Lending Club is a popular peer-to-peer lending platform that allows investors to invest in consumer loans. As one of the largest P2P lending platforms, Lending Club offers attractive returns but also comes with risks. If you are new to P2P lending, here is a step-by-step guide on how to invest in Lending Club.
Understand the risks of lending club investment
While lending club promises high returns, it is not risk-free. As a P2P lending marketplace, lending club does not guarantee payments on the loans it facilitates. If a borrower defaults, you may lose your principal investment and interest payments. It is crucial to diversify and invest only an amount you can afford to lose.
Research historical returns across risk grades
Lending club assigns each loan listing a grade from A-G indicating the credit risk. Review historical returns across these grades to set your risk tolerance. Riskier grades offer higher returns but have higher chances of borrower default. Most investors choose a mix of grade types to balance risk versus reward.
Automate investing for diversification
To reduce risk, diversify across many loans and borrowers. Lending Club allows you to set automated investing criteria so you spread capital across different risk grades. This ensures no single loan or borrower makes up too much of your portfolio.
Invest through retirement accounts for tax benefits
You can invest in lending club loans through self-directed IRAs. This allows your returns to grow tax-deferred or even tax-free. Consider funding lending club investments through retirement accounts to maximize tax efficiency.
Monitor performance and adjust strategy accordingly
Check your lending club account regularly to ensure your investments are performing as expected. If higher risk grades underperform, you may want to shift more capital to less risky grades. Be prepared to tweak your investing criteria over time.
By understanding the risks, diversifying through automated investing, maximizing tax efficiency, and monitoring performance, you can invest in lending club loans in a prudent way suitable for your goals.