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.

For equity investors, the good news is that the year is almost over. The bad news is that the future is still quite uncertain. So how do you handle a bear market, especially a bear market that's more angry Grizzly bear than tame Winnie the Pooh? You get creative. You think outside the normal "buy and hold" box. There are plenty of alternatives to equities that can survive and even thrive in a bear market.

1. Build a Website Portfolio

Just like with traditional real estate, online websites are all about cash flow. If you're good on the web, consider purchasing a website or two to add to your asset base. Just like a home, websites require maintenance and love to add value to them. Most websites under $25,000 will sell anywhere from 1 to 3 years earnings. In Stock-Talk, that's an insanely low 1-3 P/E ratio. Find quality established websites at Sitepoint.

2. Real Estate

Where is "buy and hold" really a good strategy right now? It's real estate. If you have cash right now or can free some up, you can pick up rental properties at incredible discounts right now. There is even a government tax credit for buying foreclosed properties.

This isn't for the weak of heart. The future of real estate is as uncertain as the stock market, but at least your purchase is something tangible. Plus, while housing prices may have fallen through the floor, rents haven't followed suit. You have a much better chance today of owning cash flow positive rentals than any time in the last few years.

3. You

Do you know the single greatest asset you own? It's you! As Dr. Phil as that might sound, it’s true. Consider investing in your own education. Get that MBA you've always wanted. Investing in yourself and growing your knowledge will always produce a positive return. Where else do you get that kind of guarantee?

4. Peer to Peer Lending

Peer lending is a relatively new investment option in the last few years. It's an attractive option, with rates on borrower notes from 6.69-18.63%. Peer to peer lending works as a win-win for both borrowers and lenders. Borrowers get a lower rate than they would from a traditional loan or credit card, and lenders get a higher return than a CD or savings account.

Lending Club recently got SEC approval for its investment notes with stated interest rates from 6.69-18.63%. With that approval, it also paved the way for a secondary market for the notes. That means your cash isn't tied up for the duration of the 3 year loan, as you can resell it on the secondary market.

Talk Back

What other non-traditional investments are you considering right now?

"It's the same thing every month. I always have a perfect budget, and I know exactly how much I can spend each week. But somehow, it never works out. I suddenly check my purse and there is no money left. I find myself at the ATM time and time again. Why can't I stop spending?"

I'm sure you've had this feeling before while dealing with your finances: a feeling of helplessness, where you don't understand where your money is going. However, the difficulty of continued frugality lies in two factors.

1. Internal Factors - Internal factors are those that make you need to spend, such as habits and wants. Purchasing Starbucks every day and a desire for a new iPod are examples of internal factors.
2. External Factors - External factors are temptations and expenses caused by the world around you. Think of emergency expenses, mortgage payments, and the most insidious factor of all: social pressure.

Why is it so hard to create the habit of frugality? Because there are two sides pulling you in to spend more: yourself, and your circumstances. Can you feel embarrassed about being frugal? Trent over at TheSimpleDollar says he doesn't, but I disagree: what about when you are at dinner with friends and the bill comes out to more than you expect? If you act frugal and try to scrimp on the tip, or try to pay for just what you ordered, without a doubt you will feel a little embarrassed.

To develop the frugality habit, you must combat both the internal and external factors, simultaneously. If you can find the solution to these factors, you will be able to finally develop that habit. In the next couple of posts, I'll write about how to solve each class of factor.

Until then, think to yourself: "What are the reasons that I can't save money?" Once you know the answer to that question, you will know the next step to follow to meet your financial goals.

Person-to-person lending has been a real phenomenon and has allowed both borrowers and lenders to get advantageous rates. The only real downside for lenders was a lack of liquidity, an issue that was recently addressed with Lending Club’s $600 Million SEC registration.

Traditional P2P lending models arranged for borrowers to repay lenders over a fixed term, typically 36 months. While lenders were getting above-average rates of return, some of their money was tied up in the process. Although they received regular payments on a monthly basis, they couldn’t get at their invested money. By establishing a secondary market for the notes bought and sold on Lending Club, everyone wins.

Lenders Needing Cash

Imagine you lent $500 across 20 notes averaging 10% interest today. You could expect to receive $16.13 every month for the next 36 months. What would happen later if you suddenly had an unexpected expense or an event caused your risk tolerance to change? You might wish you could cash out your monthly $16.13 for a lump sum payment at that time. Lending Club’s new features allow you to do just that. The price you can get will depend on market conditions.

Lenders Looking For New Notes

Lenders seeking new notes benefit in a number of ways. First, the number of notes available for funding will increase with a secondary market. You will be able to fund not just active new notes, but also those offered on the secondary market. New investment strategies can also be employed to seize profit opportunities by helping out people in need of cash who are trading their notes.

Borrowers

Liquidity for lenders can benefit borrowers as well. The risk of having to hold a note for 36 months is reduced for lenders who participate in the secondary market. Lower risk for lenders means they’ll be more willing to lend, and borrowers may be more likely to receive funding as a result.

By adding liquidity to P2P lending, Lending Club has positively affected all of their users. Borrowers are more likely to receive funding and lenders have increased options for new and existing tradable notes. I am excited about this new feature and encourage prospective lenders to check it out.

1.Tell us a little bit about how you got into the person to person lending space?

I first heard about p2p lending on the Dave Ramsey show back in April of 2006. He was actually talking about how he couldn't think of anything crazier to do with your money than lend it out to strangers on the internet. Now normally I'd agree with Dave, but in this case I thought the idea was interesting enough that I had to check it out some more. The more I looked into it, the more I liked the concept. I really felt like this could become an entirely new asset class for individual investors to get involved in while at the same time lowering the cost of borrowing for consumers.

2. What is your level of involvement in this space currently?

My primary involvement has been as a "stats geek" crunching the numbers and analyzing market data in the p2p lending space. I've been running my Prosper.com statistics site, Eric's Credit Community, since May of 2006 and more recently started up LendingClubStats.com to provide the same kind of data analysis for Lending Club lenders. Of course I'm also a lender on both LendingClub and Prosper.com. So far my loan performance on LendingClub has been pretty good, with only a couple of late loans out of 36. My Prosper portfolio performance has been a bit more rocky, but I attribute that mostly to some poor choices in lending to sub-prime borrowers early on before I knew better.

Aside from that, I've been interviewed and featured in p2p lending related articles for the New York Times, Wall Street Journal and Smart Money Magazine as well as quite a few blogs and other online publications. I was also a speaker at Prosper.com's annual conference in 2007 & 2008, and have been an active member of the lender and developer community there as well. I've also worked closely over the last couple years with Michael Solomon over at Loanio.com in planning for their new p2p lending platform.

3. Being the first to set up a Lending Club statistics site means you saw an opportunity. What motivated you to get the site up and running?

Ever since moving off Facebook and opening to the general public, Lending Club has really been growing by leaps and bounds. I'd been watching Lending Club more or less from the sidelines ever since you started, and had received many inquiries from Prosper lenders who were moving to Lending Club if I had any data about the Lending Club market. So, as soon as the Lending Club data exports were released, I was eager to leverage what I had learned from ericscc.com to create a similar resource for Lending Club lenders. Now that Lending Club has reopened with a new secondary market, I see a fantastic opportunity for further growth with the unique flexibility that the secondary market offers for lenders.

4. What do you think of the Note Trading platform Lending Club reopened with a few weeks back?

Having the secondary market really sets Lending Club apart in the p2p lending market. For lenders, this will have huge significance in terms of liquidity and risk management. Not only does it give you the opportunity to cash out on your existing loans if you feel the need, but it also gives you the chance to potentially reduce your risk by buying seasoned loans from other lenders.

5. What's your day job when you are not working on person to person lending statistics?

By day, I'm a software engineer for CQL a great little web & custom software development shop here in Michigan. I've been working in the software industry for about 10 years now doing everything from C++ to PHP to J2EE to .NET.

6. You have cultivated an active user community. What has surprised you the most about people's reactions to P2P lending?

I think the biggest surprise for me has been how many lenders really get personally involved in their P2P investments. I've seen many lenders who feel personally cheated when that first late loan pops up in their portfolio. Although late loans are simply a fact of life for any reasonably sized loan portfolio, that feeling that you trusted that person with your money and now they aren't paying you back elicits a much more personal reaction than say a 20% drop in the value of your Google stock.

7. What steps do you think are necessary for person-to-person lending to become as mainstream as online banking?

From a borrower perspective, it's advertising, advertising and advertising. Very few people have really even heard of person-to-person lending yet. There has been quite a bit of media coverage, but that coverage has been mostly in places where the audience is much more "lender types" than "borrower types". When I see an ad for Lending Club during the Super Bowl, I'll know p2p lending has gone mainstream.

From a lending perspective, bringing in more (hopefully good) borrowers is again a number one concern, especially for some institutional investors that would like to get involved in this space. Information is another key factor for lenders. Lenders want to know more about the risk vs. return factors in p2p lending so that they can feel comfortable that they are going to get a reasonable rate of return after defaults. While the stock and bond markets have years and years of publicly available data behind them and an untold number of tools to analyze that data, the person-to-person lending market is still very new, and the risks are not as well understood. I'm hoping that sites like mine will change that though. As more data becomes available, it will become easier for lenders to make more informed lending decisions and be more confident of their returns - which hopefully leads to more money invested at Lending Club.

8. Any last comments or recommendations to new or not so new P2P lenders out there?

My biggest recommendation for P2P lenders would be to start conservatively. Don't chase after the high rates on lower credit grade loans until you really feel like you understand the risks. You might not get as high of a return as you could have by diving into the lower credit grades, but you're also a lot less likely to end up losing money. Also, keep an eye on the market using the various p2p blogs out there and sites like mine, and spend some time networking with other lenders. You'll be able to learn a lot from their successes and mistakes.