Lending Club Blog

Investing in P2P Lending Notes for Future Income

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.

Friday, November 14th, 2008 at 10:08 am

Comments (3)

  1. Larry:

    Great Article! Im working a similiar program myself. My goal is to
    earn a weighted average of about 12%. I deduct money from my
    paycheck every week and invest in notes on the trading console once
    a month. I graduated rutgers university in 2008 with a dual degree
    for Finance/Accounting and I couldn’t be happier with the lending
    club site. Lending club allows me to become the bank.

    November 14th, 2008 at 9:49 pm

  2. Ed:

    This is a good plan. But you didn’t really consider the loans that
    won’t be repaid. Projecting my portfolio into the future shows that
    I will probably end up losing money if the number and frequency of
    defaults continues. I’ll be waiting to see how efficient the
    collections process is before I make any new loans.

    November 15th, 2008 at 9:16 am

  3. @Larry, I’m glad you like Lending Club so much. @Ed, You’re correct
    that I didn’t consider unpaid loans in this post. For future
    planning purposes you might be interested in
    the recent analysis I did on that subject.

    November 17th, 2008 at 9:42 am


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