Lending Club Investing Strategy: Red Flags to Lookout for When Shopping for Loans

Funding peer-to-peer loans is becoming a popular investment among many savvy investors and there is money to be made by becoming a lender via Prosper Marketplace or Lending Club, but it does require some work. To make a great rate of return, you’re going to have to cherry pick loans and make sure that you don’t fund loans to people who probably will probably default.

The first thing you need to do is ask lots of questions to make an effective Lending Club investing strategy. Ask the individual why they need the loan, why they didn’t get the loan elsewhere and ask for lots of specifics. If the potential borrower has inconsistent response or can’t articulate why they need the money, you probably don’t want to fund the loan. Chances are other investors will beat you to asking these questions. Fortunately, all answered questions are visible to the public and you can see the borrowers respond to other investor’s questions.

The purpose of the loan is a major factor that you need to consider. If you’re asking yourself, why would anyone need to borrow money for the reason that the person is asking for money that may be reason enough alone to not participate in funding the loan. Also make sure that the amount the person wants to borrow matches the cost of what they say they want to borrow for. If they’re looking to get a $25,000 loan to purchase a computer, you know something’s fishy.

You should also take a look and see if the borrower has answered any questions about their financial situation. How much money do they make a month? What kind of bills do they have? What kind of other debt do they have? What are their expenses? If a potential investor asks a borrower these questions and the borrower can’t communicate any of that information, chances are they have been sloppy with their finances and don’t know the information.

Although there’s no data to back this up, we would also guess that borrowers that don’t do a great job of using proper spelling, grammar, punctuation and capitalization are probably people that you don’t want to loan to. Requests for loans are professional documents via Lending Club are considered to be professional documents and if the borrower can’t communicate using proper English, maybe that’s not the person you want to lend for.

The red flags above are all qualitative in nature, but there are also factors in the borrower’s listing that are statistical in nature. Knowing a person’s credit history, employment history and current debt levels are a great way to predict whether or not the person will repay the loan. You certainly want to look for lower debt levels, higher credit scores and a long history of employment, but you should also consider some of the qualitative “red flag” factors as well in order to maximize the effectiveness of your Lending Club investing strategy.