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Peer to peer lending - Micro finance and Lending Club

Updated on June 8, 2015

Peer to Peer-Small amounts with BIG returns

In recent years the wave of micro finance has steadily gained momentum. The concept is based upon the peer-to-peer lending, in which an investor is allowed to buy small shares (called notes) to fund another individual's loan. Each loan is pre-screened by the lending company before it is available for investment, and assigned a fixed interest rate based upon various financial factors of the applicant. The return on these loans can range from 5% all the way up to 18% or more. The average CD (certificate of deposit) rate is no higher than 1.5% for one year. While the risk in micro investing is higher than CDs, there is a much higher, consistent reward as well. Lending Club, one of the peer-to-peer lending sites, has a Net Annualized Return (percentage amount returned on one's investment each year) of 9.64% since its inception.

Micro Finance and Lending Club

I'm assuming that you're you're reading this, you already are interested in earning passive income through investing, but that you have little to no experience in doing so. First, you need to decide what platform your going to use to invest. The two big ones that I know of are Lending Club and I'm going to use Lending Club as the example because I have most of my experience using their platform (both are very similar conceptually). One quick note, when deciding which to use, know that you may not be able to use one platform or the other in your state, or there may be certain limitations (which we'll discuss later). 

Getting Started

There is no minimum to start an account, all you need is your bank account info to transfer funds, which takes a few days to get money transferred in and out of the account. There is no charge or penalty to withdraw funds anytime, as long as its available money that is not tied up in investments. How much you ask? That's entirely up to you, Lending Club recommends that you only invest a small percentage of your income (a wise choice) but ultimately you'll have to decide how much you feel comfortable with. A good question to ask is- Will the potential loss of this money be significantly detrimental to my overall finances? Remember notes start at $25 so you don't have to invest much. I would recommend a small amount that you're comfortable with to begin learning how the process works. Once you have some money, you're ready to invest.

Buying Notes

So to recap-

You invest your money by purchasing notes, which are small pieces of a requested loan amount, and these notes have a fixed interest rate which pays out to the lenders (you) on a monthly basis as the borrower pays back his loan. Each payment received will be part of the principal (the original loan amount) and the rest is the interest on the loan.Read through some of the material on Lending Club to gain a better understanding of how to trade or check out more on Buying and Trading notes in Lending Club

Things to Note

One drawback with Lending Club is that it is not available in all states and some states can only use the trading platform to buy and sell notes. (As you go through the sign-up process you will be notified if this is the case) If you reside in a state that does not allow you to purchase notes as soon as they are approved by Lending Club, don't fret, you may still be able to purchase notes using the trading platform where lenders buy and sell notes. (which sometimes makes for great deals on notes!) If you have any questions just leave them in the comment box or if this hub on peer to peer lending, micro finance and Lending Club was helpful please vote it up!

Do you have a better sense of what Lending Club and Peer to Peer financing entails?

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