Lending Club Investment Tips for Lenders

In the last couple of years, many technologically savvy investors have begun to diversify their investment portfolio by becoming lenders to other individuals seeking personal loans through peer-to-peer lending companies such as Prosper.com and LendingClub.com. There are some people that have averaged over a 12% APY on the money that they have invested through these companies using some sound Lending Club investment tips, but not everyone fairs so well.

So how do you lend successfully through a peer-to-peer lending site and get the best rate of return? It turns out that Lending Club had an answer. They recently offered an online discussion with one of their veteran investors, Scott Langmack, who’s averaged 12.6% on his money through Lending Club in the last couple of years. Langmack shared Lending Club investment tips for beating the average rate of return that people receive on Lending Club.

Langmack had four suggestions to investors:

Diversification – Langmack contended that in order to maximize the stability that you have on your loans, you need to have at least 400 loans in your portfolio. Langmack says that the more notes that you have, the more likely you will receive the “expected” default rate since you’ll have the law of averages on your side. If there’s an expected default rate of 5% for a certain type of loan, you’re much more likely to have that default rate if you have a large number of loans. If you have a few, larger loans instead of many smaller ones, you might have a 2% default rate or a 10% default rate depending upon how lucky you get. By investing in a large number of loans, your default rate will be much more predictable.

Choose Your Volatility – Another one of the Lending Club investment tips that Langmack offered was that Before beginning to invest, you need to decide what interest rate you would like to receive on your money. In making that decision, you are also deciding how much volatility and how much risk you are willing to take on. Langmack stated that you can easily get 7-8% back on your money without much risk or volatility by investing in high-quality loans, but if you’d like to earn in the 12% range, as Langmack does, you should invest in loans paying 12.5% to 20%.

Job Stability of the Borrower – When reviewing a potential loan to invest in, Langmack contended that investors should not only look at the income of a borrower, but also look at the person’s job stability. How long have they been working at their current job? Is the type of possession that the person has a “high turnover” field? State or Federal Employees with a long term history of employment are much less likely to have a period of unemployment than an individual in the automotive industry in Detroit that has been working for 6 months.

Choose the Best Loan Types – Langmack contended that the reason the borrower is asking for the loan is often predictive of whether or not the individual will default. He stated that loans for vacations, weddings, and lowering credit card loans have default rates of only 2%. Loans for medical costs, home improvements, moving expenses or major purchases have a default rate of 3%. Meanwhile, loans for educational expenses, down payments on homes, start-up capital for business ventures and debt consolidation have average default rates of 5%.

To learn more about Lending Club, visit www.lendingclub.com.