club investment portfolio.

June 2010 Update: Currently earning 14.2% ROI on my Lending Club investment portfolio.

March 2010 Update: Currently earning 13.6% ROI on my Lending Club investment portfolio.

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Posted by CJ   @   1 September 2009 62 comments
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Sep 1, 2009
11:28 pm
#1 Sharon Kidder :

I “invested” $1000 with Prosper in 2006. At the time I consciously considered the “investment” in the gambling type of category; turns out I was correct. 8 of my 19 loans have defaulted so far and more are flirting with frequent lates. Of the good loans I funded, several paid off early which really reduces your return. I tried to be careful in my evaluation of the loans, but they don’t necessarily give you enough information to make good investments. And the servicer just doesn’t have the motivation to collect on *your* loss. I would advise you to proceed with caution and invest very slowly. Put a small amount in at first and see how it goes for at least the six months.

Sep 1, 2009
11:52 pm
#2 Matt :

@ Sharon,

Yeah, that’s an experience I’m really trying to avoid. What drew me to Lending Club is that they seem to have a more strict lending policy than Prosper (could be wrong), and the borrower info section seems pretty good. For me, it seems to be enough to make an informed decision and I’m hoping my “P2P investing plan” above will workout.

I’m starting with $1000 and plan on buying 40 different notes. Maybe toss in a few $100 every month and reinvest as the repayments/dividends come in each month. If the defaults begin to rise, I’ll add in a few more A rated loans.

Thanks for commenting.

Sep 2, 2009
1:14 am
#3 Sharon Kidder :

I should also have added–borrower’s lie. They may say it’s for one purpose, but use it for another. And once they have the money, there is nothing you can do about it.

I am not familiar with Lending Club as I had my fill of P2P lending, but I would encourage you to drop into their forums before investing. Folks there will probably be able to add some additional advice about Lending Club’s policy and collection practices.

Be careful.

Sep 2, 2009
5:24 am
#4 Linda :

It’s no secret Prosper sucks. But P2P Lending is an awesome concept that gives you the chance to be the banker. You can’t pass that. Lending Club is the more serious of the bunch and I recommend folks trying it out. I’m making around 8.5% after a year of playing with it and after a few defaults.

Your strategy seems solid to me. The only dif with me is that I do venture out to bigger loans (up to $18k) as long as their income can take it.

Sep 2, 2009
9:34 am
#5 Matt :

@ Linda,

So you’ve had a few defaults even with the lower risk loans? Would you mind disclosing what you think went wrong with the notes? Job losses? Too much debt?

Sorry to be so inquisitive, but I think it would help me understand what types of loans (if any) have a greater rate of default. The “Beat the Average” webinar has some really great info about which loans default more than others, but I would be interested in your experiences as well.

Thanks for commenting.

Sep 3, 2009
6:20 am

Yes, P2P lending is a really interesting concept; and has some risks as everyone is pointing out.

For those of you who are interested, I recently interviewed Lending Club’s CEO Renaud Laplanche to answer a bunch of questions that most people have about Lending Club – you can listen to that interview at

Sep 3, 2009
9:44 am
#7 Matt :

Thanks Dave. Pretty good interview!

Sep 3, 2009
10:04 am

Thanks Matt!

Sep 5, 2009
12:59 am
#9 Connie Walsh :

I live in Canada, we Canadians are a fairly conservative lot. I always wanted to be a banker too. Where your subprime defaults are in the 8-12% range. Ours are 2-5%. Cool thing is that we can lend out our Retirement money in small mortgages to people that pass a similar set of rules that you have above. Our city has had maybe 5 years total where the housing market has not increased over the previous year from 1900 and never 2 consecutive years. 2008 was I think 4-5% growth. It started out as 9-10 and then lost ground. So if we lend it out as a mortgage and only go to 80%, the chances of us losing our money is very slim.

I’m not saying zero or anything, but I sleep at night. I had my money in mutual funds for 12 years (wasn’t paying attention to them—they are just supposed to grow with the market right). I was surprised when I realized that in June of 2008, I had lost 300 on 30,000 invest over a 12 year period.

So I put that money into bricks and mortar with my other money. I have been making 12-20% on my lending money for a few years now.

Sep 5, 2009
12:19 pm
#10 Matt :

Hey Connie,

Thanks for those insights. I didn’t know Canada has such programs available. Wish we had something similar to that here in the U.S. many years ago because I would definitely have used it.

In the past, the banks have (or had) a monopoly on this sort of thing. One could argue that is a good thing considering the subprime mortgage crisis (and possible prime borrower spike in defaults due to job losses), but as I mentioned in the post above, I would have taken a more conservative banking/lending/investing route.

Thanks for commenting!

Sep 6, 2009
1:47 am
#11 Ethan :

I agree that all of your standards are good except #1 and #3.

Of course you want to diversify quite a bit, but diversification doesn’t increase your return; it just lowers your volatility. Among the loans that meet all of your standards there will still be a hierarchy of how trustworthy they appear to you: several of your standards are a scale, not a yes/no question. So why not put proportionally more money into the best looking ones? It may drive up your volatility, but it should drive up your returns as well.

I think that putting less weight on the credit score may actually be the best way to beat the average at LendingClub. If their request is hitting on all the other cylinders, including no delinquencies, why care about the FICO? Some very dependable people just don’t have well-established credit and they pay for that when they get a loan. They could be paying *you*!

I’m currently seeing 12.02% return on my LendingClub notes. One is delinquent by more than 31 days, but it’s one that I only put $25 into so it’s not dragging me down much at all. I put 9x that into my biggest note that looked solid. $2,200 in 29 notes. My average was $75. I can say from experience that you’ll have trouble investing even $2k by your standards if you stick to $25 loans. It took me a couple weeks and a few hours of reading loan apps.

Sep 6, 2009
5:51 pm
#12 Matt SF :

@ Ethan,

I respectfully disagree on the diversification issue. I, as well as the Lending Club staff (via webinars) and other investors, agree that diversification is the way to go to reduce defaults, which I consider to be the greatest threat to my ROI. I think of it like diluting out a poisonous substance… if it’s 1 drop in 10 it’s lethal, but 1 part in 100 it’s tolerable. Please forgive the strange example, but working in the biochem field for so many years, that’s just how I view loan defaults.

I completely agree on your second point regarding credit score. I could go for higher risk notes to ratchet up the ROI, but I’d like to stick in the B to C range for some added security. Whether that security is real or perceived, is up for debate, but I’m not trying to beat the average by that much.

As I said, I’m a novice here so this may work or it may not. We’ll just have to see what works out in this pilot scale experiment and tweak it as time passes. Thanks for commenting.

Sep 6, 2009
9:31 pm
#13 Hank :


Great post! In addition to the criteria that you talked about, I also like to look for home owners over renters. I like to also look at whether the income they claim is verified by Lending Club. I prefer to lend money to business owners rather than people just trying to consolidate debt. LC is great! I’m sure that you’ll love it!

Sep 6, 2009
9:57 pm
#14 Ethan :

Hmm. I don’t think I’m understanding how you look at it. Let me try to explain my thinking another way. Imagine a pool of X loans, all of which meet your standards for investment. I place $Y into each one. On average, Z% of them are going to default. As long as I experience the average default rate, my diversification among different notes doesn’t change my results.

For example, if X=100 loans, Y=$25 and Z=4% then I’ll see 5 loans default, taking $100 out of my earnings. If X=25 loans, Y=$100 and Z=4% then I’ll see 1 loan default, still taking $100 out of my earnings. Of course, the volatility is very different. For starters, when I work with a smaller pool of loans I am less likely to experience the average default rate. And furthermore if Z were 6% on average, then even if I experience the “average” it will be a 50/50 chance whether I’ll experience it in the form of 1 default or 2 defaults. In other words, *I* can’t experience 6%; I’ll either beat the average and experience 4%, or lose and experience 8%. I’ve guaranteed that I will be an outlier on the default rate curve.

So none of this reduces or increases the average default rate. It does reduce the volatility and therefore, perhaps, reduces one of the chief impacts that defaults have on investors. I’m not trying to be argumentative and this standard certainly fits if you want to minimize volatility, but I do think that is all it does.

One of the things this means is that, if there really is a sliding scale of note-quality even for notes that have passed all of your minimum standards, then as long as you are still investing in a high enough total number of notes to smooth out the defaults, there should be opportunity to favor the best looking notes with some extra cash. Doing so should, on average, decrease your default rate even further. And as long as your volatility remains at an acceptable level it isn’t hurting you on that front either.

That said, I should watch the Webinar. Maybe I’m missing something.

Sep 6, 2009
11:33 pm
#15 jc :

I have been using LC since March. I use the same strategy of investing only $25 per loan unless it is an A rating loan. Thus far, I have had two C grade loans go late (31-120 days) that I invested in when I first signed up. My net return is 10.46% with A loans making up around 62% of my portfolio.

I have since stopped investing in any loan lower than A grade unless the income is verified. I wish LC verified every loan, the stated loans are a part of what went wrong with the housing market. I try to ask questions on every loan now, if only to get a better feel for the borrower and to encourage them to get their income verified.

I would like to see a loan tracker feature added so that you can track loans that you are interested in. It would also be nice if you could set a threshold per loan to be emailed when funding has reached XX%. Often times, the verification doesn’t show until funding is close to or has actually completed.

Sep 7, 2009
6:54 pm
#16 Ethan :

I would love to see them add a carefully-crafted communication system that allowed lenders to communicate with borrowers throughout the life of the loan. Obviously there are problems to be avoided, but it seems that a more personal connection between the two sides of the transaction would create a stronger inclination to fulfill the terms of the loan agreement on the part of the borrower.

Sep 7, 2009
10:30 pm
#17 Matt SF :

@ Hank,

Thanks man! Income verification is huge, and I would have mentioned that, but from the loans I wanted were funded so fast that the admins didn’t seem to keep up. As the last two webinars have mentioned, the popularity in social lending has noticeably sped up the funding process. However, I did read the Q&A section and most of the loans I funded did say they had faxed/scanned paystubs to LC.

I hope that in the future, Lending Club will somehow make income verification a mandatory thing. LC says that if you make a borrower jump through too many hoops, you’re likely to chase them away. I agree, but maybe LC could give borrowers a discount (say 0.25% off) for anyone who verifies their income.

If the 12% – 13% plan works, I might bump it up a little higher and lend to business owners. I’ve seen some really good business ideas around 15%-16% that seemed rock solid. Thanks again for the comment!

Sep 7, 2009
10:51 pm
#18 Matt SF :

@ Ethan,

It’s natural to have confusion, or even outright disagreements when it comes to such matters. That’s what makes blogs so cool… we can agree to disagree and maybe learn something in the process.

I’m not the expert, but the Lending Club webinars I’ve seen thus far all say diversification is paramount. However, if you’re in the 100 loan range, you’ve likely got a fairly well diversified loan portfolio. I think what LC wants is trying to do is prevent new investors from investing $5000 across 5 loans ($1000 per loan). Just 1 default wipes out 20% of their cash. If they diversify out to 100 loans ($50 per loan), and only 4% default, they’ve only lost $200, and the interest payments will make up for it plus extra.

I’m not concerned with loan volatility since it’s my goal to hold the note to maturity (e.g. not to sell it). As far as I’m concerned, the only risk I have with the loan is not getting paid back. Since it’s a promissory note guaranteeing me a set percentage on my capital, I really don’t care how volatile the note might be (if at all) during its lifetime.

If you want to learn more, checkout the Beat The Average link in the 4th paragraph above. It’s about 30 minutes, and is worth the time investment if you’re serious about social lending.

Thanks for all the questions/comments. Appreciate it!

Sep 9, 2009
11:55 am
#19 Matt SF :

@ FreedIncome,

Thanks for the comment. I agree, I’m not a particular fan of outright consolidation loans because if they got in debt once, who says they couldn’t get into debt again? To me, that seems like the primary risk of buying these types of notes.

However, I do think there are some worthy consolidation notes out there. They would be:

* Responsible credit card users with recent interest rate spikes.
* Grade A or B borrowers who can get a lower interest rate via Lending Club or Prosper.
* Recently married and want to consolidate debt.

I’m sure there are a few more categories, but I like the idea as long as the borrower is consolidating for the “right reasons” and not because it’s their last option to prolong their spending spree.

Dec 11, 2009
1:21 pm

I also am a LC member and will be posting my results.

I think like in investing, debtors are finding places they can get a better rate and lending club is one of the answers.
.-= Investor Junkie´s last blog ..Why Buying a Timeshare is a Bad Idea =-.

Dec 29, 2009
9:17 pm
#21 Hank :

I love Lending Club, and I have been investing with them for over a year now. You have a great set of criteria. I use a similar one to pick high quality loans. If you are particular about who you lend money to, you will be very successful. You’re off to a great start.
.-= Hank´s last blog ..83 Money Moves To Make Before You Are 30 Years Old =-.

Dec 29, 2009
11:25 pm
#22 Matt SF :

Thanks Hank! I’m definitely giving Lending Club 110% effort, so we’ll see how it plays out.

For now, I’m just going small and trying to test the waters with a few loans here and there. As Scott mentioned in the first webinar, the only risk you have after making the loan is the borrower won’t pay you back, so I’m assuming if I do the upfront homework, it won’t be nearly as time consuming as following an equity investment.

That said, I’m drooling at the future possibility of making 12% a year and only investing 1 to 2 days a month reinvesting the monthly repayments.

Feb 6, 2010
12:14 pm
#23 Roger Pratt :

Dear Linda:
Just wondering if 16% interest on $10,000
could interest you for 3 years without all the red tape. I am a LC member as a investor and just getting my feet wet. I plan to put in an application to borrow funds and if you can work with it you’ll have
all your funds back plus interest. You can also e-mail me. I can also work with $5,000 at the 16% rate if you wish. You should contact the LC and let them
know that you want my application for funding when it
becomes available.This is what am willing to offer,
willing to give you 3 years interest in full should I
repay before the 3 years are up. The funds will be used for buying,selling and renting mobile homes on
parks and real estate from banks as they become available. Also the cost to incorporate and build business credit. When done I’ll use the business to build.

Feb 6, 2010
12:40 pm
#24 Matt SF :


I applaud your efforts to find investors prior to your Lending Club loan application going public, but I’m fairly sure that your recruitment efforts goes against what Lending Club is trying to do when it comes to investors diversifying their investment portfolios to reduce their risk to capital.

I’m not insinuating you would ever allow your Lending Club loan to default and 16% is a great ROI, but just saying that it may be better for new investors to spread their risk across multiple loans rather than put all their eggs into one basket.

Feb 27, 2010
4:50 am
#25 Jenna :

Great post!! I noticed reluctance in some of the comments to lend to debt consolidation loans. While I understand that viewpoint, I think it ignores the fact that the credit card landscape is changing so much with new credit card laws. I’m an active LC lender – and I am embracing lending for debt consolidation for ppl with good to great credit who seem to be getting caught (their rates get jacked up). Be interested to find out what others think of LC & the credit crisis. Thanks!

Feb 27, 2010
9:20 am
#26 Matt SF :

Thanks Jenna! I appreciate the kind words.

Let me first say that I do not have a problem investing in debt consolidation loans… just certain ones.

For example, I have several $25 debt consolidation notes, mostly to governmental employees, like a border patrol officer who wanted to refinance from 25% interest rates down to 12%, but only had 40% credit utilization rate.

As an investor, I feel it’s my job to reduce my risk as much as possible, so I do have a preference for loan applications < 50% credit utilization rate versus a borrower > 75% credit utilization rate. In theory, if a borrower had maxed out their credit cards but sees “the light”, and promises never use their credit card again, who’s to say they won’t do it again 18 months into their repayment plan when they come across XYZ item they really want?

So even though that I’ve been discussing ways to fight back against the Too Big To Fail Banks for a while now, I still want to be selective in the “consolidating to a lower interest rate” notes I buy (aka diversipicker), and this is just one of my more conservative screening metrics to reduce my number of loan defaults.

Of course, I could be 100% in wrong in my initial assumptions. I’m still very new at this, but being more selective than I need to be helps me sleep a little better at night. Thanks again for the comment.

Mar 19, 2010
9:55 pm
#27 Jason :

Great post! Just curious if you’re willing to disclose how good/bad this strategy has fared this far?

Mar 19, 2010
10:47 pm
#28 Matt SF :

Thanks Jason! Appreciate that.

It’s still early because I’m only into this Lending Club investment strategy for 5 months now, but the portfolio has performed very well thus far.

Currently, I’m earning 13.60% with zero defaults on 13 loans with zero defaults. Technically, I invested in 14, but 1 loan was fully paid off within 2 months. The interest rate range is 10.62% to 16.35%.

As the interest rate range suggests, I’ve strayed from the strategy on 1 or 2 loans thus far. I found a Senior Harbor Master with 23 years job experience, union member, 750+ credit score, Debt to Income < 20%, etc., that was only paying 10.62%, but since he was a debt consolidation and wanted to get out of credit card hell, I decided to throw some cash his way. I actually tweeted his loan number twice to generate some further interest just because I felt for the guy.

The 16.35% interest rate was a Venture Capital loan in which two gents needed some additional funds for breathing room. The only reason I invested here was one partner agreed to cover the payments if the initial loan applicant couldn’t (e.g. basically an unofficial cosigner for the Lending Club loan), so I took a risk. Thus far, they haven’t even been late on a loan payment. Kinda risky, but I felt vindicated considering they appeared to know their stuff.

So I’m basically bucking the massive diversification concept because I don’t want to invest $2500 just to get 100 different loans, but I’ve taken the more conservative (or scared investor) approach by selecting what I believe are high quality borrowers that have a lower credit score that I believe they should.

This reminds me I should do a portfolio update in a few weeks, so I’ll drop you a private email when it goes live.

Mar 19, 2010
11:07 pm
#29 Jason :

Good stuff! Thanks for the update. I started my account in October of 09 and my net annualized return is currently 12.49%. I’ve experimented with both hand picking loans as well as using their quick-pick tool. So far I’m pretty happy and thinking of dropping more money into the account and signing up for their PRIME program to let them handle the management.

Mar 20, 2010
12:17 am
#30 Matt SF :

No problem. I started my account around the same time, but I’m holding off for another couple months before going large.

As I understood one of the webinars, the highest frequency of defaults occurs around the 18 month threshold (e.g. halfway into the loan), so I’m holding off for a few more months to make sure I’m a good enough “diversipicker” to get the job done.

I wouldn’t mind Lending Club helping me out, but as the first paragraph implies, I enjoy the screening process a little too much to let someone else do it for me. Maybe a few years from now, I’ll raise some cash and make it a side business by taking 0.5% active management fees.

The “Steadfast Social Lending Fund” has a nice ring to it. lol!

Apr 15, 2010
3:34 pm
#31 Holly :

Why do financial aid sites such as:

suggest that these types of loans are easier for the borrower to get than a private student loan, are the borrowers not credit checked, do investors have any say in who they get to borrow to on most of these sites?

Apr 15, 2010
8:00 pm
#32 Matt SF :


First, I really wouldn’t trust the info on a site/blog like that. It’s got very little content, covered in ads, and doesn’t offer the ability to comment. Usually not the best place to find reliable, quality articles about important financial topics.

But in regards to P2P loans being used as student loans, I’m quite sure they are not the best way to get the funds you may or may not need.

In fact, I would almost guarantee, unless you have superior credit (750+ FICO, low Debt to Income, haven’t missed a payment in 60 months, etc.), that you can get a better student loan interest rate from a Federal student loan program like Stafford loans or Parental Plus loans.

P2P loans are great when you can’t get traditional financing or have an aversion to traditional banking, but often times, you’ll pay a slightly higher interest rate. This is because P2P loans are usually unsecured loans, which means that lenders (e.g. P2P investors like me) can’t seize your car, foreclosure on your house, or seize whatever asset you used as collateral.

On the flip side of this, many borrowers are using P2P loans to refinance their high interest credit card debt or debt consolidation loans because 6% to 20% (Grade A to Grade E) sounds better than paying 29.99%.

To answer your specific questions:

Yes, the borrower’s credit is checked and investors have access to that information. It’s anonymous, so we can’t see your name, address or contact information, but we can see your income, credit history, employer, etc. Based on each investors goals (conservative, balanced or ultra risky), we can select from a fairly large array of loan applications. As you can see above, my standards are pretty tight, but my Lending Club average return is around 13% thus far.

Yes, the P2P Lending company has the right to accept or reject any loan application they wish. For example, Lending Club cuts you off at a credit score of 660. If your credit score is less than 660, they won’t even upload your loan application for funding. Furthermore, some loans may not receive enough interest to be completely funded because they’re too risky, the borrower didn’t answer investor questions, or something just didn’t sit right with investors.

So just because your loan app got listed, you may not get fully funded. In that respect, it’s just like meeting with a banker sitting behind a desk. Just because you get a meeting, it doesn’t mean he/she will approve your loan.

Sorry for the long answer, but you asked some really good questions.

Jun 29, 2010
8:32 am
#33 keith :

my big question is: is this a fad and will in say 5-10 years go *poof*? pertuity direct just up and left without notice

Jun 29, 2010
8:55 am
#34 Matt SF :

That’s a fair question considering the P2P Lending/microfinance marketplace is getting more competitive. So the first to market (Lending Club and Prosper in US, Zopa in UK) are going to crowd out the weaker, lesser known brands.

I don’t think P2P Lending will be a fad because I don’t think debt will go out of style. We live in a consumer based nation where advertising is highly persuasive, so the probability that we’ll become a nation of savers versus spenders is pretty low. As long as the big banks don’t offer a “consumer debt mutual fund” where they offer us 9% ROI on our money, I’d say it’s full speed ahead.

I would prefer we saved more and consumed less as a nation, but then again, Lending Club would lose around 60% of it’s loan applicants since many of them currently in the database are looking for fixed rate loan for debt consolidation (mainly credit cards with 20%+ interest rates).

Aug 4, 2010
8:09 pm
#35 Penny :

Good post! I have been playing with Lending Club also. So far I’ve only invested the $25 they’ve given me for signing up. But it has been a positive experience.

My note is getting 14.70% interest with no missed payments. With some planning, and diversification I think this may be a feasible alternative investment means.

I’ll take your notes into consideration when I pursue this idea further! : )

Thanks, Tabz.

Aug 4, 2010
8:25 pm
#36 Matt SF :

Thanks! I’m happy with Lending Club thus far. Got around $3500 there earning 14.5% NAR with no defaults (at $25/note).

A few LC investors and I send out a weekly email discussing the notes we like. If you like, I can CC you on the next round.

Aug 5, 2010
2:36 pm
#37 Melissa :

I started in January of 2010 & have 32 loans (none over $100) with LC @ 16+ % — so I’m on the risky side. I figured I’d try risky first to see what the worst case scenario is for microlending. I tend toward debt consolidation loans – but for ppl with relatively high credit scores. I read the Q & A carefully to see if the borrowers get it that they are borrowing from real human beings. The ONLY loans that have posted late payments are from the two people who BOTH work in the financial industry. Incidentally, I had put their loans in my portfolio labeled “Riskiest” upon my investment in them. Boy, I was right.
MattSF, if I may be so bold, I’d be interested in being included in your email list.

Aug 6, 2010
12:47 am
#38 Roche :

The only thing that is going to go “Poof” is Prosper – And it will take them less then 5 years to do it.

Aug 6, 2010
1:38 am
#39 Roche :

If you limit yourself to just $25 per loan then you can only take limited advantage of what your criteria tells you to be a loan worthy of your investment dollars. On some of the loans try investing two to four percent of the amount borrowed. I would avoid the loans where the monthly payment is more then about $215 dollars. One thing that really annoys me on Lending Club is borrowers who don’t fill out the Loan Description. If someone wants to borrow money they should give their benefactors a paragraph on what the loan is for and another paragraph on themselves. I would be interested to know how much of your Lending Club investment capital goes to buying notes off the Folio trading platform.

Aug 6, 2010
1:41 am
#40 Roche :

A creative way to encourage the people to whom you are lending to pay back their loan is to ask them if they have read “Total Money Makeover” by Dave Ramsey. Of course Mr. Ramsey does not advocate individuals borrowing money in the first place but if an individual is in the “second place” where they have already borrowed money (or are in the process of doing so) then this may provide them with a source of inspiration to pay their loan off (or cancel their loan request altogether). Certainly on any loan requests for “Debt Consolidation” this should be a mandatory question that you ask before investing a single dollar in such a loan. A person can strategize all they want in order to decide which loans to fund and how much but in the end who knows if that roulette ball called “your $X note” is going to land in the green zero slot called “default”. Place your bets and Good Luck.

Aug 7, 2010
4:47 pm
#41 Matt SF :

You got it. Sending one out early next week.

Aug 7, 2010
4:50 pm
#42 Matt SF :

I’m of the mindset that the more loans I have, the more diversified I am, which would imply the less probability of a loan defaulting. Lending Club seems to back up this idea.

However, I certainly acknowledge that adding $50 or $100 to a single note might be a solid idea if it pays off, but with today’s job market and rampant layoffs, I’d rather go the diversified route.

Nov 5, 2010
7:13 pm
#43 Josh :

I’d also like to be added to the weekly email list if possible. thanks so much for this very informative post.

Dec 1, 2010
2:14 am
#44 Chris :

I have been trying both Prosper and LC for the last 3 months, each with $100 and both are returning about 19% thus far. I am thinking of adding another $1500 to LC, though the rates are lower, I think it would be more stable. Any chance I can get on your next email?

Dec 1, 2010
8:53 am
#45 Matt SF :

19% is VERY respectable Chris. Most people believe that a 15%+ return isn’t really possible over time, but if you have the ability to slowly add in your money and cherry pick those high yield notes that you believe will have the lowest rate of default, it would appear that is indeed achievable.

I’ll include you into the list today.

Feb 4, 2011
12:59 pm
#46 J.M. :

“As long as I experience the average default rate …”. There’s a great book that you should probably read any time you start a sentence with that:

Feb 4, 2011
1:07 pm
#47 Matt SF :

There you go again giving me more work to do. lol!

Oct 23, 2011
4:56 am
#48 Xin He :

The December 2010 update link at the top directs to this post which is not the right post.

Oct 23, 2011
10:44 am
#49 Matt SF :

Fixed. Thanks for spotting this.

Nov 15, 2011
12:32 pm
#50 Craig B :

Matt, I have two LC accounts, one regular and one IRA. I’m currently getting 9.2% and 13.7% respectively. I’ve had a few defaults, but that’s expected (and reflected in their stats). I just have a few comments on your strategy. First, I don’t think it makes sense to limit loans to those with lower payments. To me, what is more important is the ratio of the payment to their salary (especially if they’ve answered questions about their monthly expenses). I try to limit my loans to those where the monthly payment is less than or at least close to 10% of the applicant’s salary.

I used to limit loans to applicants whose salaries have been verified by LC, but LC tells me that statistically unverified incomes are marginally safer. They will often verify income because there is something fishy in an application.

I also don’t think it makes sense to limit yourself to lower loan amounts. In my experience, people who are desperate for $5,000 or $10,000 are living closer to the line and have fewer resources to fall back on should they lose a job or suffer a personal setback. This is born out by their lending statistics. The bigger the loan, the higher the rate of return.

Nov 20, 2011
4:27 pm
#51 Lucas :

The impression I am getting is that the A-rated loans are less attractive because of the lower interest being paid.
In fact, somewhere in this blog I read a comment stating that the writer passed on an other stellarloan application because the interest rate was “only 5.7%” (if memory serves) and not worth it to him. That’s a shame for borrowers who have been financially responsible enough to earn the A-rating.

Part of the reason to participate in P2P is to create a community outside of the usual profit-first mentality and help each other.

For example, I am looking at fixer-uppers because it requires twice the median income in my town to purchase a median turn-key house. The thing with fixer-uppers is that bank often won’t lend on them, and hard money lenders want usurious interest. I certainly hope that when the time comes, my stellar loan application will be fully funded despite its low interest relative to other LC loans.

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