Posted by Mike Smith :: November 14, 2008 @ 10:08 am

There are many reasons to invest in notes at Lending Club, but one of the inherent features of the repayment agreement is that note holders receive payments for 36 months. By investing when times are good, you can generate future income should times go bad.

Let’s look at a simple example to see how this would work. Assume that you could invest $100 a month in notes that average 10% interest. Each $100 invested would be expected to pay out $3.23 per month for 36 months. Assuming that any month when you were investing the $100 you didn’t need to withdraw the repayments you received, you would be able to reinvest that income as well. If you invested $100 for twelve consecutive months, you’d be able to purchase $100 worth of notes in months 1-5 and 7, $125 worth of notes in months 6, 8-10, and 12, and $150 worth of notes in month 11. The $125 and $150 months would use the accumulated repayments you had received to purchase the additional note(s).

If you decided that after 12 months you wanted to use your investments for income, you would have $96.04 in cash from previous payments, would receive $44.37 a month for the next 24 months, and then about $3-$4 less each month until your final payment of $4.03 one year later. The amount would decrease in the final year because the earliest notes you purchased would start to be fully repaid.

You can imagine how useful the above scenario would be. By putting in $100 a month when you had money to spare, you would receive income for 3 years after you stopped contributing. By halting new investments and simply reinvesting the income you received, you could continue to grow your account indefinitely until an income was needed. Investing a larger amount up front, or periodically, accelerates the purchase of additional notes because the $25 minimum investment threshold is met more quickly.

Investing for future income is just one of the many reasons to purchase notes through Lending Club. It can be used to hedge against the risk of losing your job or other income sources. The liquidity of selling notes on the secondary market even allows emergency funds to be grown using this method. Whatever your reason, investing in notes today could give you the income you need tomorrow.