LendingClub Experiment

This year has been great for stocks, including dividend stocks. I have not put any fresh capital into my stock portfolio, and only re-invested proceeds just once. I've been on the sidelines most of the time, waiting for two conditions: sufficient dividend proceeds to build up cash for another investment round, and good entry points for quality dividend stocks. I'm right at a point where the first condition is satisfied and will be more actively looking for good stocks.

I've been wanting to diversify from dividend stocks, and stocks in general, but never found a good options. I don't want to be a landlord, it's too much hassle, too illiquid, and too much of a gamble unless you do it large scale. So when I recently read about LendingClub, I figured I'd give it a try. LendingClub is a peer-to-peer lending company. There are others like Prosper, but LendingClub came best out of the reviews I read.  They did have some fraud issues earlier this year, but that seems to be behind them now. I'm not going to review LendingClub here, but I'll share some experiences.

High level the system allows people to get a loan, with each loan chopped into small notes that are backed by investors. For example a note can be $25, so a $10k loan is backed by 400 notes. As investor you invest in notes from different loans to reduce your risk. There are different loan grades based on the applicant's credit rating and other factors. The return is based on the interest rate and reduced by any loans that are written off if they default.

It's only been a week, so no real numbers yet. I opened an account, transferred $2500 into it, and had to wait a few days for it to clear. I signed up for Automatic Investments, where you select a risk/return profile and the system will invest for you. I figured this is good for a start to get a feel for the system.  On Monday my money was in the account and gradually used to fund different loans. You'll have to wait until a loan is fully funded (e.g. investors have picked up all the notes to back the loan), and then the loan gets issued. Within a week 90% of my notes were in issued loans, and I expect my first payments early November.  The remaining 10% are being issues, meaning their loans are fully funded, and I expect them to be issued early next week.

I'm curious about a few things. First I want to see how long I can keep a 'perfect record', meaning no defaults, charge offs or even late payments. I have some high risk loans in the mix, and I expect it won't be long. Second, I'm curious to see how quickly I get back enough money to buy another note.  Now that my initial investment is put to work, I'm debating if I should re-invest the returns in a different way -- more risky or less risky.

The next item I want to learn about it the secondary note market. I'm sure people have figured out the right time to sell a note to optimize their profits. Notes that are way past due could be charged off, or possible sold for a dime on the dollar to recoup at least some of the initial investment. I'll have to read up on it and see what I want to do. The easy thing is to just let things ride, but I want to see how much time it takes to manage it for more optimal returns. After all, I'm actively building a passive income portfolio.