Lending Club Review 2009
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.
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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 the average return for investors is 9.05% (data is obtained from Lending Club members from June 2007 to December 2008). 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
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.
For more information, here’s an interview introducing Lending Club:
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- Lending Club – Official Site
{ 14 comments… read them below or add one }
Do you have any data on default rates?
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.
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!
David, thanks for the data. Evan……..keep us posted please! Congratulations so far. Keep it up!
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.
@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
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.
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!
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.
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…
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.
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??
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 …
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.