Being average is not that impressive. To be better than average is always an admirable goal, and as a Lending Club borrower, there are some easy steps we can take to get the high returns we’re looking for.

The average default rate on lending club loans varies by grade (A-G, As have low interest rates but low default rates while Gs have 20%+ interest rates along with higher default rates). Lending Club boasts an annualized default rate of less than 3% across all loans.

Defaults reduce your returns significantly, so a large part of selecting loans is trying to determine which loans are least likely to default. While high interest loans are great, if a loan defaults, you probably only get back a fraction of the amount of money that you originally lent. If you spread this logic across all loans, you’ll see why reducing the default rate in your portfolio is so important.

For example, the average interest rate for E-rated loans is 17.36%, while the default rate is about 7.3% over the life of a loan. Defaults don’t mean you receive no money at all, just that after a certain period of time, the borrower stops making payments. Therefore, the average person who invests only in E-rated loans can expect to receive a return of 11.88%.

The goal is to select notes that I think have a lower than average chance of defaulting. That way, the loans would achieve a higher than average interest rate, and when you’re talking about higher than an 11.88% average, you’re doing pretty well.

By simply weeding out the lower quality loans, I’m trying to leave myself with the high quality stuff and a superior return. I decided to try lending club with a Roth IRA recently, and I am aiming to return greater than 13%, which is fantastic when compared the the stock market and especially to other investments during this recession.

If I see loans that has warning signs (we’ll get into that in next week’s post, but one example is a borrower who says they’re “hoping” that they will be able to pay back on time each month), I stay away. I try and predict whether that person will be likely to default and if I see anything that makes me think they are more likely to not be able to make payments, then I will pass and move on to what I believe are more worthy borrowers.

However, I think that it is a very reasonable goal because it’s based on past lending performance (which should be much less volatile overall than the stock market), and the statistics back up my theories. Only time will tell how well I do, but several other bloggers have achieved 13%+ returns and my brother, who has been investing for awhile now, has seen great results and even a few defaults wouldn’t lower his existing returns too much.

Next week, I’ll go into detail on how I select my loans and what criteria I use to weed out the low quality loans. We’ll be tracking my progress each month, so we’ll get a feel for how this strategy works, what trends I see, any advice I have going forward.

During our inaugural Yakezie Tweetchat a few weeks ago, we were talking about social lending and P2P loans. I love the idea of choosing my own loans based on the criteria I’ve been developing so I can get the lowest default rate and a higher return on my loans, but active investing isn’t for everyone.

Sam from Financial Samurai asked if there was an amount he could invest to get “concierge service.”

As it turns out, this type of service is offered at very low balances at Lending Club. Sam assumed (and I did too) that in order to get someone to do the investing for you that it would be only for investors with big balances, but that’s not the case.

For Lending Club, it’s called Lending Club PRIME.

Lending Club PRIME is a full service account for investors with at least $5,000 to invest. That’s not much for a service that does all the investing work for you. All you do is choose the rough interest rate of the loans you want to invest in (high, medium, or low risk loans) and then Lending Club does the rest. There is nobody there to filter your loans for you, so you can’t be choosy about not lending to someone looking for over $30,000 to start a business, but your money will be invested into a diverse group of loans based on the interest rate you attempt to get.

Everything about the PRIME account is the same as a regular account in that you can always log in and check your returns and notes, but you don’t do the investing, Lending Club does it for you. The fees associated with the PRIME account come via a one-time 0.8% of the initial investment. On the minimum $5,000 to open a PRIME account, that comes out to $40. Not bad for those who don’t want to actively manage their loans.

At the beginning, this is actually very similar to the ‘Build a Portfolio’ feature offered. That feature takes your balance and automatically invests it in notes based on the rough interest rate you choose.

So why go with the PRIME account if you can get the same feature with the click of a button? There’s one major difference: when you start to receive payments from these loans, your account balance grows but the money just sits in your account until it gets invested in new loans. Well, if you don’t like logging into your account each week (or day depending on your balance) to invest in new loans, the PRIME account could be exactly what you’re looking for.

With $5,000, you’ll receive about $10 a day, so logging in each week or two to pick new loans isn’t terribly time consuming. But an account with a $50,000 balance will bring in about $100 a day, so the account would likely need to be maintained more often to avoid having money sitting in an account without earning interest. For those with larger balances, the PRIME account makes a lot of sense and is likely the way to go, especially considering the relatively low cost to start and the fact that there are no future costs associated with the account.

Don’t forget that Lending Club is still offering up to 2% bonus on initial investments!