I currently have about $6,800 invested in Lending Club loans, across 258 separate notes.  Out of those notes, 256 of them are in good standing. I anticipate more of them will go delinquent as the loans age, but believe that the strategy I’m using is worth sharing. I am currently earning a 12.94% net annualized return.

The Lending Club strategy that I’m making use of has a three tenants:

  • Accept Some Risk: Maximize the net annualized return on my Lending Club investment by investing higher risk loans that I believe won’t default
  • Avoid Red Flags: Avoid loans which common sense would dictate that the borrower would likely not repay
  • Invest Algorithmically: Maximize the number of loans invested by selecting loans only on whether or not they meet the criteria that I’ve setup. I do not look at individual loan listings or descriptions

Here are the specific criteria that I’m using on Lending Club each month:

  • Months Since Last Delinquency – I select 60 or more. I do not want to make loans to borrowers that have a history of missing payments.
  • Inquires in the Last Six Months – I select 3 or less.  Credit bureaus have traditionally looked at a large number of recent inquiries as a red flag.
  • Public Records – I exclude loans on borrowers that have public records. Public records suggest that a borrower has bed debt or other judgments against them.
  • Min Length of Employment – I select two years. Borrowers that have stability in their income and their life are more likely to repay their debts.
  • Revolving Balance Utilization – I select 50%. I don’t want to invest to borrowers that are maxed out on their existing lines of credit.
  • Loan Purpose – I do not invest in the following types of loans:
    • Student Loans – If a borrower is resorting to a generic unsecure loan on Lending Club, it probably means they’ve already maxed out their existing student loans and can’t qualify for a private student loan.
    • Home Improvement – If a borrower hasn’t been able to get a home equity loan or home equity line of credit which carry a much lower interest rate, they probably have no equity in their home and can’t afford to make the improvements they’d like to do.
    • Home Down Payment – This reeks of risk to me. Ideally, homeowners will come to the table with a 10%-20% down payment. Borrowers that can’t come up with a down payment and have to borrow money for a down payment probably can’t afford a home to begin with.
    • Car Financing – Borrowers with reasonably good credit should be able to get car loans at much lower interest rates from a bank or credit union. If someone is borrowing money on Lending Club for a car, they probably have already been turned down by more affordable forms of auto credit.
    • Interest Rate – I do not invest in “A” loans. I’m hoping to make between 10% and 15% NAR and signing up for loans that pay less than 10% won’t achieve that goal.

I also do not invest more than $50 per each loan. Most of the loans that I have are $25 each. My average loan size is currently $28.00 each.

Let us know about your Lending Club strategies in the comments below.

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