It seems like years ago that I wrote my two part series on opening a Lending Club Roth IRA and how to invest it. It was actually only 5 months ago, but it marked my first major investment into peer to peer lending. I was convinced to make a larger investment because my experimental account of $500 was still above 10% returns after two years. That gave me the confidence to put $5,000 into my LC Roth IRA for 2013 with another $5k on the way next year(in 2014).
Even though I happily opened my Lending Club Roth IRA, I still think $10,000 is a lot of money to invest in an unproven and relatively new investment. We know that the return is there, but it’s tough to tell just how risky the investment is since there isn’t much historical data on peer to peer loans. But I think a lot of that uncertainty is what drives the returns up so high: people are afraid of the unknown.
It’s up to investors like me to go in and capitalize on a favorable risk-return rate.
Why’d it Take So Long to Fill Up My Portfolio?
Lending Club’s popularity has been growing exponentially over the past couple of years. It’s very hard to find notes that match my filters without logging in at the specific times when they release notes(6 am, 10 am, 2pm, 6pm PST). I set a simple daily reminder at 10:02 am to log on to Lending Club and check for new notes though. On most days, I find in-between 1-3 notes that match my criteria so I go ahead and invest.
This is one of my only complaints with Lending Club right now. There’s no way to automate the investment process so it can be a little time consuming for individual investors. If I wanted to invest more than $10k I’d probably have to widen my filters to encompass more notes(possibly lowering my return though).
Using my once a day strategy though, I filled up my portfolio in about 5 months. Going forward, I will probably only need to logon 1-2 times a week to re-invest my dividends if I decide not to cash them out. I didn’t want filling up my LC portfolio to consume my life but I could have set reminders four times a day and filled up my portfolio in a month or two if I wanted to.
Planning For the Future
Even though I’m young and very open to risk, I don’t see Lending Club as that risky of an investment. Like I said, I don’t think the market has caught up yet in terms of its risk so that’s why I don’t mind putting in $10,000.
Investing in a Roth IRA is the perfect vehicle for Lending Club notes in my mind too. Once I have enough money in my Lending Club IRA, I can start withdrawing the monthly returns as tax free dividends.
Since you’re allowed to withdraw your contributions from a Roth IRA at any time tax free, I would be able to use my returns as a source of tax free income. Here’s what I mean.
Let’s say I contribute $5k in 2013 and $5k in 2014. Assuming my portfolio is completely full by 2015 and I’m earning a 10% return, I can withdraw my $1,000 in interest each year for 10 years completely tax free.
It’s kind of like investing in a high paying CD(albeit with way more risk) but not having to pay taxes on any of the returns. Since I have already made $20k in Roth IRA contributions from 2009-2012, that would give me another 20 years of tax free returns.
I keep on telling anyone and everyone who will listen what a great investment Lending Club is. There’s definitely risk but it’s nice to have a second or third source of income that isn’t related to stocks, bonds, or the real estate market.
Readers, what do you think about opening a LC IRA? Do you think it’s worth the daily hassle to fill up a portfolio or am I right on the money with what I’m doing?
-Harry @ PF Pro
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I have around 45k into Lending club. I ran the schedule and couldn’t keep up. After trying many scripts and manually ordering to keep up with the reinvestments daily, I ended up finding a program called Peer Lending Server. What a great program and talk about great support. You got an idea, they put it in the next release. They also use this wild algorithm for artificial intelligence to determine possibility of payback. Here is the URL: http://peerlendingserver.com/
Hmm sounds interesting, I’ll have to take a look at it. It looks like it’s completely free? What’s the catch?
No catch that I have determined. I’ve been using it for a while now and it works like a charm. Big time savor and he has built ton’s of filters, great charts and the ability to use many accounts.
Thanks for the update Harry. I agree that keeping your p2p lending investments in a Roth IRA makes the most sense. I am no longer making any new investments in my taxable accounts at Lending Club and Prosper, I am focusing on adding money only in my IRA accounts.
While it is still very competitive at Lending Club, in the last few days there have been more loans available for investors.
No problem Peter. Yea I’m pretty much sold by this point on IRA only for peer to peer lending. I did notice that the past few days that I checked there were 400-500 notes available. Christmas comes early this year I guess!
Any thoughts on what to do with my old notes in my taxable account? Just wait it out?
Thanks for your post, Harry. I started with Lending Club simply because I’ve always wanted to be on the other side of the table as the bank. As far as interest payments, I’m having trouble with late payments and charge offs, but they are few and far between.
I started off with $500 in a regular account and when that seemed to do well, I added some extra cash I just had lying around (ha!). Then I wanted to see how easy or difficult it would be to get my money back out if need be. After continuing to receive good returns and especially after being able to get payments including interest out without breaking a sweat, I made the leap to a Roth IRA.
My only concern is my age and LC’s longevity. I’m hoping that things will remain as it is or better within the next three or four decades. But if history is any indication, once LC becomes something wonderful and the Big Boys get a whiff of it, I expect them to be bought out somehow. Hopefully not, though.
Interesting reason for signing up with LC, I like it 🙂 I think it may be a lot sooner than 3 our 4 decades that the big boys come in and screw things up. That’s one of the reasons why I want to put in a bunch of money right now and capitalize while I can. Peter has some interesting articles on institutional investors on his site 🙂
I’ve read Lending Club reviews multiple times but haven’t taken the plunge.
I’m curious, what is the risk grade of the loans you’ve invested your 10k in?
I invest in higher risk loans(9-22%) but I use a specific set of filters that I think helps reduce the risk of these loans. Check out my other LC articles to see what filters I use 🙂
I’d start with a $500 test account and see how you like it/how your returns are. Or you can read about my experiences, I did just that. $500 to start then $5k +$5k more next year.
So do you get better rates of return through the LC IRA vs an IRA through a low-cost brokerage firm?
Well I guess that all depends on what type of notes you invest in in an LC IRA and what you would be investing in in your regular IRA. LC notes do have a lower correlation to the market so I think they are a decent diversification tool.