I completely messed up investing in peer to peer loans through Lending Club by being greedy. Jim Cramer is famous for saying that both bulls and bears can make money, but pigs get slaughtered.
What he means is that it is one thing to make money or make a living with your investments. But, to try and make a killing on them, you will often be crushed by those very same investments.
I’m ashamed to say that I got greedy with my Lending Club investments and tried to push the envelope, and I got burnt. Keep reading to see what happened and what I’m doing now with the new loans I’m investing in now through Lending Club.
Peer To Peer Loans And Lending Is Awesome
I don’t want you to get the wrong idea from this article. I love peer to peer lending, and I’m a huge fan of Lending Club.
I think that Lending Club is the best peer to peer loans lending club investment company on the market today. If you are not familiar with peer to peer lending, it is where you get to be the bank.
Peer to peer loans allows you to safely and securely lend money as an investor directly to a borrower as an investor. Lending Club simply provides a safe, secure platform for the money transfer.
The benefit for an investor who lends money to a borrower is that you receive a higher than average interest rate from other similar investments.
Since 2007, Lending Club has issued over 36,500 loans worth a total of over $382 million. While savings accounts and money market funds are earning less than 1% annual rate of return, Lending Club has averaged a 7.4% return for investors on their safest A rated loans alone. Borrowers receive great benefits from Lending Club by skipping the bank as well. They can receive a peer to peer lending loan with an interest rate as low as 6.78% APR.
Lending Club can also help borrowers qualify for a loan with lower credit scores and without collateral than a bank would typically finance (of course those interest rates are higher). For example, you can routinely find loans on Lending Club for borrowers who are looking to finance things such as their wedding, consolidate credit card bills, pay medical bills, or even start a new business.
How I Screwed Up My Lending Club Loans
When I started investing in peer to peer loans through Lending Club almost three years ago, I only wanted to invest in the riskiest of peer to peer loans. I wanted big rates of return on the riskiest borrowers. Lending Club’s E, F, and G rated loans have an average rate of return of 17.45%, 19.29%, and 20.72% respectively. But, as I stated earlier, I got greedy. And, I subsequently got slaughtered. I invested in the riskiest rate loans.
I loved to lend my money to people starting new business and not Lending Club’s bread and butter borrower who wants to consolidate debt at Lending Club’s current low borrowing rate than their credit cards were offering. Out of the 74 peer to peer loans that I invested in a whopping 12 went into default and were subsequently charged off.
I lost my entire investment in those loans. Luckily, I was only investing $25 in each loan. So, I lost $300 of my investment. It completely wiped out most of my gains. I ended up earning only 1.16% annual rate of return for the past year.
My Lending Club Game Plan In The Future
One of the biggest takeaways that I want you to understand about peer to peer loans is that I haven’t given up on Lending Club or peer to peer lending. It wasn’t the system that went wrong. It was my greed to earn a consistent 20% annual rate of return. I wasn’t diversified. I only owned the riskiest E, F, and G rated loans.
Now, my plan for the future is to only invest in the safer A, B, and C rated loans. I plan on making my investments automatic and let Lending Club’s system pick the best loans for me. I’m done funding entrepreneurs’ dreams in this tough market. I’m going to stick to honest people with good credit scores who need to consolidate their debt.
Starting this month, I will keep you up-to-date monthly on my progress rebuilding my Lending Club portfolio into a safer and more consistent investment. My goal is to have an account balance that pays enough to fund new loans every month without making me having to add anymore principle to it, making it a truly passive investment.
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