Lending Club Review – Peer to Peer Lending Site

by David Ning · 54 comments

Lending Club promises high returns for the average investor through peer to peer lending. With every other asset class doing so poorly during the last few years, this review takes a look at this investment option to see if it’s a better option for our money.

Lending Club Sets Fixed Interest Rates

Unlike other peer to peer lending companies, Lending Club automatically identifies each loan with a fixed interest rate that is tied to historic trends, current market conditions as well as the individual borrower’s credit history. This takes a huge variable out of the investor’s decision, an advantage that I welcome.

Lending Club’s Investing Mechanism, LendingMatch

Peer to peer lending isn’t new, but Lending Club is claiming that 93% of investors are getting a return between 6% – 18% (as of August 2012).  In order to get those returns though, you need to invest (or lend) through the system.

Lending Club provides two main ways to invest: picking each note (loan) one at a time or in bulk through its LendingMatch technology.

LendingMatch takes your investments, divides it up into $25 dollar chunks and diversify it across different grades to achieve the average rate of return that you specify. While this method doesn’t really take into account the purpose of each loan, it is a quick way to diversify across many different loans as well as take subjective decisions out of the investment equation.

Rate of Default

With peer to peer lending, the inevitable question of risk comes to mind. Lending Club tries to address this by only approving borrowers that have a FICO score of at least 660. In fact, Lending Club borrower’s average FICO score is well above 700 (at time of review, it’s 713 as taken on their website).

In my personal opinion, the best way to mitigate the risk of default is through diversification across as many loans as possible.  This is because the effect of each default on your individual portfolio is reduced with every additional note that you carry. This bodes well for Lending Club, because the LendingMatch tool allows us to diversify our investments quickly and objectively.

Reinvesting

lending club reinvesting

In order to maximum our returns, Lending Club offers an automated way to reinvest your monthly payments based on the criteria that you set. A minor detail that I like about this is that I can set it to alert me through email either daily, weekly or monthly for true hands off investing.

Is Lending Club Right For You?

The Lending Club website makes many comparisons of bank savings and CDs with its lending program, but I believe that the lending club model is more directly competing with money we have for investing in securities like stocks and bonds. Savings and CDs, while having a low return, is virtually risk free while any other investment carry the risk of capital.

However, peer to peer lending with Lending Club is a very strong contender for our money compared with other investments because of the potential high returns and passive nature (if you let it automatically invest your funds). If you are enable to diversify your investment across many different loans, the potential return seem to be worth the risk.

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{ 54 comments… read them below or add one }

Neal Frankle March 25, 2009 at 5:56 pm

Do you have any data on default rates?

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MoneyNing March 25, 2009 at 6:01 pm

Neal: from Lending Club’s website, the default rates are (grade, followed by % of default)
A 0.47%
B 1.26%
C 2.05%
D 2.84%
E 3.63%
F 4.42%
G 5.21%

Lending Club claims that the data is from TransUnion Corporation and their own propriety models.

It seems to be a promising way for do it yourself investors.

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Evan March 25, 2009 at 8:58 pm

I just started with Lending Club too and it’s quite easy to start investing. I’ve only had about 3 months with them and there are no defaults so far on my investments and hopefully it will stay that way. My return is 11% so far but who knows what it will be if defaults starts to happen.

I’m still in the trial phase right now and hopefully it will be as promising as it looks.

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Neal March 26, 2009 at 11:04 am

David, thanks for the data. Evan……..keep us posted please. Congratulations so far. Keep it up.

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NHMatt March 26, 2009 at 1:38 pm

I thought prosper.com was attractive when I first signed up, but then the bottom dropped out. After 2+ years of lending, I’m just ahead of breaking even. I wonder if Lending Club will be any better in the long run.

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Ken April 20, 2010 at 8:48 pm

when the bottom dropped out, what happened with your investment?did the outstanding loans go out to a collection agency,or did you suffer a total loss?im giving lending club a shot soon.seems like a brilliant, too good to be true idea.i wasnt aware this business model existed

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Steven October 4, 2010 at 2:47 pm

I experimented with prosper.com investing $50 into each of 3 AAA rated borrowers at an average interest rate of 9%.

One of the borrowers defaulted after about 6 months which effectively reduced my investment capital by nearly 30%.
Now assuming the other two do not default I will have lost approximately 20% on the investment over 3 years.

My money’s going back into the coffee can buried in the backyard.

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dk from lendingclub March 27, 2009 at 1:38 pm

@NHMatt – Javelin Research did a very detailed investment analysis of us a few months back, analyzing our default rate from real data. You can find the report on the homepage. It’s pretty extensive reading, but really gets into the nitty gritty calculations.

Also, our minimum FICO score is 660, we really focus on listing high quality borrowers.

DK
Product Ambassador
lendingclub.com

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Chris February 1, 2011 at 6:43 am

DK – please see my comments dated Feb 2, 2011

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K-Van March 28, 2009 at 6:28 am

MoneyNing:
I wish you had done this review a year ago when I was trying to decide whether to try Prosper or Lending Club. I ended up picking prosper for being the oldest and largest. Not doing bad there, have several defaults, but all-in-all, I’m making around to 3-4%. I then moved to Lending Club when Prosper decided to shut down last year. Much better selection of loans. I know this is a matter of preference, but I love the fact I don’t have to bid to lend to somebody, and I much rather invest in better borrowers, than spend tons of time picking and choosing. I’m averaging 12% after 6 months, only 1 default out of 100+ loans.

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Diggy April 12, 2009 at 1:43 pm

The stock market is going gang busters the last few weeks but Lending Club for me was about diversification. Like others, I’ve been getting unbelievably high returns so it’s all good so far.

I would definitely check it out and hopefully Lending Club stays profitable in the future because i’m loving it.

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ICanRead September 15, 2010 at 7:49 am

Regarding: “… hopefully Lending Club stays profitable …”

Read the prospectus. This reply is 18 months later and Lending Club has yet to have a single profitable month. Last quarter shows a loss of $3 million.

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Shane September 15, 2010 at 7:37 pm

Thanks for the insight and the info. on the prospectus. Essentially they say you may lose your investment if they go under, meaning they get all the payments and leave you high and dry. Thank you for this heads up.

Read the prospectus.

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Arnie October 1, 2010 at 6:51 am

I believe, the problem with LendingClub is that it takes on horribly large loans, usually $10,000 and up, which, when defaulted, many investers get burned. Wheras Prosper, has loans, I believe, start at $1,000 where the burned rated is lower. I invest in both peer to peer companies, and have more loans defaulted by LendingClub.

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Lender April 16, 2009 at 9:04 pm

There’s really no buyer for your notes, unless you sell for a loss. Recently, the number of people lending money have dropped off drastically. As for you paypal deposit, you have to use it all with LendingClub or they’ll lock your account out. Imagine that, having your account locked out when it’s not even in the contract.

A company that makes up new unadvertised rules with your money. You decide.

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Dan April 28, 2009 at 2:39 pm

I’ve had only positive experiences, but it’s a new development, and like all new technologies it needs to further develop and reach critical mass…

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Chris July 30, 2009 at 6:16 pm

Lending Club has a very good track record and so far I’m very impressed. My loans are coming out to be 8%+ and I can’t say that I’m not happy. I wish more people would learn about its service because it’s clearly a better way to invest than those stocks that seem to go up and down without merit.

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P-Walk October 12, 2009 at 5:05 pm

I am fairly new to P2P lending and the Lending Club, but I see it as a very interesting concept and a new investment opportunity to those investors with less capital to invest who typically only have the stock market to “gamble” in. The quote, “the rich get richer” is so true of our investment opportunities, very little opportunities exist to somebody with only $15,000 to invest. With the Lending Club, somebody can almost become their own bank, pooling equity and investing it through available loans. I am highly involved in the institutional real estate investment world, and rarely would somebody with >$15,000 have the opportunity to invest in a commercial or residential development or opportunistic fund that is our raising capital to take advantage of the next real estate cycle. My question to you investors, would this opportunity interest you??

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Jeff Curious November 3, 2009 at 4:38 pm

I am researching whether or not to become a Lender investor in the club. At this point, I am unclear on how can sell the note or route borrower payments to an external account. (e.g. my personal checking account).

… any insight would be helpful …

Regards cosmo …

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MoneyNing November 3, 2009 at 4:50 pm

Once you invest in a note through Lending Club, you will get payments as the borrower sends them on a predefined schedule. You can also sell your note through folion, which is a open market place for these types of notes. In there, you can buy and sell your notes at any price you wish (face value, above, or below what the outstanding balance of the note is).

As linking, it’s like any online bank account. You set it up and transfer is done through ACH. You can wire money into the lending club account, and I do not believe you can wire money out but ACH works fine for me so far.

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Shane December 21, 2009 at 2:31 pm

Lending Club out performs most investments and at a risk less than traditional investments (not including CDs, Savings Accounts and Money Market). Diversification, however, is the key to maintaining low risk. Never invest large amounts in one loan, split it in $25 increments and you should be fine.

Yes lending is risky, but banks have been lending forever. If you qualify your risk properly you won’t have any problems

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Clint January 9, 2010 at 12:37 pm

How is this website any different than other peer to peer sites that have failed? I do not see anything that makes the concept and take on the idea any different than say Proper.com, which has had a huge default rate on most loans given?

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MoneyNing January 10, 2010 at 8:08 am

Their difference is in only accepting high credit quality. All the borrowers have an average FICO score of 700+ currently, but this little tweak works extremely well.

The loans I’m doing are doing well, but note that you will have defaults. Though if you spread your loans into as many as possible, default rates will diverge into historical norms.

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Mercy January 28, 2010 at 11:38 am

I started using Lending club in 2006. At first it was nice… but after 3 years I’ve lost quite a bit of money due to defaulted or charged off loans. I know it’s probably closely related to the busted economy… but it still sucks that after 3 years My net profit is negative 2 dollars. =)

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Jack February 14, 2010 at 3:16 pm

@Mercy – it’s interesting to hear your story, especially given that the average return for investors according to a Javelin research report is 9.05%. It would be interesting to know the variability of returns, and what the worst and best returns have been for investors. I’ve been investing with Lending Club for about 4 months now, and haven’t had any defaults. My return so far is averaging nearly 14%.

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Bruce V February 14, 2010 at 10:05 pm

Once you invest, how do you get your money out after the loans are paid? Or is the money continually reinvested?

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Simon February 15, 2010 at 5:59 am

Lending Club lenders ask specific information of the borrowers. This may be useful for the lenders, but poses significant risks for the borrowers. If you are a borrower, DO NOT supply detailed employment or financialinformation which lending club then posts publicly for all to see. Your employer or relatives or friends, or people out to defraud you, can get hold of this information.
I am currently forwarding these security concerns to my Attorney General and the local consumer advocate.
Prosper.com is a much safer, cleaner, and more reliable peer to peer lending site.

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Unclejim April 28, 2010 at 7:14 pm

Simon; I disagree with your assessment of Lending Club. The borrower does not have to give information he does not want shared. That will; however, reduce the number of lenders he is able to attract. Plus; the borrower has the option of going some place else if he does not like giving the lender this kind of information.

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Unclejim April 28, 2010 at 7:16 pm

Prosper has not been able to get approval to do business in Michigan. That does not bode well for their business plan.

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Shane April 28, 2010 at 8:19 pm

I am from Michigan too and it bums me out. My Lending Club account is doing well, no defaults even with two D grade loans. If you spread out the risk you are sure to get a good return. 11.73% return so far.

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Unclejim April 29, 2010 at 8:10 am

That is a great return. How long have you been with Lending Club?

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Shane May 22, 2010 at 12:11 pm

I’ve been with them since the early days, almost about 2 years?

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Simon April 28, 2010 at 9:23 pm

UncleJim you are correct. The borrower does not have to supply personal information. However, Lending Club did not adequately protect borrower’s from posting identifying information. They also do not post payments promptly. Overall, my opinion is that Lending Club is a cowboy operation with poor protection for borrowers. My recommendation is to avoid them.

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Unclejim April 29, 2010 at 8:06 am

Simon; You might want to do some closer research.

All a potential borrower need do is to visit the Lending Club site and read what other borrowers have posted there.

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Simon September 16, 2010 at 7:12 am

Unclejim, I did do closer research thank you very much. My comments were based on real time experience of the site. I stated exactly how it operated. You might want to compare Lending Club to other sites in practice. Trust and verify. Prosper.com provided a more professional, and cleaner experience for the borrower in my opinion.

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Kelly May 22, 2010 at 11:09 am

What does everything think about the new 5 year notes? Are they somehow better or not?

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Ed August 13, 2010 at 4:06 am

Has anyone sold notes over the Folio n?
I have some notes that are late which I want to sell off.
Anyone have experience on how I should price the notes?
Thank You.

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jim August 16, 2010 at 10:36 pm

Was seriously considering this investment opportunity, but it seems to be risky. Have read the positive comments and hope you continue to do well with your investments with the Lending Club.

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Spencer August 28, 2010 at 4:44 pm

I agree with the previous comment from Mercy. I’ve been investing with Lending Club since March 2008, and two of the eight loans I helped fund have defaulted and one of the others just became late (maybe a better way to go is to use the LendingMatch technology). From looking at the “statistics” page, 15,586 loans have been funded ($121.6M), 1491 have been prepaid ($13.1M), 12,209 are current ($99.7M), 429 are late ($3M), 757 have defaulted ($5.8M), and a total of $52.9M has been repaid. My opinion? I like the idea, but I’m not convinced that this is a good investment idea.

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Shane August 28, 2010 at 6:14 pm

Spencer, it’s all about diversification. I’m currently sporting a 13% return, even with loans in the C D and E grades. By investing in the smallest amount possible ($25) in a variety of loans and avoiding the high-risk categories (Dream Vacation, Wedding), I don’t have any problems.

Stick to the borrowers that need the loan (car for getting to work) or have financial literacy (refinancing higher debt). Plus you can still use the credit rating as an indication for their ability to repay.

I’m not saying loans aren’t defaulted on, but by using diversification and smart investing, they won’t be your loans.

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Greg November 1, 2010 at 4:29 pm

@Shane, I have been using Lending Club since Dec 2008 and have a 9.84% return with one default (B grade). I attended one of Lending Club’s online forums and they showed that the categories with the fewest defaults were
1. Wedding/ Dream Vacation/Renewable Energy Financing
followed by
2. Consolidate Debt/Refi Credit Cards

The highest default rates were for
Educational/Medical Bills/Business Loan/Home Improvement.

According to this forum Length of Employment was the best predictor of default. Short employment=more likely to default.

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techentre November 1, 2010 at 5:26 pm

10% is a pretty good return, I pulled all my money out after reading the prospectus though, read the prospectus.

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Spencer August 28, 2010 at 6:52 pm

Shane, thank you for the reply. I basically agree with your comments, but it might not be as easy as it seems to make “smart” loans. I realize that of course this isn’t a representative sample, but of my two defaults, one was B grade (money needed for surgery) and one was F grade (money needed for education). For the loan that’s late, it was B grade (money needed for a new truck for business).

Also, I question the published default rates. From Lending Club’s statistic page, $52.9M has been returned, but $5.8M has been defaulted upon (will never be returned) and another $3M is late (some, maybe most, of which will be defaulted upon). I realize that this isn’t enough information to figure out the default rate, but overall, it seems much higher than a few percent.

But, as my son pointed out, one reason we’re doing this is to help out other people. We’re not necessarily in this to make a large profit.

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Shane August 29, 2010 at 7:44 am

Medical bankruptcy is the number one reason people declare bankruptcy.

Most individuals that take out loans from p2p lending don’t have a business plan.

If you want to help people, I’d recommend creating two separate portfolios, one based on investing for profit and one investing in people. Play the law of averages on the profit portfolio and read through each loan application (and ask probing questions) on the one to help people. You can have the best of both worlds.

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Kym J. Thornton, ARM December 2, 2010 at 9:38 am

Compared to the other peer-to-peer lending websites out there. How would you rate lending club with respect to a return on your investment?

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Kym J. Thornton, ARM December 2, 2010 at 9:39 am

P.S. What is the minium start up amout of investment for this program?

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Shane December 2, 2010 at 7:26 pm

$25, I’m not sure how Prosper is doing financially, but with a company that hasn’t turned a profit in 5 years (Lending Club) and with all of your investment at risk, I wouldn’t consider it.

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Chris February 1, 2011 at 6:41 am

I have several comments to add to the discussion – all I have addressed to LC directly over the last few months.

1) LC takes 4 days on an ACH transfer from my bank to LC – however the money leaves my bank within hours the first day – I suspect the other 3-4 days are “float” for LC (I know for a fact that most ACH transfers I do between other financial organizations take at most 12 hours from when my cash leaves one account and shows up in another account, excepting holidays/weekends);
2) LC pays no interest on money that is not yet invested (either waiting for initial investment or P&I having been repaid on existing loans)- that is a considerable sum of money given the daily cash flow of LC’s operations;
3) On defaults/late payments LC’s efforts appear to be less than satisfactory, more so in recent months;
4) Payments seemingly are all either late (on average approx. 5 days from the stated Payment Date) OR Lending Club’s processing is inefficient (the assumption is payments are generally made on the date due and it just takes LC a long time to process payments) OR WORSE – LC is purposely taking it’s time to process loans – once again for the benefit of their float.

The above being said I am a sophisticated investor (also an accredited investor by SEC rules), and have investments spread around the world. Until recently I was going to invest a large sum in LC’s operations however in the last 6 months my enthusiasm for Lending Club has diminished, despite my returns, which since early 2008 have been over 8% with defaults included. For a large portfolio in LC it would take a considerable amount of time to manage a portfolio worth a large sum of money and using the LC programmatical (automated) approach to automate your investing is no acceptable to my way of investing.

Therefore my investment in LC, while not insignificant, will no longer grow in size due to the above problems I have described.

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nomind February 1, 2011 at 7:39 am

I have posted before about my dissatisfaction with the way Lending Club conducts business. I AGREE with Chris. Lending Club does not post my payment for at least 5 days according to their web site. This is entirely unsatisfactory and I have reported my concerns with their business practices to my Attorney General. Prosper.com has a much more user-friendly operation in my opinion.

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Thomas February 10, 2011 at 10:55 am

I do believe in trying to help those in need. And I also believe that circumstances play a part when people default of the loan takes place. On the other hand there are many scam artists out there just waiting to take advantage of goodness and kindness.
I started out with 65 loans with Prosper in 2007 I now have 29 charge offs, 19 paid in full with a loss so far of 374.67. To say that I’m dismayed would be a gross understatement. The largest defaults were those borrowing 25,000. Now you know who these sharpies were. They never intended to repay those loand.

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Paul March 17, 2011 at 5:51 am

I’ve been a lender on Lending Club for six months. My net returns are currently 12.22%. No defaults so far, but my technique is to sell loans pretty quickly that look like they’re going to go seriously late. I’m impressed with the functionality of the website and the borrower screening process Lending Club uses. Lenders need to get comfortable with the idea that you’ll have some defaults sooner or later. It’s going to happen, and it’s even part of the overall business model. The many note payments you receive will more than make up for the occasional default.

My only real gripe with Lending Club is that they seem to be riding the float on loan payments and deposits I make to my account. Payments take 5-7 days to hit my account after they’ve been made. When I transfer funds from my bank account to my Lending Club account there is a similar lag. This bugs me and I’d like to see Lending Club address it.

But, overall, a good experience so far.

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Eddie September 6, 2011 at 9:23 am

I’m a small time investor, but I’ve been investing with prosper.com for close to 2 years now. I have 11 loans with prosper.com and have yet to have anyone default. I’m averaging $26.99% back on my money. I do not invest in people with AAA credit simply because the return on your $25 is only 6-9%. Therefore, I’ve only invested in folks that are HR (high risk) or D and E credit. However, I do have one loan with someone with B credit only because the return on that loan is 15.99%. Since I have 10 loans with not so spotless credit ratings I am now going to invest in folks with B rated with interest of at least 15.99% just so I can diversify balance out my portfolio. I absolutely love it!! This is the way I see it, if you’re going to invest, invest in more than just one, two or three loans. Otherwise, if someone does default you won’t feel it. The way I’m looking right now if someone defaults I won’t even miss it….by the way at this point I no longer transfer money from my checking account into prosper. I just reinvest what I make monthly. I love talking about this if you have any questions feel free to email me directly with your phone number or I’ll email you back with my phone number and we could either talk or text. My direct email address is hotbrand10@yahoo.com. Good luck and just do it!

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'NVestor February 9, 2012 at 11:18 am

I invested through Prosper pretty heavily when it first started. They didn’t have their model very well refined, and many investors lost significant percentages of their investments. My total defaulted principal amount was $3,400+. Prosper then shut down for a while to get their registration with the SEC straightened out, as they were deemed to have been selling “unregistered securities,” as I understand it. Prosper then re-opened with a new and improved business model — with limitations on the types of borrowers they accepted, with fixed-rate loan offers (instead of a bidding process), and with much better results.

Most of my remaining original loans performed, but I took most of the money out as it was repaid. This was in part because I wasn’t earning my usual income and needed the money. Occasionally I’d invest what had accumulated into a new loan.

Then I noticed that occasional loans I had invested in under the new model were performing as agreed — no defaults and few lates. So I have gradually been getting back into Prosper lending. My “net loss” was at about $450 last June, and I”m now at a positive couple hundred dollars. I know that’s not a huge amount, but it’s $650 in 9 months on what is probably an average invested amount of under $8,000, so it’s a return of better than 10%. There are a couple of borrower’s who have filed BK, so that money will be lost, but those are among the smallest loans I have, so the effect will be minimal.

Prosper characterizes what investors invest in as “Borrower-Payment-Dependent Notes.” (I think I have the terminology close.) So that menas the investor’s payment from Prosper will only arrive if Prosper has recevied the payment from the borrower. The concern, of course, is that Prosper could run into financial difficulties and “investors” in Notes would become general creditors of Prosper like the utility company, the phone company, and the computer lessor. I’m sure it’s all in the Prospectus, but most investors will not hasve read that — and certainly not with a complete understanding of the implications.

So the bottom line is it’s working for me (again) — at least so far. I haven’t investigated Lending Club, but from the comments, it sounds like the business models are now pretty similar, as are the estimated returns. We’ll see how defaults evolve as the “recovery” goes forward. On the one hand, I wonder about people for whom a 17% interest rate makes an attractive loan, but on the other, I realize that at one point one credit card company raised my rate to 30% and another cut my credit line from $30,000 to $1,300.

Best of luck to all.

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John Parker April 4, 2012 at 4:16 am

I tried to use Lending Club, but after I started an account I found out that I could only trade existing notes on FolioFN since I am a Florida resident. Bummer. There is very little information available on FolioFN on the background on the notes up for trade, so I bailed out of LC quickly.

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