Worth Trying?

In a piece about personal loans making a comeback, SmartMoney says the following:

Peer-to-peer, or p2p, lending web sites like Prosper.com and LendingClub.com enable consumers to be both borrowers and lenders. If you have extra money to spare, you can consider lending to a consumer in need, with the option of spreading your risk by lending very small amounts (say, $50) to several different borrowers. Each borrower includes with their request a personal profile (not unlike those at a dating site), which explains why they need the money and how they plan to use and repay it. Rates vary depending on the borrower’s credit rating. At LendingClub.com, they range from 7.05% to 21.21% and at Prosper.com, from 8.65% to 25.6%.

I've been thinking of trying LendingClub with a bit of money (maybe $1,000 or so) to see how I make out. If nothing else it will make for some interesting writing, huh? Besides, if I could earn anywhere near 7%, that would be GREAT!

Anyone else use p2p sites to lend/make money? If so, let me know your thoughts.

And for the rest of you, remember that you can get $25 free from LendingClub for opening an account with them (which is free to do) as a new user. Here’s how it works…

1. Visit Lending Club using this link.

2. Open and activate a lender account (which means you hit "invest" when selecting what you want to do with LC -- I'm not encouraging anyone to borrow money.)

3. The $25 will be automatically deposited in your account shortly thereafter.

It's that simple.

A couple notes:

1. There are some eligibility requirements for opening a Lending Club account (must be 18, certain states excluded, etc.), but those should quickly become apparent when you click through.

2. The signup page won’t say anything about the bonus, but they’ll be able to track and credit you using the special link in this post.

Enjoy!

Comments

[D]

I have been using LC for some time now and it has been really great. Nothing wrong as of yet. Also, the new referral is $64.62, not $25.

I'll post later with more details about my experience, but wanted people to know about the 64.62

[tom]

I've been using lending club for a few months and have an annualized return of 12%... i am heavily invested in the A and B rated loans and a few in C, D, E, F, G loans.

You can expect with A and B loans an annualized return of 7-9%.

So far... out of 60 ($25-50 each) loans $2000 total... no defaults or late payments... keep your fingers crossed.

[ladam8518]

I've been using LC since January, they report a 9% return for me, but if i include their fees it's more like 7%, still better than elsewhere. I am only invested in Grade A loans. Of the 14 loans I invested in, one was paid in full within three months and another has never made a payment. If I factor in the default loan as a loss, I am still positive for the annualized return, albeit at 0.05%.

[Peter]

So far I've been doing pretty well with Lending Club - about a 11.6% return on my money. No defaults on my loans. It hasn't been very long though, only 4-5 months, and i have a minimal amount invested so far. So far I 've been encouraged, however, and they do make it easy for you to manage your risk by hand picking your loans, and doing some work as far as credit scores and employment background/etc.

[Bobbert]

I got a $25 sign-up bonus a year ago, and my wife got a $50 bonus about 6 months ago.

We both have about a 9.5% return and we were both dismayed at the selection of loans to fund. Lots of CC consolidation and pay-off-my-wedding stories there.

Would I put my own money in? Maybe after maxing out my 401k and IRA accounts. For a free $64.62 I would encourage anyone to try it out though.

[Alan]

I invested $25.00 to try the system out about two years ago. The loan was rated B and it has been paid back as scheduled with 12 more payments to go. My return has been around 9%.

As long as you invest over many loans you can earn a pretty good return with a fairly minimal risk.

[Travis]

@ FMF - Aren't you located in Michigan? Neither Lending Club or Prosper allow lending for residents of Michigan.

I started w/Prosper a couple years ago and lost ~$200 when the economy tanked. I was mostly lending to individuals with good credit according to Prosper but at higher rates 12%-20%. I spread the money across multiple loans lending between $50-100 each. The loans I currently have average 15% which is pretty good and I'm confident what I have will be paid back in full.

I live in Michigan and until Prosper gets licensed here I can't get any new loans but guaranteed I will once it opens up again. I think I've learned a bit from my first run and will look for more loans with less risk but still invest into higher returns just not as much as previously done.

[Old Limey]

I don't see any point whatsoever of LC and similar operations.
I wouldn't dream of giving a private individual that I don't know an unsecured loan for a sizeable amount of money.
If you have so little faith in a private individual's ability to make payments that you feel the need to spread $2,000 over sixty piddling loans of $25 - $50 each why not just buy $2000 worth of a very good junk bond mutual fund that is paying a very good monthly dividend, is invested in a large number of non-investment grade bonds of well known corporations, and has also been producing sizable capital gains this year.

There are many junk bond funds that can be purchased without paying a transaction fee. The only thing to watch for is that quite a few, but by no means all, have short term redemptions of 1%-2% if you sell your shares before you have owned them from 30 days to 90 days (depending upon the fund). My personal favorite at this time is BJBHX, a Morningstar $800M five star fund, but don't take my word for it, do your own research.

[D]

I started investing with LC about 8 months ago. I got the $25 bonus and put in another $1,525 after that. I am only purchasing A and B grade loans and read through their "story" and credit history with a fine tooth comb. I do not purchase any notes if the borrower has a debt-to-income ratio greater than 12% and will only consider a candidate that puts effort into their description / reason for the loan. There are people out there that put no description at all and do not take the time to answer any lenders questions; AND expect the note to be fully funded.

I've followed these "rules" and so far I have no defaults, one late payment (he was on vacation and forgot to transfer $ into account before he left - LC followed up and got the money as soon as possible). I have a net annualized return of 9.5%, not bad compared to what the stock market has done for me.

[FMF]

Travis --

Yes, I'm in Michigan. I'll have to check into that restriction. For some reason, I thought they could allow lending in MI.

[Brian]

I've had a Prosper account for 3 years. Been able to loan at great rates, 11%+. However, 4 have defaulted due to bankruptcy which eliminates any profits. 3 of the defaults were A-graded creditors and 1 was a B-graded creditor. Proceed with caution, and only with 'play' money. As an Ohio resident, I have been unable to reinvest in new loans, so I remove the cash balance each month.

[Apex]

Multiple people here are posting their 9,10,11% plus returns and then give the caveat of 1 or more defaults which then give them negative or zero (0.05%) returns.

I have amazing stock returns too if I don't count the ones that went down.

I don't think it makes much sense to report what kind of return you are getting on loans that actually pay if you have loans that didn't pay. Banks tried that in 2007 but eventually had to admit that the bad loans mattered and oh look, they made us lose all our money, can we please get a bailout?

[tom]

FMF,

Regarding Michigan not being on their "approved list". They must register with the state securities office before you can loan money. I spoke to a LC rep about 6 months ago when it was in work in Missouri... they called me back the day they were approved. It just takes time to get through the red tape.

[Crystal]

I clicked the link, entered an email address and password, and keep getting pushed to an "Apply for Loan" page. When I try to hit "Invest" or "My Account" instead, it takes me back to the "Apply for Loan" page...is that normal?

[FMF]

Crystal --

I'm guessing you had "apply for a loan" clicked (the default) when you submitted your email and password. It's right above where you put your email address in.

[Crystal]

FMF, nope. I just figured it out...I can't lend if I'm a Texas resident. Oops. Thanks anyway!

[Crystal]

Quick FYI, prosper isn't open to lending from Texas residents either.

[cmadler]

Travis:

My understanding is that although Michigan residents can't make loans directly, they can participate in a secondary loan market (lenders sell loans rather than holding them) that LC has set up. I haven't looked at the interest and default rates to see how they compare to the primary market, but it should be reasonably comparable.

[Sargonas]

While not all states can purchase notes directly, nearly all can purchase lending club notes through their secondary market hosted by FolioFN: https://www.lendingclub.com/foliofn/aboutTrading.action

[adrienne]

Was interested in trying this with some "mad money." But I see from the comments that those in certain states are excluded. I wonder if having living in a state (TX) but maintaining residency in another (FL) would make our family ineligible?

[Eugene krabs]

Count me in as someone who doesn't particularly care for p2p lending.

I've read horror stories elsewhere about people who have tried their hand at this, only to get burnt, even from people who had good credit ratings.

I'd rather just buy something like Walmart bonds where I KNOW Walmart is good for the money. Their return is "only" 5%, and it's locked in for a couple of years, but I don't have to sleep at night wondering if Wally Mart is going to skip out on this month's payment or not. On top of that, because it's done in a Roth account, I don't have pay capital gains tax either.

That is not to say that I am recommending against p2p lending just yet. Just so long as people understand that there is risk involved here, and it may even involve losing money, then I'm fine with it.

[MikeG]

Question: What are the tax implications of investing in p2p lending? Do you (or your accountant) need to declare the income on each note you invest in? Or does Propser/LC provide you with one single 1099 that aggregates all your activity on the site? Anyone have experience with this?

[Jason]

Seems too risky to me because if people with good credit need loans why are they going to LC instead of a bank or CC? Makes no sense. And if you lend to people with bad credit . . . well no explanation needed.

Also you only will get the rated return if you are completely invested during the stated time frame! Since the borrower is paying back some principal with each payment you have to immediately put that back into LC or your rate of return is effectively cut in half.

[cmadler]

MikeG: I'm pretty sure they send you a 1099 -- I'm sure you can find the answer to this in the FAQ for each site.

[Andy]

Jason,
I would guess the reason people with good credit would use p2p lending is that they should be able to get a lower interest rate by cutting out the banks. Not sure if this is true or not, but that's the only reason I would do it.

[mapgirl]

Hi FMF!

I used to use Prosper before I moved from VA to DC during their quiet period. If I still lived in VA, I could lend again, but c'est la vie!

As far as my Prosper experience goes, I've had surprisingly good experiences, i.e. a Class E loan is almost fully paid off now and never late. But I have also had a loan go completely bad on me.

My advice is to use Prosper as a diversification tool, but not to sink too much into it that you can't afford to lose. Someone should do a follow up on Pensioner, the guy that Tricia at Blogging Away Debt interviewed on his investments. I wonder what he'd have to say now.

I tried to use LC, but it didn't really work very well on the sign up because I was moving.

[Paula]

I have been using Lending Club for about a year now, after getting the free $25 link here. Although I don't have a lot of money in there, (am working on finishing paying off debt and upping retirement) it has been a good experience for me.

I have a mix of loans A-D, no defaults or even late payements and a 13.85 rate. While I don't have any hard rules, I do go through and spend a lot of time reading the different loans and picking the ones I feel will pay me back.

[Eric]

Been with a LC for a few months now. Everything going smoothly and I'm really liking it. I think you should definitely try it out. A lot of people already have :D