After 10 months, and multiple 5 figures invested with Lending Club, here are more thoughts on this alternative investment.
I’ve been thinking about and gathering notes for this article for a while now. Partly because many of you actually wrote to me with questions after my initial Lending Club review, and also because of the concerns of whether our reviews are even genuine.
The following represent what I think you need to know about Lending Club before you invest with them.
First things first. Many people, myself included, are compensated if you click through our links and sign up an account with
Lending Club. I would love to say that writing about this has absolutely nothing to do with the compensation, but the fact of the matter is that it at least subconsciously affects my decisions, whether I like it or not. Keep that in mind while you read the rest of the article.
Lending Club for the Investor
Make sure you understand every point below before you start investing with Lending Club.
- Fees – Not sure if many people actually read the prospectus, but Lending Club charges a 1% fee for their service, which cuts into your returns. On top of that, if you were to sell the notes before they mature, you are charged another 1% of the note amount by the company that handles the transaction.
- Keep Reinvesting – People pay off their loans early all the time, and some of the loans don’t even start. It’s not really a set it and forget it type investment that most people think it is. If you don’t reinvest your funds, the money will sit in your account collecting no interest.
- Play by the Numbers – Most people think they can pick the winners from the losers, but in reality, all they are doing is making emotional decisions based on someone’s “story”. The most successful way to invest with Lending Club is to have as many loans as you are allowed so your returns come close to the average returns and just accept that. (Remember that each note needs to at least be $25 dollars, so you can only have a maximum of 100 loans with $2,500 invested).
- Prime Account – If you have $10,000 or more in your balance,
Lending Club actually has a service where they will help you invest your funds. The system isn’t perfect (for example, they don’t reinvest your funds every day and their notes are generally $100 each, but it’s a good alternative for those who don’t want the hassle of keeping up with the administrative side of this type of investment). - Liquidity – Statistics have shown that selling your notes at what it’s worth takes approximately 3 days, so expect at least a week or more for your funds to get to your checking account if you absolutely need your money back (3 business days to sell, then at least 3 more business days for it to be transferred out to you). Also, imagine trying to liquidate hundreds of these notes all at once. Not exactly a piece of cake.
- Default – People default, and that’s one of the biggest risks. I’ve heard others do well by selling their notes at a discount when someone is late with their payments, but that’s much more work involved.
- No Long Term Track Record – Let’s face it. This is a completely new way of investing. The returns look pretty good so far (it’s published on their website and I am getting a good return too), but who knows what’s going to happen 5, 10, 20 years down the line.
- Company Risk – There’s always a chance that Lending Club will go under. Although they’ve made arrangements for another company, Foliofn, Inc., to take over all the notes, there’s no guarantee what exactly will happen in terms of how easily you can get your money back. After all, this is not the same as a FDIC insurance.
- High Risk Investment – This is considered a high risk investment, and definitely not guaranteed. Yet, I keep hearing everyone compare this to their savings account interest rates. IT IS NOT THE SAME. Don’t compare them that way. The Lending Club investing system can give you better returns, but it comes with more risks. Make sure you think about the consequences and are comfortable with this before you invest.
Lending Club for the Borrower
My experiences are mainly on the lending side, but a borrower with high interest debt is crazy not to at least try getting a lower interest loan with Lending Club. It’s a legitimate business, and it’s borrower’s heaven to get a lower interest rate loan. I mean, don’t go check it out just because, but if you are paying high interest debt on your credit cards, you are doing yourself injustice by not taking advantage of this new alternative investment.
And What Do You Think?
So far, my loans are working out which I’m extremely glad because while 5 figures may not be a lot of money for some of you, it is for me. What about you? Have you used the Lending Club service yet? Good or bad, help others learn from your experiences. At the very least, I will very much appreciate your thoughts as I’m a user and need to learn about it as much as possible too.
{ 11 comments… read them below or add one }
I have a few notes with both Lending Club and Prosper, all of which have combined to give me a just north of a 10% ROI. I have had one note go into collections, but that was almost 2 years into the loan, so I received the majority of it (and could possibly receive more of it).
Unfortunately, my sample size is small and neither site is available in my current state. Given the opportunity though, I would invest more money with it. I know it’s not guaranteed, but I think it can be a good opportunity.
Couldn’t agree more. I think the best thing to do if you’re just starting out, in my humble opinion, is to keep a small number of the “less risky” notes. This way, you’re only dipping a toe into the P2P investing space but also learning how the process works.
Grade A’s and low Grade B’s with a net portfolio rate of return in the high single digits so you’re only investing in borrowers with a very high probability of repaying the loan because they know the importance of keeping a high credit score, and will do all they can to keep it that way.
Herein lies the dilemma right? If you dip your toe, you don’t have enough of a sample size even if you choose high credit score loans but if you have a bunch of loans, you are making a huge investment.
I have invested with both Prosper and Lending Club and I think that Lending Club is a better match for me. I only have $250 invested in LC but I am thinking of making one loan about every other month this year (reminds me I need to do one this month!!!) until the money I get from the repayments is enough to fund one new loan.
I love LC because it is easy to use (and I guess it is orange like ING so that makes me happy.) and it seems it draws a better caliber of borrower. I was a borrower there myself and paid off my loan early and decided to help out other people. I have one loan paid early, one in default and all the others are on time.
If it’s not FDIC or comparable, it’s just too much risk for me in my late stage of the game. At my age, I’d rather get 2% than risk losing it. I like the idea of it and all – just not for an old fogie like me
Great that you are sticking with more conservative investments
Lending Club is definitely not for everyone. The returns are high, but risks are high too. I think the category of “alternative investment” actually fit this quite well because it should never replace be the primary way your money works for you.
Boon for the borrower, still too nascent for the lender.
I’m glad you have “multiple 5 figures” in Lending Club and highlighting the product. That is consistent marketing!
In a way, the prime account is like a hedge fund. You give them money, and they pretty much take over. It’s high risk but with less fees.
You do trade investment flexibility for the fees though, but not many of us have the assets to invest with hedge funds either.
I’ve been investing with Lending Club for a while now but never really thought about selling those notes until now. It does seem like a huge hassle but I also think that 1 week (the 3+3 you were speaking of) is fine. I mean, any asset other than putting it in your checking account takes a few days to liquidate.
I think you should sell some of these notes just so you get yourself familiar with the process. The last thing you want to do is to learn how everything works when you need to liquid hundreds of notes in a hurry as you need to set your own prices too.
Though I personally like Prosper better and actively invest money with them, I do have a $25 investment with Lending Club. The reason I like Prosper is their automated portfolios (currently have Aggressive and Aggressive Plus plans). The only thing I dislike about Prosper is their reporting. For me their month-end reports are incomprehensible.