Are you tired of earning less than 1% in your bank account? How does potentially making 7-10% interest sound instead?
There is a really innovative new way to make passive income in this range through something you may not have heard of called marketplace lending or better known as peer-to-peer lending.
Table of Contents
What is Peer-to-Peer Lending?
For the longest time, big banks were the main way that anyone could get a loan. Now with peer to peer lending, you can become the lender and get the return that was once only available to the major financial institutions
. One of the leading companies in peer-to-peer lending is LendingClub. They have helped over 1.5 million people since 2007 achieve greater financial wellness through their platform
How Does Lending Club Work?
There are many reasons people might need a loan, but don’t want to hassle with a bank. Here are two examples to show you how peer-to-peer lending works:
Consolidating Credit Card Debt
For instance, Joe has $4,000 in credit card debt that is at 20% interest and he would love to get a better rate so that he can pay it off faster. He has good work history, a decent credit score, and is looking for a personal loan to consolidate his debt as well.
This is where you can come in.
You can invest your money with LendingClub who will offer Joe a loan at a much lower interest rate and at the same time you get a much higher return on your money than if it was sitting in a traditional bank account.
In addition, Joe doesn’t have to go through the stringent process of going through a bank and you don’t have to go through all the administrative work that would be involved if you loaned him the money directly.
Making Improvements on a Home
Mike and Jennifer want to get solar panels installed so that they can reduce their monthly expenses long-term. They want to get the project going quickly and they don’t want to hassle with the process of getting a Home Equity Line of Credit (HELOC). They have had frustrating experience working with banks and would rather not delay the process.
Peer-to-peer lending is more appealing to them because the process is quicker due to the fact that they don’t have to do the bank paperwork or get a home appraisal. There are also no pre-payment penalties or hidden fees.
As one of the investors in this loan, you are not only getting a decent return, but you are helping Mike and Jennifer get the solar panels they need to accomplish their goals.
Risk Versus Reward
One of the first things I thought about when it comes to loaning people money is the risk involved in getting one’s money back. You have probably heard of about situations where someone loaned money to a friend and they never got their money back. This is something totally different.
98% of the loans that Lending Club processes have a positive return. This implies that only 2% have a negative return, which is not bad in the scheme of things.
You have options
All investments have some sort of risk associated with them. If you do not like to take a lot of risks, Lending Club grades their loans based on the borrower’s credit. The grading scale goes from A to G, A being the lowest risk and G being the highest risk.
So if you want to lower your risk, then you should consider investing A and B loans. It is worth noting that with a lower risk, tends to be a lower return.
If you have a higher risk tolerance, then you could consider F & G loans which have the potential for a higher return. On the flip side, typically with a higher potential return, there is a higher potential risk involved. If you decide to go this route, I would not make it a significant part of your overall investment strategy.
You have probably heard the phrase, “don’t put all your eggs in one basket” and that is because if that basket falls all of the eggs crack and you are left with nothing.
Why Choose LendingClub?
Here are some things that set LendingClub apart:
- Over 150,000 investors
- Over 1.5 Million borrowers
- Over $26 billion invested
- Invest as little as $1000
LendingClub is Celebrating 10 Year Anniversary
While some marketplace lenders are new, LendingClub has been around for a while. LendingClub was founded in 2007 on the premise that an online marketplace powered by technology would operate at a lower cost than traditional banks, and those savings would be passed on to borrowers through better rates and investors through stronger returns.
Ten years later, they have grown to become America’s largest online credit marketplace and has transformed how people access affordable credit and invest for their future.
Useful Mobile App
They recently released a mobile app for iOS called LendingClub invest where you can check your investor account anytime and anywhere. This is a great feature as most people prefer to check accounts via their cell phone instead of a computer. See here for more details about the mobile app.
They Offer Types of Investment Accounts
- Traditional IRA
- Roth IRA
- 401(k) rollover
- Individual account
- Joint account
- Corporate account
- Custodial/minor accounts
If you are looking for a way to make passive income, peer-to-peer lending is definitely worth considering. Not only can you get a higher return with LendingClub on a minimum invest of $1000, but you can help someone achieve their financial goals at the same time. Who doesn’t love a Win/Win scenario, right?
Please realize that all investments have some sort of risk involved. Make sure to do your research and only invest in things that you understand and feel comfortable doing.
Have you ever tried peer-to-peer lending? If so, please let us know your experience in the comments below.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage and history. The APR ranges from 6.95% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. *The origination fee ranges from 1% to 6%; the average origination fee is 5.2% (as of 12/5/18 YTD).* There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com