P2P Lending

In an effort to further diversify my investments, I’ve been looking in to Peer to Peer Lending.  There are different risks than with stocks or bonds, which is important for diversification.  See Wikipedia article.  The article at http://www.peerlendingwealth.com:8080/PeerToPeerLending/P2PLoans.html is also very informative and persuasive.  And a Google search is always a good idea.

After doing my research, I’ve opened an investor account with LendingClub.  There are other web sites that provide a similar service, this is the one that made the most sense to me.  I liked the work they put in to qualify borrowers before their loan is put up for funding.  I liked that the loans are all for a fixed period of time, and a known interest rate up front.   And I liked the amount of information about the borrower, and being able to browse the borrower’s explanation of what a loan is for.

At LendingClub, the mechanics are that I put money into my account, and use that money to fund a part of one or more loans, providing a minimum of $25 to each loan I choose to fund.  For diversification purposes, I’d like to fund a maximum number of loans, so they’ll each get a small amount from me.

To start with, I’m using these criteria to select loans I will fund:

  • Borrower credit score 714 >
  • Borrower has 0 delinquencies in the last 2 years
  • Borrower DTI (Debt to Income) ratio < 10%
  • Borrower stable employment
  • The loan description must show reasonably good spelling and grammar, and actually explain why the borrower wants the loan
  • The loan description must give me the impression the borrower has a reasonable grasp of financial reality
  • Be selective about business loans – carefully consider what it is for, and how it will be paid back if the business fails
  • Look at the number of credit lines open, the revolving credit balance, and the revolving line utilization.  I’m not sure yet exactly what my hard boundaries are on these metrics for a yes/no decision.  I know that a revolving line utilization of 80% makes me too nervous to invest in that loan!

And I’ll see what kind of returns I actually get.