Last year, I decided to build my Lending Club portfolio faster by automatically depositing $25 from each paycheck. My portfolio has certainly grown and I now have enough loans to add a new one each month from my lender payments.
Here is my current portfolio summary:
I have made 39 loans so far, and 9 have been fully paid or paid early. I have 30 loans outstanding and all are issued and current. No loans are currently late and none have defaulted.
What excites me most about Lending Club are my consistent positive returns. One bad loan would be devastating to a portfolio this small, which is why I am trying to build it faster with 26 monthly deposits. I call this the social lending snowball.
From my time working in a bank, I know the biggest risk factors on a credit report. I review each loan I make individually and only choose the best loans. I am a stickler for low revolving debt balances, low revolving debt percent used, and late payment history.
Based on my strict guidelines, I am able to choose loans that are lower risk and better investments. Over time, I have relaxed my guidelines a bit to bring in higher-interest loans. Right now, I have 4 A-grade loans, 11 B-grade loans, and 15 C-grade loans. Over time, I will likely gravitate more toward C-grade and D-grade loans as my portfolio grows.
Making Social Lending Work for You
The key to doing well with lower grade loans is to have a lot of them. Just like banks spread around risk by building a big portfolio, as social lenders it is important for us to as well.
I don’t advocate making social lending the bulk of your investments, but I do suggest readers follow my lead and give it a try. If you deposit $500 to start, you can make 20 loans to distribute your risk. If you can’t afford that, you can start like I did with as little as $25 or $50.
Unlike stocks and mutual funds, you can’t quickly and easily sell your loans and walk away with the cash, so you have to treat these loans more like a CD with a cash flow. Your money is locked in until the loans are paid back. (There is a system to buy-sell on a secondary market, but it is not as easy as selling a stock.)
Give it a Try
If you have read about social lending before and never tried it, what are you waiting for? It doesn’t take a lot to get started, but the long term benefits are big. I have accounts at both Lending Club and Prosper and recommend either site. Full disclosure: I have most of my loans at Lending Club.
Let me know what questions you have in the comments below.
Image by marubozo / flickr
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