I started investing with Lending Club in August of 2010. Two years later, I’ve seen an awesome 13% rate of return on my initial investment. Lending Club is a relatively new site that brokers peer to peer lending. In essence, you become a bank and you are free to browse and invest in thousands of notes at various interest rates.
From a borrower’s point of view, Lending Club is a great option. As long as your credit score is above 660, you can apply for up to a $35,000 loan. The interest rate a borrower receives will depend mainly on their credit history. In fact, the rates are very competitive when compared to banks(ranging from 6.78% to 29.99%). The interest rate is fixed for the term of the loan, either 3 or 5 years and borrowers can apply for loans online with a relatively simple application process.
Lending Club seems like a great option for borrowers, but what about for investors?
How Investing Works
There are several income restrictions listed on Lending Club’s website, but in general most people should qualify as long as you live within the following states: California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Kentucky, Louisiana, Maine, Minnesota, Missouri, Mississippi, Montana, New Hampshire, Nevada, New York, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin, West Virginia, and Wyoming.
In just a few minutes, you can be on your way to investing with Lending Club. I funded my account through a bank transfer and was immediately able to browse through hundreds of notes. Lending Club offers several automated options that select notes based on interest rate. However, I choose not to use this automated tool. I think it’s best to use a customized filter in order to narrow down your potential investments.
Although I’ve only invested a relatively small amount($500), I have seen a 13% return after 2 years. I usually invest $25 per note in order to diversify across as many notes as possible. Out of my 33 notes, 4 have been paid off, 29 are issued & current and so far I have had no defaults(a little lucky here I think). Lending Club uses a slightly different formula to calculate your interest rate so it’s usually a little higher than reality. They don’t take into account the time when your money is sitting idle. Here’s a look at my investor home page:
For each loan, Lending Club allows you to ask a set of pre-defined questions like:
- Please explain the reason why you carry a large revolving credit balance.
- What is your intended use for the loan proceeds?
- What are your current debt balances, interest rates, and monthly payments by type (credit cards, student loans, mortgages, lines of credit, etc)?
Some investors rely heavily on these questions but I prefer to focus more on the quantitative data available like gross income, length of employment, and home ownership. Here is the exact criteria I search for when picking loans:
- Only high interest notes of grade C – 15.21%, D – 18.26%, E – 20.99%, F – 22.99%, G – 24.54%
- Revolving balance utilization of 50% or less
- Minimum length of employment: 3 years
- Max loan amount of $25,000
- 0 delinquincies in the last two years
- Home ownership: mortgage or own
These filters really narrow down your eligible pool of investments, but I think they make a lot of sense. I’m looking for someone who’s had relatively stable work the past couple years and owning/paying a mortgage on a house makes me think they are less likely to default. I never invest in debt consolidation loans, so it’s important that the credit card utilization be low and there are no delinquincies in the last two years. The goal of these filters is to remove the emotion out of investing in peer to peer loans. I don’t even bother looking at the pre-defined questions because there is no way to verify the answers.
The most important part of this strategy is to select the higher interest loans. I don’t think the lower interest rate loans justify the risk. The aforementioned criteria should help you negate some of the risk and although my sample size is somewhat small, you can see my results have been overwhelmingly positive.
It’s Not All Good
Before you go invest your hard earned money in Lending Club, it’s important to know the risk. As with any investment, the higher the rate of return, the more risk there will be. I’m still skeptical myself of investing a large amount(ie $10,000) due to the infantile nature of peer to peer lending. Remember that these loans are unsecured, meaning that if the borrower defaults, your money is probably lost. Lending Club will attempt to retrieve the principal, but there is no guarantee you will ever see that money again. That’s why it’s important to diversify across many loans.
Lending Club initially charged .5% service fee but that has increased to 1% over the years. All peer to peer lending companies are not FDIC insured, so in a worst case scenario, you could be out some or all of your investment in the event of bankruptcy. Though to be fair, Lending Club has seen strong growth in the past few years and I think the benefits definitely outweigh the risks.
My last issue with Lending Club has to do with taxes. Unless you make over $15 on a single note, you will not receive a 1099 from Lending Club. Your income will not be reported to the IRS so it’s up to you to report the income from all of your notes over the course of the year. Lending Club investments are not considered passive investments either, so you cannot lock in the long term capital gains tax rate. For this reason, I am considering funding a no fee Roth IRA with them this year.
I started investing with Lending Club almost 2 years ago, and I’m very happy with the results I’ve achieved so far. I don’t think I would commit more than $5,000 to peer to peer investments, but it looks great when compared to the current CD and bond markets. Remember there are some inherent risks with peer to peer lending and we probably won’t know the ins and outs of this particular investment type for many years to come.
Any time you can achieve rates of return like this you’re taking on high risk. So if you’re a borrower and Lending Club offers you a lower rate than a bank, it’s a no brainer. But for investors, be careful and do your due diligence and research before investing with Lending Club.
Would you consider investing in a peer to peer lending site like Lending Club or is it too risky for you?
Disclosure: I am a Lending Club affiliate and I make money if you borrow or invest with LC. As always, I only endorse companies that I use and feel strongly about. :)
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