I’m incredibly angry about what has happened in our country in the past several years. At the height of the housing bubble, we had trained economists telling us that houses would never drop in value, and in 2004, with interest rates at near-historic lows, our Federal Reserve chairman, Alan Greenspan, told us that we would probably be better off with adjustable-rate mortgages. Those same mortgages were the ones that blew up in many folks’ faces a few years later, when the “adjustable” rates adjusted to 10% or more.
I think you have every right to be mad as well.
During these times, I’m probably not alone when I say what I am seeking most is a feeling of control. Despite selling my company at the top, I didn’t realize the stock market would plunge over 50%. I lost a bunch of money there — and you probably did, too.
I am also disgusted with how most banks have performed, and that disgust has fueled a passion to clear myself of debt. From over $100,000 of revolving debt in 2007 (most of it used to finance my business), I’ve come a long way — I now have no debt other than a low-interest car payment, and I plan to pay that off this year.
With banks paying meager interest rates and the stock market bouncing around like a pinball, you are right to look for other places to invest your money. Particularly with small amounts, investing in the stock market doesn’t really make sense; the transaction fees eat up profits for any investment under $1000 or so. I can invest a small amount — say, $25 — in my business, but it’s iffy whether such a small amount would show a measurable return.
What Alternative Investments are Out There?
I spent months researching alternative investments. Finally, a few weeks ago, I came across Lending Club. You can take as little as $25 and lend it out to other people. What intrigued me is that this allows you to form your own tiny bank of sorts. You read each potential borrower’s profile, including their credit score and history. They tell you why they want a loan, what interest rate they have agreed to pay, and how much they wish to borrow. Just like a bank, you can then decide whether that borrower gets your $25 (or whatever you’ve decided to lend.)
But the best part is this: Just like a bank, you get to collect interest on the loans you fund — from 8% to 16%. Lending Club claims that a well-diversified portfolio should earn you an average return of 9.05%. Since CD rates have dropped so dramatically, Lending Club seems like a viable option for diversifying your portfolio.
But was Lending Club really worth it? I funded my account with $100 and dug in deeper.
To sign up (which is free), you must go through a 4-step process that verifies your identity. Once your identity has been verified and your bank account confirmed, you can fund your loans.
If you have ever used Kiva.org, this process will be straightforward. Let’s take a quick walk through it…
How Lending Club Works
Once you select “Invest”, you can either choose LendingMatch, which is Lending Club’s proprietary tool to help you get the exact return you want, or you can browse all available loans. I prefer to simply browse loans.
When you click “Browse”, you will see some options on the right, where you can filter loans by their interest rate, credit score, etc. When someone applies for a loan, Lending Club sets their interest rate. The loans with the least risk (as judged by Lending Club) carry the lowest interest rate. To balance your portfolio, you will want to make several loans to different people at various interest rates — just as you wouldn’t put all of your investments in one stock.
How do you know which loans to fund? A few tips, most garnered from other lenders, are below. These tips are subjective, but you can use them as guidelines:
- Don’t loan to anyone who seems desperate or needs cash “now!”
- A person who has had a lot of credit report inquiries in the last 12 months is likely more risky.
- Business loans, especially for someone with no previous business experience, are more risky than personal loans.
- A high debt-to-income ratio means the person is more likely to default, since they are carrying a large amount of debt relative to their income. Ideally, the debt-to-income ratio should be less than 20%. Use the “DTI” checkboxes on the right side of the loans page to adjust for this.
Why Lending Club?
Why should you invest in Lending Club and not in the stock or bond market? In my opinion, it’s not an either-or situation. Lending Club fits best when you have a savings account and a retirement account and want another option that doesn’t involve you losing your entire investment to transaction fees. Let’s put it this way: very few of us would miss $25 a month. Usually, those small amounts just sort of disappear from your checking account. But investing $25 a month every month means that, with just a few minutes a month, that $25 could be making you money instead of being wasted. If you’re a fan of paying yourself first, Lending Club even has an auto-deposit feature.
How much can investing just $25 a month really make you? At Lending Club’s 9.05% average return, investing $25 a month for 3 years will earn you $170.13 in interest. That’s free money…just for taking the “spare change” you already have and sweeping it into Lending Club instead of frittering it away. And if $170.13 doesn’t excite you, try $50/month or $100/month!
As if gaining interest on your money isn’t enough, Lending Club is offering you a $25 bonus just for signing up! It’s free to sign up.
What’s the Catch?
As with any high-yield investment, Lending Club does have its pitfalls. First of all, you are lending to individuals, who can default on their payments. Lending Club builds in some defaults to its 9.05% average return promise, but your default rate may be higher or lower. Remember to diversify your portfolio, and keep in mind the guidelines above, to be safe.
Lending Club charges a 1% fee on every payment they collect from a customer, which equates to a 0.7% interest loss per year. This isn’t that big of a deal, but it’s something to be aware of.
Finally, there are some investor requirements. You must be a resident of one of the following U.S. states to participate as a lender:
California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Minnesota, Mississippi, Montana, New Hampshire, Nevada, New York, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin, West Virginia, and Wyoming.
Lending Club has filed for registration with the appropriate State securities authorities in all other states and expects to be adding more states over time.
In addition, individual lenders who are residents of states other than California must (a) have an annual gross income of at least $70,000 and a net worth (exclusive of home, home furnishings and automobile) of at least $70,000; or (b) have a net worth (determined with the same exclusions) of at least $250,000. Individual lenders who are California residents must (a) have an annual gross income of at least $100,000 and a net worth (exclusive of home, home furnishings and automobile) of at least $100,000; or (b) have a net worth (determined with the same exclusions) of at least $250,000.
As far as I know, Lending Club has no way to confirm what your net worth actually is, but stating your net worth is required by the Securities and Exchange Commission.
All loans have a 36-month repayment term, so consider this somewhat like investing in a bank CD. Lending Club has a trading platform where you can sell your notes for quick cash (which I may explore in a later blog post, if there is interest), but you’ll lose a small amount of your principal by doing this, and it may take a few days for your loan to sell.
I have been enjoying using Lending Club as an alternative investment vehicle for the past few weeks. Already, I have loaned out $100 and received $0.83 in interest. My greatest joy, however, is the satisfaction of becoming my own tiny bank — and beating the big banks at their own game!
For me, Lending Club is a way to regain control over my finances. I may not be able to control higher tax rates, gas prices, or our government spending money like it’s going out of style, but I can make wise investment decisions for myself. Every loan I help to fund on Lending Club is one less loan that greedy banks get to cash in on…and one more way I can help someone else improve his or her life.
Helping people and making money…and getting a free $25 just for spending 10 minutes signing up? To me, it doesn’t get any better than that.
Now, to do something I don’t do very often: I’d like to ask for your help.
Here’s the deal: I want 80 of you to sign up for Lending Club and collect your free $25. Do this today, because every day you delay, you lose potential interest payments. Since it’s free to sign up, you have nothing to lose.
If 80 people sign up through my link and collect their $25, I will celebrate by giving everyone who signed up a free copy of my first ebook, which is due out this summer. Its working title is “Pay Less For Life,” and it’s all about how to effectively save tons of money on everything from banks to bills to better food.
To claim your free copy of my ebook, sign up using the links in this post and then comment on this post. Leave a valid email address, and I will email you my book when it is released. This will save you at least another $20!
How can you help? Who do you know who could use a free $25? Tweet this post, post it on your Facebook account, Stumble it, and email your friends. Your friends will appreciate you sending them a link to get $25, and you will all win by getting a free copy of “Pay Less For Life.”
Sign up now — don’t let someone else collect your interest payments!
Thank you in advance for your help!
If you’re interested in signing up as a borrower and getting a loan, please sign up for Lending Club via this link. It won’t get you a free $25, but it may get you a loan!
Disclosure: I collect a small amount of money for every person who signs up for Lending Club through one of the above links. Per my advertising policy, I have personally reviewed, actively use, and endorse Lending Club, and have not been paid to write this post.
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