How to Build a Social Lending Snowball


I have written about using the debt snowball to cut your debt and I have written about using social lending to make money like a bank. Today we are going to combine the snowball idea with social lending to show you how I have been making money and reinvesting to make money.

Social Lending Portfolio

I started my Lending Club portfolio about three years ago with $50. While I have only added money in $25 increments a few times, the portfolio has continued to grow. Like a DRIP stock, my social lending portfolio has grown through smart investment and reinvested profits.

In the last three years, I have made $38.08 in interest payments, or a 10.01% return on my investment.

I currently have 16 outstanding loans and five that have been fully paid back. I get about 85¬Ę per loan per month from payments. With 16 loans, that is $13.60 per month. That means every two months I get enough cash flow from my portfolio to invest in a new loan. If you have 30 loans, you can invest in a new loan every month.

How to Build a Social Lending Snowball

First, you have to sign up for an account at Lending Club or Prosper. Both are outstanding companies with bright futures. They are trustworthy and transparent.

Second, put in an initial investment. Remember that most loans are made in $25 increments, so a $50, $75, or $100 investment is a good starting point.

Third, pick your investments. I suggest picking low risk investments for your first 5-10 loans to prevent defaults. Remember, if the borrower stops paying, you take the loss. I would rather earn less interest while building my portfolio so one loss does not wipe out my investment earnings.

Fourth, wait. When you have been paid back $25, pick a new loan. It really is that simple. You could also setup an auto-investment that will pick a loan and remind you when it is time to reinvest.

Bonus: Steroid Growth

You know how the athletes grow muscles really fast with steroids? You can use the same logic on your portfolio. Inject $25 every month or two to increase your cash flow faster. The more loans you have, the faster you can reinvest. The more you reinvest, the faster your cash flow grows. It is an awesome cycle that can make you a lot of money.

Your Turn

Do you have any questions or concerns about social lending? What have your experiences been if you have tried it? Please share in the comments.

Image by ff137

Comments

  1. says

    That’s pretty much exactly what I’ve been doing as well.¬† Drop a bit here and there into the account and then use the money from payments to reinvest into new loans.¬† It’s a pretty easy way to invest and make some decent returns.¬† I haven’t had any defaults yet, so still waiting on that.

      • Gharkness says

        My experience (and I have quite a bit of it, but not as much as Peter :-)) is that once a loan starts going late (paid in grace period) nothing good ever comes of it, sorry to say.  If you can unload it on the trading platform you should.  This is a great reason to never invest more than 25.00 in one loan, which was my biggest newbie mistake.

  2. Peter Renton says

    Good post Eric. I agree that the best way to take advantage of the rapid compounding that Lending Club and Prosper have to offer is to add new money to it regularly. I do that on a monthly basis to really get my snowball growing.

  3. Jenna from Adaptu says

    I’ve thought about it.¬† I also like the idea behind Kiva (although you don’t make money there).

    • says

      You don’t make profit from Kiva Jenna, so I have a smaller portfolio there. I have made 4 loans of which 2 still have outstanding balances. It gives me a nice, fuzzy feeling. Not a lot of money, but a lot of impact.

      • says

        ¬†I investigated microfinance too, but the returns are so, so low. In addition, I was concerned about the lack of regulation on the ground level for borrowers. Some of them are really, really smarmy and full of corruption on the local level (mainly because of the political climate of the countries they’re operating in). It’s a great concept, too bad it can’t be slightly more profitable and trustworthy.

  4. says

    Sounds like something I should look into.¬† The returns sound pretty good, provided they all pay the money back.¬† If someone doesn’t pay, do you actually have to contact them yourself?¬† Or is that handled by the Lending Club or Prosper?

    • Gharkness says

      There is a “wall” between lender and borrower.¬† That wall is Lending Club/Prosper.¬† They do all the footwork as far as contacting the borrower, turning over to a collection agency, skip tracing, etc.¬† But eventually, some of the loans have to be written off.¬† It’s part of the risk and why the rewards are so high.

    • says

      Gharkness is correct. Lending Club and Prosper have their own collections departments that handle everything for you. I had one loan go late and was regularly updated by notes from the collections efforts.

  5. Dannielle @ Odd Cents says

    This takes guts! You are a boss!¬†What’s the longest you had to wait to get back your investment?

    • says

      There are both 3 year and 5 year loan options. I have a few of my original loans still outstanding from over two years ago.

  6. says

    I just opened a Lending Club account with an initial investment of $250. I’m hoping to invest around $800 by summer, which with reinvesting should give me a total of $1000 by the end of the year, based on my projections. I’m investing at a bit of a higher risk than you initially did, but I’m going to balance out my portfolio with higher-grade loans in my following deposits. Thanks for the tips!

    • says

      Sounds like a good plan. I started with all A grade loans and slowly added more higher risk loans. I wanted to have a solid base before I took any bigger risks.

  7. says

    Thanks for sharing your experience. It’s interesting, especially for those of us who haven’t used social lending and have resisted taking a plunge in it.

    Good point on reinvesting. Like with other investments, the more you reinvest, the more money you might make.

    • says

      I have had a great experience so far. I would suggest giving it a shot and seeing how you like it. Fortunately the starting cost can be very low.

  8. Ben Reyes says

    Lending club does work. I purchased about 30 notes over time (wire about 25 bucks a month) and now the cash flow generates enough money to purchase a loan for reinvestment

    • says

      I’m glad to hear it is working for you. Once you can get one new loan per month you can grow your portfolio pretty quickly.

  9. Glenn G. Millar says

    I would add that keep your investments small and get as many loans as possible, until achieving 100 loans or more.  Diversification is key as defaults are predictive only in large numbers.  In the case of Prosper.com, we looked at all investors who had more than 100 loans since July, 2009 and 100% of them had a positive return.  
    http://blog.prosper.com/2011/12/12/power-of-diversification-100-positive-returns-with-100-or-more-prosper-notes/

    Glenn G. Millar
    Prosper.com Employee
    Notes offered by Prospectus  www.prosper.com/prospectus