If you’re interested in finding the very best P2P Lending notes with minimal default rates, then our Lending Club Strategy is for you. As with any debt security, finding the most credit worthy individuals to invest in is incredibly important. Our Lending Club Strategy filters out the highest risk individuals, reducing our default rates and allowing us to maintain the highest interest rate compared to similar portfolios. Although the majority of our portfolio is invested into lower risk A, B and C notes, we also have a small allocation to higher risk D, E and F notes which help provide a nice boost to our returns.
For more information on P2P Lending and how it works, please read our What is P2P Lending article.
High Returns, Low Risk – Lending Club Strategy
We have been investing in P2P notes for several years now and have learned what works best for each level of risk. Due to the strict filters that we use, even the highest risk notes that we invest in are still relatively safe compared to their peers. Over the course of our portfolio’s lifetime we have managed to stay right at or near the highest interest rate levels compared to the other Lending Club portfolios with similar allocations. This has allowed us to enjoy interest payments similar to higher risk portfolios without the high default rates associated with them. Since defaults can also have a psychological effect on investors, our Lending Club Strategy makes it much easier to rest peacefully at night.
As you can see from the image below, Lending Club’s projected return for our portfolio allocation is only 6%, but we have consistently beaten that return using this strategy. The image on the right shows how our portfolio is always returning right near the maximum average for all portfolios with a similar P2P note allocation.
The return on your invested funds is very consistent with this P2P Lending Strategy and pays out daily interest payments. Since I’ve set up my own Lending Club account as an IRA, I always reinvest 100% of my profits back into the portfolio, allowing me to leverage the power of compound interest. I highly recommend this type of investment for anyone needing a stable income investment or for people that are looking to reduce the volatility in their portfolio.
Our Lending Club Strategy Allocation
We currently allocate 85% of our P2P Funds into the lower risk A, B and C notes. Our experience with Lending Club has shown that our grade A notes have been very stable with only the occasional late payment. However, since grade A notes pay out a much lower interest rate, we decided that an allocation of 20% would be more than enough to maintain the stability that we are looking for from these notes.
Over the years, we have played around with the allocation of our B and C notes. We eventually decided that a higher allocation to B notes was worth the slight decrease in interest. After a while, we began noticing a much higher default rate on our C notes as compared to our B notes and the psychological effect of seeing these extra defaults began to take its toll. So, based on this experience, we have reduced our allocation to C rated notes to 25%, which has greatly helped reduce the default rates we were seeing. However, having a quarter of our portfolio allocated to higher interest, medium risk notes has done wonders for our overall interest payments. This then leaves 40% of our portfolio allocated to B rated notes which tend to be relatively stable with pretty decent interest payments as well.
The last 15% of our portfolio consists of higher risk notes that have consistently proven to boost our interest rate, maximizing our returns. Since all of our notes use the same screening filters, even these high risk borrowers tend to be the cream of the crop for their particular risk category. All of these high risk notes provide exceptional interest rate payments, so we decided an allocation of 9% to D rated notes, 4% to E and 2% to F was more than enough to give us the boost we’re looking for from these notes. You may have noticed that we don’t allocate anything to the extremely high risk G rated notes. The reason for this choice is because we have always found the risk to reward ratio for the E and F notes to be better than G notes and we don’t think the extra risk is worth it.
Lending Club Strategy Filters
These filters are the key element necessary for making sure you always invest in top tier borrowers with much lower default rates. Once you have your allocation set up properly, this is the very next thing you need to do before automating your P2P Investments.
So, here are the filters that we personally use for our own Lending Club Strategy:
- We always set the maximum investment amount for each loan to be the minimum $25 for maximum diversification.
- Always exclude borrowers that have public records since these people have a history of not paying their loans.
- Investing in borrowers that make a decent living wage is very important, so we look for borrowers that make at least $6000 a month.
- We only invest in loans that are meant to refinance credit card debt or consolidate debt.
- The borrowers can’t have any delinquencies or late payments within the past two years.
- We invest in both 36 and 60 month loan terms, but have found the majority continue to be 36 month loans reducing risk even more.
- Home Ownership often shows that a borrower is responsible with their money, so we only invest in borrowers that have a mortgage or currently own their home.
- We never want to invest in the same borrower twice, so we exclude all loans previously invested in.
- All interest rate loans are considered but our allocation prevents any G rated notes from getting chosen.
- The max debt-to-income ratio that we want our borrowers to have is 25%, making them less likely to be burdened by too much debt.
- All of our borrowers must have worked with their current employer for at least one year.
- Since the public record filter only goes out two years, we decided to make sure that none of our borrowers have any Major Derogatory records within the past 59 months as well.
- We don’t want to invest in borrowers that have been turned down by other lending institutions, so we set our inquiries to zero.
- None of our borrowers are allowed to have delinquent accounts.
- All our borrowers must have a good history of paying their debts with zero collections being made against them.
When combining these filters with the allocation presented above, you will have a very solid Lending Club portfolio of top tier borrowers paying you consistently every day. Once you finish setting everything up, just sit back and watch the money roll in.