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.
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.
- Lending Club – Official Site