Today I took my first forray into the world of micro-lending. Otherwise known as peer-to-peer lending, micro-lending is the act of lending small amounts of money to an individual. These micro-loans are combined together into one larger pool of money which is lent out. I am using lendingclub.com. The way this works is that someone seeking money puts in a loan request. They list how much they need and what they need it for. Lendingclub pulls their credit history and assigns them their interest rate and repayment terms. If the borrower accepts, the loan is placed on lendingclub.com for funding. People like me search through the various loans until we find one we like and then we buy into it (we buy "notes). Once the loan is funded, the money is sent to the borrower, and the game is in motion. Lendingclub processes payments from the borrower, subtracts 1%, and credits the noteholders (like me) based on how much they bought in.
The first loan, I put $50 into. The total loan is for $16,500 to pay off a Prius loan, plus consolidate some other loans. Repayments are for 3 years at 9.32%. Assuming they pay it off, I should earn just over 8.32% on that $50. The borrower has a credit score of between 714-749, no delinquencies and they claim that they are moving into an apartment that will save them $800/month. Overall, this loan seems fairly solid. The other loans are still solid, but in one, the borrower has a delinquency in the last 2 years. The third loan has no delinquencies, but the borrower is using 94% of their credit line (which could be attributed to their mortgage). On these loans, interest is over 13%. I put $25 into each of them.
All of the loans are over 95% funded and I believe that they will be fully funded in the next 24 hours. If they don't get funded, the borrower can either lower their requested amount or cancel the loan. If they cancel, that money gets returned to us. Once the loan becomes active though, that money is "gone". Altogether, I have $100 spread between3 loans, averaging over 10% (after lendingclub fees).
The downside is that one has to wait about 3 years to truly see if the investment will pay off. In that regard, it's like a CD but without the bank guarantee. Working through lendingclub seems to be a safer bet than dealing with stocks over a three year period, the drawback being that you can't pull your money out like you can with stocks. So, this will most likely be a very small part of my investing practice, but I can always be surprised.
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