With today’s pitiful interest rates, it’s hard to sit there and invest your money in CD’s that are returning 1
or 2 percent. So if you’ve been searching for alternative investments you may already know about Lending Club. But if you’re new to the peer to peer lending scene, you can read my first review of Lending Club here.
I invested a little over $500 two years ago and everything was going great until I got my first default a few months ago. I didn’t write about it immediately because I wanted to give Lending Club a chance to get my money back. But now that the loan has officially been charged off, I’ve lost my principal investment($25) and I’m pissed. Here’s why..
I use a custom set of filters(read my first article to find out what they are) that I think helps reduce the risk of defaults while also giving me higher returns. But since peer to peer lending is still in its infancy it’s hard to accurately judge the risk. That’s why I’ve been apprehensive to add more money even though I’m still earning a solid 11.64% return after two years.
And although every time I log on to my account and Lending Club tells me I’m earning 13.12%, their calculation doesn’t take into account loan defaults. So I use a simple excel formula to calculate my real return. XIRR is a function that allows you to input cash flow in/out dates and amounts and it will give you the real return. Here’s an example of how the calculation can be used.
My Current Lending Club Stats
You can see that I’m current on 34 notes, in funding on 2 notes, fully paid on 9 notes and charged off on 1 note. So out of 44 total notes(not including in funding), only 1 has defaulted so far. That doesn’t seem too bad, but I still have 5 years or less on all 34 current notes.
I’ve been going back and forth on investing a significant amount of money with Lending Club for a while now. I think I’d be willing to take on the risks for a 10%+ return since peer to peer lending also has a low correlation with stocks, bonds, and real estate. But let’s take a look at all the risks and see if it’s worth it:
No Pre-Payment Penalty
Since there’s no pre-payment penalty, borrowers are allowed to pay off their loan at any time. That means that I could lose out on a lot of interest while still having the initial risk of default. Usually, I’m all for borrowers re-financing but I don’t want the people I’m loaning money to to be able to pay off their loan and get a lower interest rate. In this scenario, the lender(me) has to eat the service fee paid to Lending Club while the borrower gets to reduce their interest payments(oh the irony!).
Not Enough Loans
Since I only go for the higher interest rate loans, there aren’t a ton of people who meet my criteria. I’ve always been able to invest my money, but it might take a while to get $5,000 worth of notes invested. I’d probably have to consider increasing my investment to $50 per note instead of $25.
Lending Club still hasn’t developed a tool that will allow you to invest automatically based off your own filters. They have automation tools that will allow you to invest based on certain breakdowns but not the ones I want. It doesn’t matter too much right now, but if I had more money invested, it would become tedious to always have to re-invest in new funds every week or two.
This is my main concern with Lending Club since it’s what will hurt your returns the most. I don’t like the fact that a loan can just be charged off, are these people scamming Lending Club or do they just not care about their credit score/history? On my charged off loan, the borrower made 3 payments and then stopped. What the hell happened? I feel like if it was a scammer he would have made one payment and then run off with my money. But 3 payments seems to signify it was a real borrower. I don’t understand why Lending Club can’t go after this person and get my money back? Where did the money go?!
Even after all of these concerns, I’m going to keep an eye on peer to peer lending. I’ll probably invest another $500 with Prosper(LC competitor) just to see how their platform is. So you can expect a Prosper review in the next few months and after that I’ll decide whether I want to invest some real money with peer to peer lending or not.
Readers, how are your peer to peer lending accounts doing? Do all these risks justify a 10% return or would you rather get a 10% return elsewhere(please tell me where!)? If you’d like to sign up with Lending Club, you can use my affiliate link below. But if you plan on investing $2,500 or more, send me an e-mail(yourPFpro@gmail.com) and I’ll send you an invite from my account that will give you $100 free!
-Harry @ PF Pro
The banner below is an affiliate link which means I’ll get a small commission if you sign up with LC using my link.