Peer-to-Peer Lending: 3 Lending Club Investment Strategies

Many investors that started originating loans in 2007 and 2008 before the SEC came down on the peer-to-peer lending industry through Prosper.com got burned by giving loans to people who were absolutely terrible credit risks. Lending Club.com refined that model by placing more stringent requirements on borrowers and by giving improving their collections practices. Many investors are now giving peer-to-peer lending a second look, but like picking stocks, there is some skill involved.

Many investors providing loans to individuals through Lending Club have implemented different strategies to maximize the safety of their investments and maximize their rates of return. Here are 3 Lending Club strategies that investors have been successfully using.

Strategy 1 – Minimizing Risk

Some investors are focused on making sure that they only originate loans that are extremely likely to repay. They do this by only originating loans where the borrower has a credit rating of ‘A’. In the last year, only 0.86% of borrowers in the ‘A’ range have been delinquent or in default on their loans. Borrowers hoping to minimize their risk also spread their funds across as many different ‘A’ level loans as possible so that they do not have too much money put into any one borrower. These lenders have been earning averages rates between 7% and 8% on their money.

Strategy 2 – Buy the Market

Some lenders aren’t interested in combing through each loan and checking the borrower to meet a certain level of criteria, so they use Lending Club’s “Lending Match” to invest in a broad swath of loans. This is probably one of the easiest lending club strategies to implement. This would be similar to investing in an index fund. Some loans will perform extremely well and a small percentage will default. You’re investing quite a bit across a lot of different funds knowing that most of them will do well. The average rate of return that Lending Club states that its lenders get is 9.64%. Lenders using this strategy would very likely see rates close to that rate.

Strategy 3 – Combing Through High-Risk Loans

Some experienced lending club lenders, including Scott Langmack, have developed a specific set of criteria that they use to determine whether or not they should fund a borrower for their lending club strategies. The qualifications typically include the reason the person is borrowing their loan, the longevity at their job and their history of repayment. Typically, these investors will put money into higher risk loans hoping to pick and choose which borrowers will repay. This strategy requires a significant amount of time, but can result in interest rates near or above 12%

If you’re interested in becoming an investor with Lending Club, visit www.lendingclub.com.