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.
Automation
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.
Scammers/Defaulters
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([email protected]) 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.
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I just can’t believe they can say you have a 13% return when it is actually 11%. I mean, I believe that it says 13% and I believe you did the math and it’s actually 11%, but I cant believe that it’s a good idea (or completely legal) to put a wrong number on there. I think it’s practices like that which feed the fire for those who claim P2P is a scam.
Do people claim P2P is a scam? I haven’t heard of anyone that has been scammed by P2P, I think almost everyone is actually seeing pretty good positive returns. I don’t think it’s a big deal though, businesses do this all the time. It’s all open to interpretation as to how you take into account defaults, service fees, bonuses, etc.
I don’t know anyone that has claimed to be a victim either, but I have heard lots of people say “oh that must be a scam” when they hear how high the returns on P2P are. I think the P2P companies could clean up this public relations issue if they try and be completely up front about returns and not make them sound better than they are.
Yea they could definitely help their image as far as that goes. I do think it’s prudent to be skeptical though of an investment that has way above average returns. That being said, I think the market hasn’t adjusted to the risk-return of P2P lending so now is the time to invest.
I’ve been doing Lending Club for a couple years now and have 66 issued and current notes. I was disappointed early on when I had 2 notes charged off pretty close in time to each other. I have since created my own criteria for investing and am very conservative. I only invest in funds that are approved and with income verified as well as a clean record as far as delinquancies. I have not had any more charge offs and realize its always a possibility but will continue to invest. I think you increase the chances of a charge off when you invest in the more scetchy notes. I always take note of total credit card debt and am shocked at the amount some people have. I won’t invest in any note that has more than about 25K in credit card debt. I also find it curious when someone is requesting a note of say 25K but has like 80K in credit card debt.
Good luck with your p2p lending.
It’s interesting to see the criteria that everyone uses. I’m beginning to think the criteria matters less and less though since everyone has such different criteria yet everyone is seeing such good results. I just funded a Roth IRA with 5k so I’ll be doing some more research since with my current filtering criteria it will take too long to fill up 5k worth of notes.
The 13.0% return quoted above is a Net Annualized Return (“NAR”). This formula is just another way to calculate your returns, so it is not “wrong” in a sense of it being false or misleading; it just depends on how you want to look at your returns. The NAR formula accounts for the service charge LC takes against each transaction. It also does NOT include idle cash. Further, if a loan is in default, it does not account for this loan anymore. The XIRR formula (yielding approx 11.0%) the author of this article states is basically an annualized Internal Rate of Return, which accounts for the passage of time and the change in account value. It does not account for the service charge levied against your transactions, and does account for the idle cash. It would make sense, then, that the NAR formula will usually yield a higher return than the XIRR formula — with the two ideally converging near year-end. For information on the NAR, see http://www.lendingclub.com/public/lendersPerformanceHelpPop.action?v=2
For information on the XIRR or Internal Rate of Return, pick up a textbook, as this is finance 101.
The main point I was trying to make is that you shouldn’t just take what LC or anyone for that matter tells you is your rate of return. When I invest $10,000 in a 1 year CD paying 1%, at the end of the year I’ll have $10,100. The XIRR formula would also calculate a 1% return after one year in this case.
Your real rate of return is calculated with XIRR. Obviously, it’s a smarter business move for LC to inflate their returns, companies do this kinda crap all the time, no big deal to me. Just calculate it yourself, takes about two seconds.
I do not think there is anything false or inflated in the way LC reports the NAR. Like you both agree, LC’s NRA does not account for idle cash or cash in funding and why should it? That cash is more in your control. Also, how long it takes to approve a loan likely depends more on how quickly a borrower submits all required documentation and proof that they are legit. I understand you points but doest it actually make more sense that calculation should be done on outstanding principal (you know, money that has already been invested?). So, why would LC include idle cash in their calculation? The fact that you transferred money into your LC account does not mean you have invested money. Same thing applies if you transferred money to a stock broking acct and did not go into to buy stocks.
Now you can say “one of the cons of LC is length of time to invest funds” but to say they are bloating returns is not really accurate.
Right I don’t think it’s false either. It’s just a way of manipulating the return to show it as high as possible, it’s a smart business move by LC and companies do this all the time.
There’s a little more to it though since they don’t knock down your interest return rate until the charge off happens(90-180 days later), etc. But the whole point of that part of the article was to get people to double check their calculation. Just because a company tells you your return is X, doesn’t make it so.
Love this article (and the original review, too)! I have also apprehensively invested into Lending Club and have been pretty much happy with my returns (about 13%). I started out with some extra cash I had lying around just to experiment, but when I saw the great returns, I went ahead and invested $4,000 in the IRA portion. As a matter of fact, just yesterday I gave permission to LC to have funds automatically withdrawn from my bank monthly into my Roth account. As for the original “experimental” investment, I’m currently divesting as payments come in just to see how easy it is to get my money back.
I have, however, received a few “charged off” accounts in the last month which brought my percentage down from the 18-19% I was earning before. I’m not worried about it though since I’m earning well over the amount I had earned before when I invested in ETFs that tracked the Dow Jones and S&P. An added bonus is that I REALLY like checking my account every month and having money waiting there to invest – I actually do use their buttons to auto invest.
Thanks for your time.
Thanks for your kind words Roberto. I think I’m just about ready to put $5k into LC but I’m not sure if I want to go the IRA option since I read that you have to have a minimum of 5k in the first year to avoid fees and 10k the second year to avoid a $100 fee. What’s your experience with that?
I think the return is worth the risk. You know the average default rates so I think there is more uncertainty risk than anything else since P2P lending is such a new(relative to stocks/bonds/real estate) platform.
If you have been investing in p2p lending for any length of time you will receive defaults. I have been investing for 3 1/2 years and I have received well over 250 defaults (on 4,000+ notes) in that time. Unless you are very lucky you will receive defaults particularly if you invest in the high interest loans like I do.
Why? There are a very small minority of buyers who are scammers but LC does a pretty good job of weeding most of them out. Most borrowers who default have been hit with hard times. LC has a rigorous collection effort where they will seek judgments against borrowers, garnish wages or take out liens on assets. But if the borrower declares bankruptcy or has no assets there is little they can do. If you don’t like defaults I suggest sticking with A-grade loans.
As for Lending Club’s NAR there is nothing fraudulent going on here, their formula is one that simply overstates the real world return. Which is why I tell every investor to work out their actual return on their own. It is quite easy to do with Excel, I show people how to do that here (I hope it is ok to provide the link):
http://www.lendacademy.com/how-to-calculate-your-real-p2p-lending-return-with-xirr/
Peter, that’s a good point. I expect a certain percentage of defaults since I’m investing in the riskier notes. I just want to make sure these are true defaults and that it’s not too easy to scam LC and its borrowers. I prefer the high interest loans b/c I think the risk-reward curve is better in this range.
As for the interest rate, I agree. Businesses do this all the time, no big deal. I actually linked to your XIRR article already since that’s where I found about that function 🙂 so thanks. You have double links now!
Thanks. I didn’t realize you had linked to that article already.
As for scammers, it is difficult to eliminate them but I have found they are a tiny percentage of the borrower population. It seems to me that only 0.25% – 0.5% of borrowers are out to defraud investors. While it is annoying to have these people who take out a loan and never make a payment, “straight rollers” as Lending Club calls them, if you are well diversified they should not dramatically impact returns. And in these situations LC is very focused on trying to get your money back so you may get something back down the road.
Seems to me when I looked at Prosper there was a collection side to the company. I can’t believe Lending Club doesn’t have anyway of collecting on these people. Certainly wouldn’t be a very good business model if everyone knew you could default and not have any repercussions.
cd :O)
Oh they definitely have a collection side, but like Peter said above, there’s not a whole lot LC can do if the person declares bankruptcy. I was more concerned with scammers but I think LC does a pretty good job of filtering these people out. It’s not that easy to scam a company like LC and most criminals aren’t the brightest so it should be safe right? 😉
I just had my first default with LendingClub as well and the story was the same. The borrower made a couple payments and then bolted.
I’ve noticed the same thing with Prosper. If a note is going to go belly up, it will do it right away. Once a note has 6 payments behind it, they seem to be safe.
Bottom line is there are still scammers out there and will always be.
I’m probably over-reacting since this was my first default, but it definitely got me thinking. Once I get over it, I’ll probably invest some more money. I think my filters worked pretty well though, considering I went 2 years before I got my first default. Like with stocks though, I think past performance is probably not a good indication of future performance.
What an interesting way to invest – what was the time span from when an account went into default to being officially charged off? Does LC also explain what happened with that situation, or is that just a risk that comes with the territory (like you don’t ever get to find out what happened with the borrower)? I’ll definitely look into this once I have my current stuff paid off in a few months… just in time for a Prosper review.:) Thanks for sharing!
Yea it’s definitely a new and exciting investment since the returns are so high. LC won’t ever tell you exactly what happened but they do update you thoroughly on the process of the note going from late to being charged off. My borrower missed their 4th payment on 7/29/12 and the loan was charged off on 12/24/12. In-between that time though, LC shows that they tried to contact the buyer around 50 times(with the help of a collections agency). So at least, they tried right?
I have read many strategies for p2p lending. I just started and am still mostly infunding process after my first $500 like yourself, started very small, see how it goes kind of thing. But what I see some explain they will dump anything that goes into grace on Folio for a 5-10% discount, if it doesn’t sell at par first for a day. This seems like a reasonable option to mitigate risk.
Tim, thanks for stopping by. That’s actually a pretty good idea, I hadn’t thought about that but it seems like it wouldn’t hurt your returns too badly and you would never get a default that way.
Unfortunately though, it does require some extra active management. You’d have to stay on top of your late notes and list them ASAP and figure out how much of a loss you’re willing to take.
What does this mean? “But what I see some explain they will dump anything that goes into grace on Folio for a 5-10% discount, if it doesn’t sell at par first for a day. This seems like a reasonable option to mitigate risk.”
When you log onto your LC account, it will give you a summary of how your notes are faring ie. 5 current, 1 late, 1 default. So as soon as a note goes late, you could sell it on the secondary market called Folio(within LC’s site). But you would have to sell the note for a loss obviously, I’m not sure how much it would be but I would guess it would be at a 10-40% loss depending on how late it is.
So for example, if I have a $25 note and the buyer makes 5 payments for $1 plus applicable interest and then misses the 6th payment, I could list the note on folio asap. So I’d probably list the note at only $18(10% discount) and lower it by 10% every day until it sells. Make sense?
Although it hasn’t been totally charged off yet, I had a borrower receive the loan and then never make a single payment (it is now over 2 months late on the first payment). That to me seems the most fraudulent and I’m surprised Lending Club can’t go get the money back. Would also love to know if there is a way to get more info.
Most people who are out to defraud go and spend the money so there is nothing to get back. Even so, LC has been known to challenge a bankruptcy filing where they believe that fraud has occurred.
Yea I think the key with P2P lending is to just assume there will be a small percentage of defaults. If you take every default personally, it’s tough to stay focused on the product. It’s all a part of P2P lending and that’s why the returns are so high 🙂 If it was safer, the returns would reflect that and be much lower.
I experienced the same thing when I engaged in P2P lending. That is the main reason I stopped, I found that when individuals defaulted a valiant effort wasn’t made to collect the money.
Yea honestly it doesn’t seem like LC tried that hard, in the loan notes it just shows that they tried to call the guy a hundred times but he didn’t have a voicemail so they couldn’t even leave a voicemail. I think you kind of just have to not take it so personally and assume that defaults will be a part of it.
LC has like 4 people in their collections dept. and they just outsource most of the work. From comments I’ve read about collections logs in general from people in the industry, it’s best to ignore the logs altogether- it’s just lip service.
Yea I agree, it’s just a part of doing business. I think I’m still going to invest my future wife’s IRA in LC and hopefully the good returns will continue.
I wouldn’t worry too much about one default, you’re net return is still great. Defaults happen, that’s when its risky! I would invest, but they don’t offer it in Canada yet.
Hmm maybe a business idea then? I’m surprised they haven’t expanded to Canada yet but I’m sure there are some laws precluding it. I know Prosper had a bunch of problems with the SEC for a while there but I think now they’re both certified for most states in the US.
So your returns look pretty awesome and the default rate is really not that bad. I’ve been really wanting to try out Lending Club or Proper.com but unfortunitely in New Jersey you can’t participate in peer to peer lending yet *deep sigh*.
Where are you from? Have you heard anything about the intermediate company you can use to participate in Lending Club from non supported states? It seems you can’t buy directly but you can buy second hand. I’m worried that only the bad loans will be available second hand :/
Hey Andrew, I’m from California. Yea that’s a total bummer about those few states not being able to invest in LC. Are you talking about the folio trading platform? I don’t really use it too much, but it works similar to the bond market. If the loan is being payed off for a few months in a row, the borrower’s credit score is increasing you can sell it for more on the secondary market. If the borrower is late or has been late on a payment, you’ll probably have to sell it for a slight loss. That’s what one of the commenters alluded to earlier. One strategy is to sell the notes at a loss if they ever go late.
One default is pretty good for two years. What exactly are you expecting LC to do? You’re loaning to lousy credit risks and then you’re surprised when they stop paying? Why do you think they’re having to pay 19-22% for these loans? Because they’re unlikely to pay them back. If they were likely to pay the loans back, or if the loans were secured by something other than their word, yields would be 2-8%, and your returns would be perhaps 5% instead of 13%. You just have to take the expected defaults into account.
Well that’s the problem. When I started investing with LC, I expected defaults. I didn’t get my first default until 2 years later so I’ve gotten pretty used to having no defaults. Realistically though, you’re right. I should expect a few defaults here and there that will eat into my returns since I’m going for the higher APR loans.
I will say that having been in LC for 2 years now and I have become very disappointed with the premise. I have a total of 301 notes mostly A, B, and C with a few riskier notes thrown in but overall a very conservative approach. My concern is that I already have 8 notes that have been charged off with 11 more approaching default. At the rate this is going I can’t imagine that default rate won’t be dramatically higher (possibly 300% higher) than what they advertise. The other problem for me is because I don’t itemize deductions on my federal tax return I can’t write off the losses to lessen the pain.
Interesting, I feel like the filters I use have definitely weeded out a couple defaulters. That’s too bad that you’ve seen so many defaults though. The problem with their advertised default rate is that what they advertise today may be correct, but it’s very hard to predict the future default rate(and that’s the one that matters to us right?).
I actually forgot you could write off a default so thanks for reminding me. I itemize my taxes since I own my home so that $22 loss just turned into more of a $12-$14 loss haha. Thanks.
Here is one older man’s perspective: Be very careful here. These type of investments engender big time risk. The higher the return the greater the risk. I am not even sure this is actually legal. To me, this is really a risky investment and someone at some time is going to get burned real bad. Just one man’s opinion.
I cannot let a statement questioning the legality of p2p lending without being challenged. I can absolutely guarantee everyone that this investment is indeed legal. It is regulated by the SEC with a prospectus and registration filed.
As for risk it is clear that investing in p2p lending carries some risk. But many investors, myself included, have a long track record of decent returns. It is always good to be skeptical but don’t just blindly assume that a 10% return must contain a huge amount of risk without doing any research.
Haha Peter you beat me to it. LC is definitely legal and as Peter said, they are approved by the SEC and everything is fine on that end.
I think it’s prudent to be skeptical of any investment that’s paying 5x or more the going safe rate of return. But as Peter has said and I’ve shown over 2+ years I am still earning 11% returns. Peer to peer lending is very easy to understand and that’s why I like it. I wouldn’t ever invest in anything that I didn’t understand and trust me there is still risk with LC. But I think you are compensated fairly(or more than fairly) for it.
Have you considered selling the notes after 1 year? I invest in 5 year notes and sell them after 9-12 months.
On most loans the interest is front loaded in the first 2 years so I have no incentive to hold the notes past that.
I figure most the people will charge up the cards they paid off with the lending club loan in a year or two. They become more of a risk the longer I hold the note.
Hmm that’s not a bad idea, kind of similar to another commenter’s strategy of selling any note that goes late ASAP to avoid a complete default. The interest isn’t front-loaded though. Similar to a mortgage, your payment becomes more principal than interest towards the end because you owe less and less.
I actually don’t invest in any debt consolidation loans which works well for me since I don’t have a significant amount of money in there. Should I invest 5k I’d probably have to to be able to get enough notes.
Just watched a Sunday morning TV show where the discussion was about P2P investing. And I found this discussion very informative. that been said, Am I understanding right? Are people really borrowing $25 – $50 ?? With payments of $1 or $2 per month? Is it all online or thru the mail?
I’m looking to invest also but this seems like a lot of work. I’d be happy with 5% and less work/risk. Any ideas?
Hey Fred, borrowers can actually borrow up to $35,000. Investors like you and I then go out and invest in increments of $25 in these loans. So the borrower’s payment would be evenly split up to all investors which is why as an investor you may only receive a dollar or two a month off a $25 loan. Make sense?
Everything is online and the process is very easy, not a lot of work but there is some work depending on what strategy you use to pick loans. I could give you 4% with less work and no risk 🙂
https://yourpfpro.com/get-a-guaranteed-4-return-on-5000-thru-sharebuilder/
I wish I knew what you people are talking about. If anyone would care to mentor me, let me know. Yes, for a modest fee.
Haha Scott, no worries bud. Shoot me an e-mail with whatever questions you have and I’ll be happy to help you out. [email protected]
I’m not too familiar with peer to peer lending so found this intro into that world fascinating. Above 10% returns is highly sought after but it sounds like the risk is too high. What if someone defaults on all your notes? Do you lose everything. Ill be looking forward to your updates.
Hey John, obviously there is more risk with peer to peer lending than say bonds/cd’s but I think it’s been shown over time that the risk-reward value is way up there. I don’t think all of my notes defaulting is a very likely scenario. I plan on investing about 5-10k in the next year or two, now I need to decide whether to put it in a roth ira or not.
I’m going to have to look into this. What do you mean by put into roth IRA or not? The peer to peer lendings works with roth IRA’s? Or do you mean put your earnings from p2p into a roth IRA?
You can open a Roth IRA with LC, same limits apply though(5.5k/ year). It would keep all my earnings tax free and I could even take them out(up to 5k at least since money is fungible) tax free kind of like a dividend producing asset.
But the only caveat is you have to invest 5k the first year to avoid fees and 10k by the second year to avoid fees.
I applied for a loan with LC & within 48hrs was finished with the approval process. Everything was completed, showed as funded, etc.,. LC said there was nothing else to do, all was good. Was told I’d have money deposited in 4-5 days. I waited 6 banking days and had no money. When I called I was told it takes 3-4 days. I explained my history, the rep spoke with their supervisor, & I was told it’d be done by the time my application expired (which I think is 14 days from initial application submission). I then found out the SOONEST I would be funded was the 1st of the month. Now I don’t know when the money will be, if ever, deposited. A very odd process, and at this point I don’t feel confident I’ll see the money. I applied as I needed the funds within a reasonable time, not whenever it’s convenient for LC. Has anyone had this experience? or a similar one? Thanks!
Thanks for sharing Josh, that seems very strange indeed since once the loan is funded it should be just a simple ACH transfer(max of 3-4 business days). Did LC give you a reason for the delay? To be honest, I have a lot more experience on the investing side and not the borrowing side as much. I know that only a small percentage of applicants even get accepted as borrowers but I haven’t heard of any problems after that point.
Do NOT loan for Lending Club Grades above D2. My default rate is outrageous, and FAR higher than their advertised default rates. (Although it is possible that the higher rates are due to the recession. I haven’t issued a new D3+ loan in over a year.)
Lending Club DOES take defaults into account when displaying the Net Annualized Return. Otherwise, mine wouldn’t display negative.
My Defaults:
D: 3/11, all D3+ (3 paid, 5 current/grace period)
E: 5/14 (4 paid, 5 current)
F: 4/12 (5 paid, 3 current)
G: 5/11 (6 paid, 0 current)
Below D3:
0 defaults, out of 6 loans (1 of those is just issued)
I’ve tried all manner of filtering, and I’ve always done only verified income loans. The only thing that’s worked for me so far is OLD credit lines with no records/delinquencies EVER. But that does limit my loan interest rates.
Lending Club does engage outside collections, but only very rarely does that seem to do any good. Especially after default. People just declare bankruptcy, at which point you’re out of luck.
I still believe this can work, but I’m just about on my last strategy, though until I finally find some success, I’m only reinvesting payments and no new cash. Fortunately, I’ve followed the golden rule of investing, and never invested what I can’t afford to lose, and just kept this at an experimental level.
David, thanks for sharing your stats. Your default rate definitely seems higher than normal but probably more due to bad luck than anything. Take a look at this site: http://lendstats.com/ where you can compare historical data and performance of Prosper/LC loans.
Your sample size is pretty small for trying all manners of filtering. I would go with 1 or 2 strategies(maybe an aggressive one and a more conservative one) and employ those across 40 or 50 notes. Many people including myself have had good returns, even after extended periods of time. Head over to Peter’s site at http://www.lendacademy.com if you’d like some more detailed information on P2P strategies and things of that nature.
Based off your last point, you are obviously a very savvy investor. Until you fully understand an investment, the returns and the associated risks you should never invest more than you’re willing to lose. I’m just about done with my experimental phase and I’ll be putting in 10k to a LC Roth IRA over the next two years so stay tuned for more info.
Is it possible that the discrepancy between your advertised net annual return and your actual return is due to the time between depositing funds and getting the funds invested? If it took several months to get your funds invested, that would seem to cut into your returns, but going forward it’s safe to assume you wouldn’t have a majority of your funds sitting on the sidelines for any amount of time.
Hi Ross, that is exactly why LC’s rate of return is higher than the one calculated with the XIRR formula. LC and Prosper both only look at the amount you have invested in notes, and don’t take into account the money that’s just sitting there like you mention. Of course, I see why they’d wanna do this(inflate returns) but it doesn’t give you an accurate portrayal of your returns. As you allude, as time goes on, your returns should get closer and closer to LC’s since you have less money sitting out.
Oh awesome, thanks for getting back to me so quickly. Perhaps this is one more argument in favor of 5-year loans, due to the reduction in the waste that comes from the reinvestment process. Anyway, that’s really interesting, and good to be aware of. Too bad they don’t publish two figures – one for “moneys invested” and one for “total account.”
No prob, yea that’s a good point. I just opened a Roth IRA with LC and funded with 5k so I’ll be working on a new article shortly.
It seems to me that the main weaknesses of the P2P lending are the defualt follow through and the potential for internal scams.
Obviously, if the organizer doesn’t follow through with FICO notices of default then the borrower skips away without penalty. So, the lender loses and the organizer still makes their fee. It would seem that bad word of mouth on the organizer would scare off lenders.
Another potential problem I see is if there is an internal scammer within the organizer who creates borrower profiles, borrows money and defualts. Then, since they are internal, they do not follow though on collections. The lender won’t really know what happened and the borrower, (insider) skips away without any negatives. R.L.R.
What do you think of these comments ?
Hey Robert, thanks for commenting. Yea that’s definitely one of the biggest complaints readers/commenters seem to have but I mean that’s why you are rewarded with 10%+ interest rates right? I’ve kind of come to accept the defaults, whether they’re scammers or actual defaulters as a part of P2P investing. You’re rewarded accordingly for taking on this risk. In fact, I think you’re rewarded more than you should be which is why I think P2P is such a good investment and I recently opened up a Roth IRA.
I don’t think an internal scammer is really something to be worried about. You could make that argument for any type of investment or business that you invest in. I think a lot of people would have to be in on it for that to go down and even so, there can’t be more than a couple hundred LC employees. How many loans could they really do this on without getting noticed??
I closed out my lending club account after a year. I had 3 loans go bad within 4 months of funding them. These were B and C quality loans. What really ticked me off is the collection notes would show they sent a reminder email once a week. That’s it – just an email!!! Where are the tough collection and debt negotiations you here about? I never saw them.
I don’t know if that’s all they do, Peter at Lend Academy would probably know a little bit more about it, but I would hope that they do more than that. I think that’s something they could work on though, they should make their collections process a little more transparent so that you know they’re going after these guys who default. 3 defaults out of how many though?
http://www.lendacademy.com/the-collection-practices-at-lending-club/
Hi, Harry. 3 out of 25 went to collections within 3 months of issuance. It was a test purchase and I’ve since run from the sight. I agree they need more transparency in their collections. Also, their ROR calculation was very slow to reflect these defaults. I’ve since moved on to buying publicly traded junk bonds funds. The returns are 8-10% and the funds are diversified.
Well I guess it was smart that you did a test run before investing too much money. I’m curious though about what type of loans defaulted for you(what were their descriptions?). And I completely agree, they’ve got to do a better job showing investors that they are really investigation on the collections side of things.
I have notes that go to “In Grace Period” quite often and they usually become current. However, right now I have one that is “Late (16-30 days)”. This borrower has not made a payemnt AT ALL on his $8,000 loan:
Loan Summary:
————-
Issued Date 9/16/13
Loan Fraction $25
Loan Amount $8,000
Rate E2 : 21.15%
Term 36 months
Status Late (16-30 days)
On Payment Plan
Credit Score Change Down
Accrued Interest $0.71
This is what Lending Club is doing thus far to get my money back:
Collection Log:
—————-
10/30/13 (Wednesday) Notified borrower of failed payment (e-mail)
10/30/13 (Wednesday) Seeking to locate borrower using alternative means (skip trace)
10/30/13 (Wednesday) Attempted to contact borrower (left voicemail)
10/21/13 (Monday) Notified borrower of failed payment (e-mail)
10/21/13 (Monday) Attempted to contact borrower (left voicemail)
10/21/13 (Monday) PAYMENT Failed
This is one of the first loans I have participated in that was for a “business”. I have a few others that are for business as well, I hope they don’t also turn into late payers. I am going to stick to debt consolidation loans for now. I put some money into business loans due to scarcity of loans that were for debt consolidation. I should have waited until loans that met my criteria were posted.
I also think that Lending Club should report the Net Annualized Return in a more accurate manner.
I am currently in the process of withdrawing my funds from Lending Club. Of my 300 notes, 20 have been charged off so far, another is in default, and 3 more are more than 30 days late. I can see the number of defaults growing to 30 or more which is quite a bit higher than the advertised default rate. These are almost exclusively high rated notes. Frustrating, I have also had some one default without making a single payment.
Mike, sorry to hear you’re having so many defaults with LC. I would think that 300 would be a big enough sample size that you should see returns in at least the 10%+ range. What are your returns and how long have you been investing with LC? I’ve invested in a few hundred notes over the years and haven’t seen anywhere near that number of defaults. Are you using a filtering criteria to select your loans?
wow Mike. Sorry to hear that. That sure seems like a lot of notes. What type or filters do you use to select notes? I personally try to stay away from borrowers trying to borrow close to the max or the max amount.
I have not had much trouble with notes I buy from the initial stage. I have however had issues with notes that I have purchased from the secondary market that make me really suspicious. I have gotten notes from the secondary market that look very attractive with track records with no missed or late payments since the issue of the note (sometimes as long as a year), only for the load to go completely bad after I buy it…almost like the seller new something I did not know. I find this very unsettling.
Small businesses have historically underperformed the other categories so I think it is a good idea to focus on the debt consolidation loans.
Funny you should mention Net Annualized Return, I have heard a rumor there are changes coming very soon on that front….
I know small businesses tend to fail a lot in general but are they really that bad when you’re comparing them to other high risk loans? I think I tried to look at what categories of loans defaulted more than others but it’s hard because it’s all based on the description right?
Did you go in and look at a sample size of descriptions and see which categories tended to fail more than others?
Thanks for stopping by Jake. I think loans where the borrower defaults before even making one payment are very frustrating to say the least! Clearly, this has to be a scam right? I mean what business could fail that fast haha? Unfortunately, that’s one of the risks with LC right now and why the loans compensate you with a 10-20% return.
As for your business vs. debt consolidation conundrum, it’s funny that you mention that because I was thinking about that today! I actually invest in everything but debt consolidation loans but I think I’m going to start investing in them. I never really had a good reason not to and it will help me fill up my portfolio a little faster. I’m trying to make my LC Roth accounts a little more efficient and streamlined. Basically I want to do less work.
Ok. I’m actually thinking of getting a loan through LC. Sob story. Divorced, short sell on the house, credit card debt around 20k , and slowly rebuilding credit. 684 at the moment. I hate that I have to turn to these methods but CCs are just driving me nuts and I’m sick of banks gaming me left and right. Is this a safe way to get a loan? I’m not to keen on upfront costs. I’ve been “approved” for 21k at 575 for five years. Not bad considering no banks do debt consolidation anymore. Any risks for for me?
Is your interest rate 5.75%? That seems too low based on your credit score and loan amount.
But as far as borrowing from LC, it is pretty straightforward. You’re right to question it since it may seem too good to be true. Why would LC offer me a 10% loan for example when my cc company is charging me 20%? But the reason why is bc people like me are on the other end investing, not some bank with overpaid board members, lavish branches, etc.
If your cc interest rate is higher, than it’s probably a slam dunk to consolidate into an LC loan and save yourself some interest. Good luck in paying off your debt bud.
Sorry. The 575 is the loan payment projected with LC. Should have clarified that one.
Ive been digging for days looking for means to sign up as a Canadian. I cant figure it out. Care to share any insight if you have any? my ideas have been along the lines of Trying to register a TIN #, or a SSN, Work Visa? Anything…
And from what I can see I cannot be exempted from being an accredited investor.
Yea Steve I think you’re out of luck, it’s hard for even Americans that don’t live in the right state to sign up with LC. You could try posting your question over on the forums on Peter’s site: http://www.lendacademy.com/
Thanks for the article. I heard about Lending Club on the news and am doing some research to see if the investment is right for me. Lending Club offers lenders two services which justify their fees: verification of loan applications and collection of outstanding debts. I’m concerned with how well they carry out these tasks.
Regarding loan applications, when I browse notes, I’m shocked that many are already close to fully funded before the application has been reviewed. My reading of the loan application is that the loan is issued when the note is fully funded, whether the application is fully reviewed or not. What is Lending Club’s risk that would justify it to fully review an application if investors have already put up the money? Wasn’t this lack of incentive one of the problems which led to the financial crisis?
Regarding collection of outstanding debts, I’ve read some comments here that give me pause, but one of my main concerns is on page 2 of the prospectus. It says that 3-year notes can automatically be extended to 5-year notes, and payments received after the 5-year maturity date will not be sent to the lender. So if the loan is in collection at the maturity date, or if the last payment is just a few days late, does that mean the lender automatically loses the outstanding principle? I think that would hurt investment returns, but you’d have no way to measure it until you’ve held the notes for 5 years.
Hey Chuck, your concerns are definitely valid. I would prefer if LC would review the apps fully before posting for lenders but that’s not what they do. I think most loans actually fund before the app has been verified although if LC does find something fishy, then yes they ‘should’ remove the loan from their database and you’d get your money back.
I haven’t heard much about your second point but that doesn’t make much sense to me. That might be a question better suited for LC, I’d give them a call.
The thing you have to keep in mind though is there’s a reason why these notes are paying such high interest rates, there’s risk. I still am not comfortable investing more than 5%(right now at about 1-2% of net worth) of my portfolio in LC even after doing it for a few years and seeing the high returns. It sounds like you’re a pretty smart guy though since you’re already weighing the pros/cons and reviewing the fine print. Lmk if there’s anything else I can help you with.
Good thread. I’m very surprised about many of the default rates I’ve seen. I tend to invest primarily in B/C loans with a about 10% A, 10% D and 4% E. None with a grearter risk profile. It makes a lot of sense to put thought into how you filter and I add one more which requires a manual look- the loan payback must not be more than 10% of their gross income, especially for 60 month term loans.
Those reaching for yield by purchasing high-interest loans should take note. While you may outperform in the near-term, your return will regress over time. Further, if there is a town turn in the economy, these are likely the first loans to go bad and you could end up doing badly.
As far as scammers, I’m certain there are many. It’s frustrating when you get 1-3 payments, then they stop paying and often go Chapter 7. That’s just the cost of doing business. LC does a good job of policing credit scores, but I understand nearly all if not 100% loans are fully funded. They do not aggressively enforce income verification- that is concerning. I’m not surprised because they want to fund as many possible loans- particularly now that they are a public company. I intend on monitoring closely their default rate. I’m currently earning an adjusted NAR of 9.85% which I consider excellent. I know that rate will diminish over time as the loans mature, but all and all, I’m very happy. I would be much more nervous if I owned a lot of more speculative loans. Interestingly, I don’t see a huge divergence between loan grades- sure the D/E loans default more often, but not disproportionately for the risk. I get plenty of A loans aging out and several have gone bad. With this many loans out, some probably had medical problems, died or fell on hard times. I think it’s good mental hygiene to look at your overall rate of return and not focus too much on individual loan performance. The biggest frustration now is that nearly 80% of the loans are bought by hedge funds who use API calls to scoop up many of the best loans. This seems wrong for a supposed P2P company, but that’s life I guess. Makes it time consuming to develop a large number of high-quality loans. GLA
Avg Loan age- 7 months
My Notes at-a-Glance 3701
Not Yet Issued 138
Issued & Current 3,241
In Grace Period 19
Fully Paid 252
Late 16 – 30 Days 7
Late 31 – 120 Days 25
Default 2
Charged Off 17
I want this to be passive income so I have used the knowledge of the experts (Peter at Lend Academy is one) to determine my filters going forward. And now I just fill up the loans 🙂
I’m actually about to drop another 11k in my LC roth ira for 2014 and 2015
I agree with your assessment of scammers. First, DTI does NOT include housing costs. I was shocked when LC even pointed out they have a disclaimer stating that. Unless someone is homeless, the DTI calculation is unknown. That is a vital piece of information. Second, the company is susceptible to application fraud. Someone can apply for a loan knowing they will declare bk in 30 days and LC isn’t equipped to handle it. Their applications should include a line about the applicant not knowing of any negative event happening in the next ____ days. Someone with a 700 credit score committing bk 30 days later is obviously a scammer (and Is possible because housing is not included in DTI).