Hero Images/Getty Images

Hero Images/Getty Images

A peer-to-peer lender is looking for investors for securities backed by a pool of personal loans.

Lending Club, a major P2P lender, uses WebBank to originate the loans that Lending Club securitizes. Investors buy the securities which are backed by the loans.

By the end of 2015, Lending Club had issued almost $16 billion in loans, but here we’ll be talking about investing through Lending Club.

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Here’s my take on how Lending Club describes the investment approach:

  • Borrowers apply for loans at Lending Club. Currently loans are for either 3 years or 5 years.
  • Lending Club carefully screens applications using a proprietary credit scoring model that also requires that borrows have a FICO score of at least 600.
  • Investors invest in notes that represent fractional shares of loans, creating a diversified investment among hundreds or thousands of loans.
  • As borrowers pay back loans, investors get cash each month representing the payment of interest and repayment of principal.
  • Interest% – Default% – 1% servicing fee = Investor Net Return

Service fees on principal and interest

The 1% servicing fee applies to both the interest and principal payments made by the borrower. Lending Club makes its money on this service charge, and on the loan origination fees charged to its borrower. Origination fees range from 1.11% to 5%.

Not a liquid investment

Investors who don’t want to hold a note to maturity have the ability to sell the note on a note-trading platform operated by FOLIOfn, an unaffiliated registered broker dealer. “In 2013 it took an average of approximately 4 days to sell a note on FOLIOfn with an offer price at or below par,” according to the 2014 prospectus.

Yield pickup versus increased risk

In a world where certificate of deposit and bond yields have been low for so long, P2P lending has become a way for individual investors to earn higher yields even after accounting for the default risk on these personal loans.

The investor can choose the level of risk he/she is willing to accept and has the ability to diversify the investment across hundreds of loans. Investing in P2P loans will never have the low risk of an CD insured by the Federal Deposit Insurance Corp., but for investors who can tolerate some risk, the expected pickup in yield is substantial.

Are you ready to invest in personal loans through a P2P lender?

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