Peer to Peer (P2P) lending has recently emerged as a viable option for an alternative income. New books are emerging that chronicle how P2P lending is radically disrupting how loans are transacted, such das The Lending Club Story: How the world’s largest peer to peer lender is transforming finance and how you can benefit. I have been investing with LendingClub for about 10 months and my experience has been positive.
P2P lending is a way to distribute and democratize the loan funding process. Instead of big banks controlling all the money that changes hands in a society, individuals can now engage in the practice of lending money out to their peers privately. To invest at LendingClub, the user purchases a $25 note that represents part of a much larger loan, up to $36,00. The investor should only purchase one note per loan to avoid default risk.
Just like any other lending agency, LendingClub evaluates their applicants and assigns them a certain risk profile. Based on this evaluation, the loan associated with that applicant is assigned an interest rate ranging from Grade A loans with an interest rate of 4-6% and Grade G loans with an interest rate of 24-26%.
Initially, one would assume that investing with the higher grade loans is a better option because it reduces default, but that’s not totally true. There are other factors that can change the average default rate– the search parameters used to find loans. Users can craft custom filters to find low grade loans. This raises the average return while maintaining the same risk profile or in some cases better than selected purely on the basis of loan grade.
Sites like NickelsteamRoller provide simulation platforms that allow users to backtest strategies. If you try that site, be careful to only base inferences on simulations that consider at least 1000 loans. When the sample size is too small, statistical variations are meaningless.
I’ve tried two different strategies since I started. The first strategy was from the Brave New Life Blog and the second strategy was based on my own research at NickelsteamRoller. So far I’m averaging a 15% return and I have had one default. That default cost me probably about a 7% reduction in my return. My account is currently generating $35 per month, which means it is now self sustaining because it earns enough to purchase one note a month.
Do you have creative alternative income streams? Or do you want to know more about P2P investing? Comment below and I’ll respond!