“…peer-to-peer (P2P) lending has finally earned its place on an income investor’s menu.”
Nat Harward is no average 20-something. He owns a strategy consulting firm which he started in 2012 after being an account manager at a New York PR firm. He’s a self-taught investor – and now an investment mentor – who describes himself as being “obsessed” with personal finance since his childhood. And his portfolio has been boasting impressive returns of around 20% – net – outside of the stock market.
Nat’s favorite investment platform is LendingClub.com, which has now surpassed Prosper to become the largest peer-to-peer lending website. (If you’re not familiar with P2P, read last week’s article, “Peer to Peer Lending: How Investors Are Earning Double-Digit Returns.. by Helping Strangers!“)
Nat is now well into his third year of peer to peer (P2P) lending. He has studied peer lending investing as well as crowdfunding, experimenting with various strategies, and attending the inaugural and recent LendIt Conference, which he credits with giving him an edge over the average lender. After costs (Lending Club takes 1% fee), his first year returns were north of 14%, and they have only improved since.
Today, we’re diving deeper into the topic of Peer Lending Investing – and how to succeed with it – with advice from Nat.
“How did you get started with Peer Lending?”
I was using Mint.com to track my expenses and personal budgets and saw an ad for it, promising higher returns. It was several months later that I actually clicked and looked. Once I started looking at the site, I was really attracted to the idea.
“What attracted you?”
I love efficiency and coming up with better ways to do things. So when I saw that Lending Club uses the internet to take financial middlemen out of the personal loan market, I got excited. Then when I saw that I could start loaning with as little as $25 and pick from low-risk-rated loans with nominal return rates of more than 6% and up to high-risk loans with rates at 25%, I thought — WOW this is WAY more attractive than keeping stuff in a savings account! AND it seemed more accessible that buying stocks or indexes.
“Who do you think is a good fit (or not) for peer lending investing?”
Well, definitely you’ve got to meet the state-by-state requirements for participation. Lending Club and Prosper both have sections of their website with more information on legal requirements.
For anyone with less than $100,00 ready to go … even as little at $25, it can be a good fit. (With $100k on hand, I am more interested in leveraging that for real property or making an angel investment in a business.) Even if you don’t like managing your money or looking at numbers, you can learn how and it’s a great way to train and develop yourself as an investor.
Who I think it’s a great fit for is someone who has $500 to $5000 or even $50,000 in liquid capital, and that capital is not needed for any other immediate purpose. In other words, you are going to be fine operating without that cash in your back pocket. Peer-to-peer notes are not publicly traded securities so you’ve also got to be willing to not have the money liquid again for at minimum 3 years and typically 5 years. (Lending Club has a secondary marketplace where you could liquidate your notes, but the market isn’t vibrant right now and you might take a hit if you’re looking to exit quickly.)
Peer lending is also great for someone looking to create a source of monthly cash flow. Just like people holding mortgages and car loans, P2P borrowers make monthly payments and the lenders get their fraction monthly. I personally re-invest all payments I receive, but after a few hundred dollars, the cash flow (or EMP, expected monthly payments) can start to cover your cable bill, then your phone bill, then a car payment and so on.
Lastly, even if you are someone with more than $100,000, P2P lending can be great if you aren’t looking for a high-risk investment with aggressive returns. P2P marketplaces offer a space to quickly deploy $100,000 into notes with 6%+ annual returns.
Nat’s 5 Tips for Peer Lending Investors
We asked Nat what he would say to readers who would like to start lending, and what they can do to maximize returns from peer lending investing while protecting themselves from risk. Here is his advice:
1. Have a Target. Nat described that because most lending platforms have become adept at scoring the risk levels of borrowers, one can either play it safe or go for the gains, depending on how peer lending fits into their overall investment strategy. Whether you’re seeking super-safe income or double-digit growth, Nat’s advice is to target the ROI and the results you want. Then track your progress and tweak your strategies to reach your goals!
2. Diversify Properly. Just as it’s not smart to put all of your money in only a few stocks, so you don’t want your money all riding on a few borrowers. Even if you’re not investing much (especially if you don’t have much to invest) – spread your risk out in increments as small as $25. He says the beauty of peer lending is that “you can spread $2000 across notes for 80 borrowers, instead of investing it all in one asset.”
3. Check the Site for New Loans Frequently. There aren’t always attractive loans available, and you don’t want to buy the “wrong” loans just because you’re shopping when loans are in short supply. Lending Club release batches of notes four times per day. Nat found that some times are better than others to find good loans. For instance, Friday evenings are better than Sunday afternoons. You have to get to know the site so that you learn the best time to find new loans.
4. Read the Applications! Lending Club offers automatic portfolio management that makes robot decisions based only on numbers. However, you’re lending to humans! So instead of buying notes purely from the numbers, read the application to see the full picture not captured by the numbers.
Nat elaborates, “One of the Lending Club users I mentored says she looks exclusively for people who write in complete sentences. She’s enjoying a 17% net annualized return right now! How a person fills out an application can display patterns of negligence, which is a habit you may not want in a potential borrower.”
5. Cut your Learning Curve. Peer lending investing is a strategy where the more you know, the better your results will be. Nat credits his commitment to learn from others as the secret to his success. Whether learning online, attending the Lendit Conference, or experimenting with strategies and tracking his results, Nat has been an active learner as well as an active investor.
Nat doesn’t earn above-average returns because he’s lucky – he’s invested himself in learning what practices will help him achieve excellent returns. He’s also starting to mentor other lenders with great results.
The Downside – Not Every Loan is a Winner
In spite of learning and following the best advice, loans will default. Nat has had very few loans default, about 3% of his portfolio, but it does happen. I asked him, “What happens when a borrower stops making payments?”
Lending Club will do what any other lender would do – they initiate calls, try to establish new promises to pay, and if those efforts are unsuccessful, they start collections. The loans impact borrower’s credit and sometimes a full or partial recovery of the loaned amount can be made. (If you’re investing in $25 or $50 increments, that would be the maximum you could lose. It is also possible to sell loans on the secondary market, particularly when the borrower is not yet 30 days delinquent.)
Peer Lending Mistakes to Avoid
Nat was also very open about what mistakes he has made, and mistakes he sees other investors making that compromise their results. These include:
- Not diversifying into enough loans (ideally, 50 or more)
- Setting up default automatic trading strategies (“I’m not a sophisticated loan analyst, but there are red flags that get ignored when you choose the automatic investment option,” says Nat.)
- Treating it passively rather than being involved (passive investors don’t get the returns that active investors get, but it does take an investment of time), and
- Taking too long to get started
Is It Your Turn to Try Peer Lending Investing?
Nat Harward is the creator of a soon-to-be-released program to help investors get started right in peer lending and crowd funding. In this video course series, he’ll reveal everything he’s learned in peer lending and crowdfunding:
What they are and the differences between them, how Lending Club works, a complete review of the platform, and fast action strategies to cut your learning curve and bring you faster and more profitable results, while protecting you from avoidable risk.
(Nat is not an investment advisor nor does he play one on TV, he’s simply an investor with impressive returns sharing what he’s learned. Neither Nat nor Partners for Prosperity, Inc. make any guarantees of what returns you might earn with peer lending. Some links in this article are affiliate links.)
LISTEN: Guide to Financial Peace radio show: The Truth About Peer Lending Investing.