[...] My Dollar Plan presents Have You Checked out Lending Club? [...]

So lets say that my company announced job lay-offs at the end of the month (2 weeks away), and uugh, the axe fell to me. I have been working at this job for 15 years making a 6-digit income. My fist thought is how will I pay the bills? I can’t tap the equity in my home (banks have discontinued HELOC’s), my credit card just lowered their credit limit (so I’m maxed out there too), and I don’t have a rich uncle.

I consider micro-lending (e.g. Lending Club) and immediately I qualify since I have a FICO score of 650 and am currently employed. I may even make my first loan payment through Lending Club with some $$$’s from my last paycheck. But then…DEFAULT!

I wonder how often this scenario is played out as more and more people lose their jobs. A lender is betting that the borrower will have the means to make their loan payment and … that they will keep their job.

These micro loans are far too risky for most conservative investors. But I will concede that their are some with a preference for high risk. Not me!

On Prosper, I went higher risk (greed) and was burned right away. I’ve lost about 12% of my investment, but I’m still making about 2-3% after losses.

On Lending Club, I had no choice but to go lower risk because they only let better quality borrowers in (no subprime <640 FICO people). Not surprisingly, my performance is better: about 3% of my portfolio is defaulted, but at a 13% average interest rate, I’m still making around 8-9% after fees and losses.

In summary, receommended as a way to diversify your investments, but be willing to learn and lose a few here and there. Go super safe first (best credit grades)

[...] and Friends Make a New Year’s Resolution for SMARTER Goals This Year Paying For a Missing Item Have You Checked Out Lending Club 20 Largest Stock Funds 2008 Performance: Nowhere to Hide. Case Study:  Paul and Melanie Want to [...]

From the prospectus (https://www.lendingclub.com/info/prospectus.action):

“The Notes are unsecured and holders of the Notes do not have a security interest in the corresponding member loans or the proceeds of those corresponding member loans. The recovery, if any, of a holder on a Note may be substantially delayed and substantially less than the principal and interest due and to become due on the Note. Even funds held by Lending Club in trust for the holders of Notes may potentially be at risk.”

Prosper probably has the same risk. Just be sure to read their prospectus _after_ the SEC gets through with them.

Also, if you’re thinking of making a large loan to friends or family, check out http://www.VirginMoney.com. The fees seem a little too steep to me, though.

Lastly, if you’re interested in lending small amounts to entrepreneurs in the developing world, check out http://www.kiva.org/ or google for “microlending”. Most of these sites are charitable lending (0% interest). Some allow you to specify a nominal interest rate.

I just ran a test using LendingClub’s data to test DK’s claims that their results are better than Prosper’s. I looked at all loans originating from June 1, 2007 through Dec 31, 2007 and looked at at their status 1 year after they originated. This is a total of 580 loans valued at just over $3.4 million. Here are the results:

88% of loans were current or prepaid (513 loans)
1.2% of loans were 15-30 days late (7 loans)
5.5% of loans were 30+ days late (32 loans)
4.8% of loans were in default (28 loans)

So using a similar comparison to the study looking at Prosper loans 1-year out which found 20% of loans to be 30+ days late or in default, LendingClub is somewhat better with only 10.3% of loans 30+ days late or in default. If you look at the amount of these bad loans, it is even worse encompassing 11.5% of the total amount lent.

_______________________________________________

From the details above keep in mind that though possible, it’s difficult to make any good money in P2P lending.