Exclusive interview with peer-to-peer lending investor and how he makes money on Lending Club
Readers of the blog will know I’m a big believer of peer-to-peer lending investing on Lending Club. I’ve only been investing for a few years but love the diversification and cash flow I get from the new asset class.
I understand that a lot of investors are still reluctant to jump into investing in loans. P2P investing didn’t get a great name when it first started just before the financial crisis.
Loan defaults jumped and returns were negative for a lot of investors…of course, nowhere near the level of losing half their value like stocks.
I’ve posted several reviews of peer lending investing sites and a rundown of my own Lending Club strategy but I wanted to give you a second opinion so I reached out to a friend of mine, a long-time Lending Club investor.
In this exclusive interview, we’ll talk about how peer loans can help save you from a stock market crash and the best criteria for picking loan investments.
I love the face-to-face interaction and the community we’re building with the new YouTube channel. This is the future of beating your debt, making more money and making your money work for you. This is the financial future you deserve!
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Earning 10% Returns with Lending Club Investing
Today’s interview is with Hank Coleman, a major in the United States Army with two tours in Iraq. I know Hank through a financial bloggers conference and we’re a part of a mastermind group that talks regularly.
Hank’s been answering questions about money since 2008, which I would say makes him kind of a grandfather of financial blogging but I think we’re about the same age so we won’t go quite that far.
What I’ve always liked about Hank ‘s site moneyqanda.com is that it does exactly that it takes the most common money questions and makes them answer is easy to understand. There’s some great posts there on the blog including an excellent introduction to Dave Ramsey’s Total Money Makeover.
I read one of Hank’s other popular posts on the site 10 ways to earn a 10% return on your investments, and I know he’s been active in peer-to-peer lending investing. I’ve been investing in p2p for a couple of years and wanted to get Hank’s insight into it.
Just as a quick lead into peer loan investing if you haven’t seen some of the earlier videos on the channel. Investing in loans is nothing new. Bonds are loans to companies and banks almost always sell off their consumer loans to investors. The only difference here is with p2p sites like Lending Club is that you invest directly in those loans.
So, you cut out the middleman of the bank or those brokerage firms. Borrowers apply for loans up to $35,000 and investors pick which loans that meet their criteria investing as little as $25 a month. You get monthly cash flow from your loans with borrowers paying back the principal and the interest.
Hank welcome to the show. Thanks for being here and offering to share your expertise in peer-to-peer investing.
Hank: Well, thanks Joseph. I appreciate you having me.
What is Peer-to-Peer Lending Investing?
Joseph: What is peer-to-peer investing? Why is peer-to-peer investing a good option for investors?
Hank: Well, it’s a little tricky now with the stock market doing so well this past few years. When I started peer-to-peer investing in loans the stock market wasn’t doing so great.
It was the Great Recession, you know the stock market was on a downward trend and I was looking for an extra boost to my investments, you know looking for that extra return on investment. Peer to peer lending really gave me another option.
I was looking for something that was that was not correlated to the stock market. You know when the stock market zigs, I was looking for something else that zagged and peer-to-peer lending really worked well. Because it’s not correlated. It’s loans for people like you and me who don’t want to go the traditional financing route through a bank or use their credit cards.
It was a great return on investment when the stock market was down in the doldrums. Peer-to-peer investing is still going to give you that that double-digit rate of return but right now the stock market is doing great so nobody cares about 10% returns.
But how long can that last? I think the days of 8% returns on the stock market or lower are coming back. I’m afraid sooner rather than later. And it’s just another great thing to have in your bag of tricks, just another option for you to invest in. I take about ten percent of my total portfolio and I go after a little bit of return with peer-to-peer lending.
Joseph: Yeah, you know it’s funny. I hear that a lot. People ask me why invest in in peer-to-peer loans when the market did 30% last year. You never know when that’s going to change. Nobody knew it in in 2000, nobody knew it in 2008 and you need these other assets, these bonds, these peer-to-peer loans and real estate to smooth out that risk.
Hank: I think the markets are going up but I don’t think the markets going up 20, 30 percent again this year, next year. I think we’ll see a return to historic norms. So, we need something else.
Joseph: Sure, and for investors that need cash flow they need a good investment that provides monthly cash flow to help pay expenses and peer-to-peer loans provide that in those principal and interest payments.
Hank: That’s a great point. I love it for the passive income portion of my portfolio. It’s a great passive income stream, another income stream.
What Returns Can You Expect from P2P Investing?
Joseph: So, so you talked about you started in back in the earlier days of p2p I guess during the recession. What have your returns been like over that time? Were there any mistakes you can point out that that maybe you made early on?
Hank: I started out going gangbusters had great double-digit returns, 13, 14 ,15 percent. I’ve seen it dip down as my loan picking prowess isn’t the greatest sometimes or wasn’t the greatest a couple years ago. I dipped back below ten percent at one point. Now I’m trending back up into the double digits again by refocusing on what I was doing.
I have made some mistakes with peer-to-peer lending. At one point, I was going real aggressive because you know these peer-to-peer lending platforms rate their loans. A lot of them rate them from A to F or A to G, just like bonds. You can get returns of 20% annually for a G-rated, super risky loan.
There was a time when I was going after the super risky loans, the ones with the really poor credit.
I ran through a rough patch and I had to refocus last about three or four years. I really refocused my efforts, focusing on the ten percent range, the safer loans. I really found that sweet spot for me is actually debt consolidation loans.
Joseph: Yeah that’s what I found. For people that don’t know quite what we’re talking about basically on sites like Lending Club they have borrowers apply and then they rate them in categories from A to F according to difference credit scores and factors. But you can also go in and you can see you know why they’re applying for the loan. How much they’re applying for and a lot of other factors.
How Do You Pick Loans on Lending Club for Investing?
Joseph: You can go through these factors and say, “I only want to invest in loans where people are making this much money or they have less than this much debt already, or other loan factors.” You can you can customize that kind of screen to only invest in loans that you’re comfortable with. It’s a great way to really minimize the risk while still keeping that return high.
That actually works into our next question here, What do you look for when you’re picking loans?
Hank: I like to look on their application, the screens that you see when you’re picking the loans. I like to look for people with a long employment history, a decent credit score, a history of repaying their loans with no delinquencies or delinquency.
Joseph: Good points. I invest extremely conservatively on Lending Club. You can get that return of fourteen percent and even higher by going with some of those riskier categories but you’ve got those higher defaults.
So, I’m happy with right around 10% return if I don’t have to worry about defaults.
I invest in those first four loan categories. It’s kind of a nice mix of very safe borrowers and higher return. One of the great things about it is you can pick out your criteria, your categories and your factors and Lending Club will automatically invest any of your free money each month. It’s a great way to keep your money invested and working for you instead of just sitting there in your account.
I’ve done quite a bit of testing and research on these loan criteria for p2p investing. How many loans they’ve had charged off and late payments and these factors that you can pick so you only invest in those types of borrowers and loans that you want.
It’s a really great way of keeping your defaults low so you don’t have too many loans that you don’t get paid back on but you still get higher returns.
- No current delinquencies or any delinquencies in the last two years
- Borrowers must have a monthly income of forty-five hundred or more and be employed for five years
- They have a mortgage and they can only be paying a max of twenty percent of their monthly income to debt
That debt to income ratio is only twenty percent that means they’ve got eighty percent of their monthly income that they have to pay other bills. They’re not getting close to over their head in debt.
I also only invest in loans under fifteen thousand-dollars. I figure if someone is going to try to rip off investors, they’re going to be taking as much money as they can. Those lower loan amounts are more likely to be legitimate borrowers.
How Do You Get Started Investing in Peer-to-Peer Lending?
Joseph: What are three tips that you would give somebody if they’re interested in getting into this new asset class, they’re looking at Lending Club investing and want to get started.
Hank: You stole my first one and that’s to set up the automatic investing tool on Lending Club. I’m a big dollar-cost averaging kind of guy so I love being able to automatically invest every month in new loans. I put a little extra in my Lending Club account each month and cash comes in from loans so I love that investing tool that puts my money to work.
I think another point, just like any investing, is to just get started. It’s a new type of investment and most people will sit there and just put it off. Maybe they don’t feel like they know much about it or are worried if it’s a scam or something.
The minimum to get started is very low and it’s definitely an investment people want to get started on to help protect their portfolio.
It really becomes a passive income source. Like we said, those 30% stock returns aren’t going to last and I think it’s a great alternative.
Joseph: Yeah. I love the automatic investing tool they have set up. It takes all of three to five minutes to set up and puts your p2p investments on autopilot. Not only does it give you that diversification from stocks and bonds but it’s really something you never have to worry about. I have a direct deposit going into my Lending Club account and don’t have to log in to do anything.
Joseph: I would say also p2p investors should consider using a retirement account either an IRA or a Roth IRA for your type of account on Lending Club. That interest you receive every month is taxable. You know it’s not like stocks where you can wait to sell a stock and then your capital gains are taxed. You’re going to be taxed on that interest you receive every month. If you invest through a retirement account though, you don’t pay taxes on those interest payments until you retire.
Some great ideas about p2p investing with Hank Coleman. Set up your Lending Club account and use some of these ideas to pick your loan criteria for solid returns that will smooth out your portfolio and help save you from the next stock market crash. Make sure you join the YouTube community by subscribing and get all our videos on beating debt, investing and making more money.