Peer-to-Peer Lending: Earn High Returns While Helping Individual Borrowers with Lending Club?

The Wall Street Journal recently reported that, because of the recent recession, almost four in ten workers say they plan to retire after the age of 70, or else just keep working throughout their golden years. Only 6% of the people surveyed indicated that they'll retire between age 50 and 59. Not only has this bad economy laid off many people and made it harder to find good-paying jobs, returns on investments have drastically declined as well. Some of the very best CD rates on the market barely pay 2.5% for a five-year deposit, and the best saving account rates barely exceed 1% APY. Inflation in April 2011 was 3.16%, so that means the vast majority of deposit accounts can’t keep up with inflation. So what's an investor to do? You may want to consider investing in a social lending club like Lending Club.

Here’s how it works. Individual borrowers apply for loans through Lending Club, for everything from vacations to credit card consolidation. Lending Club rates the risk of the borrower, based on things like their credit score, income, and so forth. Borrowers pay an origination fee that ranges from 2.00% to 5.00% of the loan amount, depending on their loan grade, which is based their credit rating. The borrowers are assigned an APR for the loan, based on their credit rating and their determined risk. Since the Lending Club overhead cost is so low, and borrowers are often able to get financed for rates lower than a traditional bank would offer. When borrowers sign up, they link a bank account to their Lending Club account. The loan is deposited into this account, and monthly installment payments are automatically deducted from this same account as well.

People can invest in the loans of these pre-screened borrowers. Lending Club’s credit policy results in less than 10% of borrowing applicants being approved to list their loans, so investors can be assured the borrowers listed have good credit and are generally low risk. Investors have earned an average 9.64% APY and $23,067,087 in returns have been paid to investors as of 6/2/2/2011.

You can invest two ways. For maximum control, you can browse borrowing notes and select the individual borrowers you want to invest in. Alternatively, you can use their Lending Club’s portfolio tool to help you develop a diversified portfolio in seconds. Of course, as it is with regular investing, diversification helps you manage risks as well. Lending Club states that every single investor they have that holds 800 or more borrowing notes have experienced positive returns on their total investment.

Of course, this still is an investment that does carry some risk, as do all investments that aren’t FDIC insured. Lending Club’s notes are offered pursuant to a prospectus filled with the Securities and Exchange Commission. Before you invest, you should read their prospectus to be sure you fully understand the investment you are undertaking. While investors have, historically, received a solid rate of return on their Lending Club investments (and you also receive the bonus benefit of knowing you are helping out a qualified individual borrower somewhere), it’s important to understand all of the terms, conditions, and risks involved with all investments before you decide to invest.