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lending club review

Lending Club Review: An Investors Secret Weapon

Lending Club is a peer-to-peer online marketplace that matches lenders with borrowers. By providing investors with the ability to purchase consumer debt, Lending Club can offer better rates for borrowers as well as a high rate of return for investors. In addition to being able to buy individual loans in chunks as small as $25, investors can also have their funds automatically invested based on their unique specifications.
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Lending Club’s returns are great! I’ve made over 18% returns doing what banks have done for ages – lending people money. A strategy few experts talk about.

Banks lend you money because it’s extremely profitable.  A major share of a compan like Bank of America come from mortgages and credit cards – loans to individual people.  The rates that most of these loans go for are pretty solid and always based upon fixed payments.

Imagine lending someone $200 at 18%+ like a crazy profitable bank.  You would earn $36 a year.  Yes, that’s nuts.  Guess what, now you can get in on the gravy train too and this particular gravy train is called Lending Club.

This is my Lending Club Review using my current investment summary:

Lending Club Account Summary

What is Lending Club?

Simply put, Lending Club is a peer to peer lending service.  That means, instead of going to a bank for a loan, you can get a loan from a group of random people.  On the flip side of things, you can also contribute to funding a loan for other people allowing you to get in on the bank’s profit engine.

Borrowers use Lending Club because they get better rates then they would with a bank loan and loans are issued much faster through the power of the crowd.  The crowd will also approve loans that normally banks may not.  For example, if you run a small business and need $30,000 to get started, a bank may flat out say no where there will almost always be average investors interested in helping to fund your loan.

Personally my investment focus is on Small Business loans as the returns are excellent and they are often made by people willing to work hard – something I always invest in.

Lenders show up and participate in Lending Club because the returns are incredible, they only need to put $25 in per loan.  That means they can significantly reduce the risk of any single loan.  There are also mountains of statistics at their disposal to help build the strongest portfolios possible.

Lending Club is geared towards helping the lender as much as possible because without them the system wouldn’t work.  They have a vested interest in lenders being more successful here than other investment opportunities.

How It Works

Lending Club functions similar to a mortgage company in that they help broker deals for amortized loans.  Amortized loans are just loans that are front loaded with interest payments and are structured such that overpayment simply reduces the overall term of the loan, not the monthly payments.

Loans like this are stacked in the lenders favor as the lender will receive a higher portion of interest earlier in the loan allowing the lender to not really care too much if the borrower pays the loan off early.  The one major difference between Lending Club and a mortgage company is that Lending Club contributes no money toward funding loans.  All loans are funded by people like me or you.

The primary objective of Lending Club is to make sure all loans are accurately classified in terms of risk.  It is often that I try and invest in a loan and it doesn’t reach 100% funding.  What happens is, when I invest in a loan Lending Club holds that money in escrow until they officially fund the loan.  In this limbo period, Lending Club is investigating all of the information entered by the potential borrower for accuracy.  The majority of loans that don’t get funded are due to incorrect information entered by the borrower.  Lending Club will help you broker a loan, even if you have the worst credit in the world, however they won’t let you post up a loan with incorrect information.

As a borrower you will have to make monthly payments to Lending Club much like you do with your mortgage.  This can be automated just like your mortgage – through a linked bank account.  You can also overpay your loan with no penalties allowing you to end your loan at any time.  Lending Club even encourages you to call them so they can walk you through completely closing out a loan early if you’re able to.

If you’re an investor it’s even easier.  You link your bank account, transfer the funds over to your personal Lending Club account and then begin investing.  As for the details of how to invest, picking the best loans, etc.. we will detail that in a bit.  Beyond investing, the only thing you need to be concerned about is payment.  Lending club details all of this for you so you know exactly how much income to expect and when.  After you receive your monthly payment you can leave it in the account, withdraw it back to your bank account or reinvest it in another loan once you accumulate at least $25.

The beauty of the treasure trove of data which Lending Club makes available is it allows you to have realistic expectations around the entire process, as a lender or a borrower.  Based on the data I saw it seems nearly all loans get funded within 24 hours and become active within 7 days.  Having a loan become active just means that the money you invested which starts off in escrow with Lending Club gets sent to the borrower and the loan term begins.  On the other side of the coin that means it’s very realistic to expect the whole loan acquiring process for a borrow will last less than 7 days where the end marks cash in their bank account.

How to Invest with Lending Club

There are a ton of different strategies to investing with Lending Club.  I’ve only been using it for about 6 months now and I’m doing pretty good so far.  That said, I’m sure I’ll get a few bad loans along the way but I think through diversification and strategic offloading I can keep returns pretty high.  Below are the details of how I pick an investment in Lending Club.

Since Lending Club’s returns can be pretty high I wanted to see if I can keep my Net Annualized Return at 12% or higher.  Net Annualized Return is simply the expected amount of money you will receive every annually after charge offs (delinquencies or defaults) and fees (what Lending Club takes as payment).  That means, with an investment of $2,000 and a Net Annualized Return of 12%, I can expect to make an income of $240.  And by income I mean cold hard cash that I can withdraw and spend or invest in other new loans.

In order to get 12% returns or higher, I turned to Lending Club’s data (login required) to make my decisions.  Remember, our goal is to shoot for the average optimized portfolio although I think that if we’re thoughtful about our investments we can do even better.  Based at no more than 5 minutes at the summaries on their data portal we we can tell that the highest portfolios:
Are Grade E with an interest rate of 11.04%.
Have higher return rates the more money you invest.  This is interesting and I’m guessing because as you get more and more diverse, each bad loan hurts less.
Have more than 100 individual investments ($2,500+)

Lending Club Data

Yup, that’s it, statistically, if you do that you’ll exceed our 12% goal.  Now we could just blindly pick all loans that match these categories or we could be more thoughtful and try to add a few more restrictions.  I don’t want to be giving a loan to any deadbeats who likely won’t pay me back.  Worst case, if a loan does go sour, I can always try and sell it before it goes completely bad.  I can do this through FolioInvesting (FAQ) but that’s going to be annoying and there will be no guarantee I’ll actually be able to sell them.  Instead, I’m going to try to proactively avoid these bad loans.

That begs the question, who is the type of person we want to lend to?  We’ll I want them to be decent debt handlers and have decent credit, no delinquencies in the past 2 years, and no major derogatory marks.  I want them to have a relatively reasonable amount of credit utilization because I don’t want the loan I invest in to be too much for them.  Finally, I’ll be a total dick and judge them on their job and gross income ;)  The best part is if they lie on their loan application, Lending Club won’t issue the loan.

Lending Club Interesting Loan

This is an example loan that I invested in right before I wrote this article (I always reinvest loan income). Now, it meets our core requirements of having a decent credit score and a solid credit history but you’ll notice one crazy thing.  Look at that Revolving Credit Balance!  It’s $139,638!  That’s a crazy high number but if we look at the Debt-to-Income ratio, it’s 22.67%.  Woah, that means his yearly income is $615,960.

How could this be?  Figure the guy or girl got their first credit card as soon as they turned 18 (like most of us did) then that means if their first credit line was in 1993 they must be 39.  Ok, now it’s sounding a little better.  Also, they are opening up a small business loan.  So, maybe this money is going into an existing business for an experienced guy who knows what he’s doing and really doesn’t have much debt.  If so, I’m in luck!

Of course you can’t always get lucky so sometimes you have to give loans out to people who much more normal.  In fact, some of the best ones I invest in are for Credit Card Refinancing.  That’s a cause I can get behind and something I definitely recommend using Lending Club for.

Lending Club My Loan Pie

This is an example of what I invest in – not always according do the core rules and definitely skewed towards higher interest loans.

Lending Club portfolio

Since it’s hard to just look at loans as rates of return, I like to personally classify them by type of investment.  I figure this may tell me a few interesting things over time and since it takes only an extra minute with each order, I decided to set it up.

Take Aways

So, will this all work out?  I have no idea but based on the data it looks like 92% of the people who have 100 notes or more worth $2,500 or more make a return of at least 6%.  Since that’s not far from the market average I figure it can’t be that bad.  Right now my Net Annualized Return is 19.30% so I’m off to a good start!

Are you thinking about using Lending Club?  Do you use it right now?  Let us know in the comments!

UPDATE: Lending Club reached out to me and whispered that they will be launching a “Small Business product soon”. I would be lying if I wasn’t really excited. As soon as I hear anything I’ll be updating this post so check back!

Featured Image Photo Credit: “Left Hand – Kolkata” by Biswarup Ganguly

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  • You can’t beat those returns easily. There’s just something about it that makes me more nervous investing with this stuff vs. investing in the stock market where it’s regulated.

    • No, it’s not easy to beat those returns but all we really need to do is average and we’re doing pretty good! Anything above 10% returns is golden for me. As for being regulated, it is. There are tons of laws for lenders and Lending Club is no exception. For example, there are many states where you can’t even use Lending Club yet.

      There are more risks as you’re investing in a single person, however you can invest a minimum of $25 per person which is not a lot to lose.

  • Skunkwise

    Andrew,
    How are you avoiding paying hefty income taxes on your profits? It seems that after income taxes, in addition to losses from defaults (capital gains losses that can’t be applied to income), plus any loans that you sell off prematurely due to being late, would significantly impact your ROI.

    Thanks for all of your help.

    • Skunkwise, taxes are pretty easy to handle.

      Lending Club will generate you a properly formatted 1099-OID form at the end of the year summarizing all of your various notes and their income. In TurboTax you just plug this in the final income number under “Personal Income -> Interest and Dividends”.

      The profits you make are taxed as ordinary income so it’s no different than if you made a little bit more in your salary.

      In terms of profitability, I’ve yet to do a full analysis of all my investments for the year (it’s only May) but I suspect it will outperform most everything that I own including the taxes I pay on profits. If the return stayed the same for the whole year, based on my income level I’d still have over 10% returns. That’s damn good in my book.

  • Hey Fellas,
    Thanks for the great information. I’ve been listening to you guys for a couple of months and really enjoy the way you guys look at money. I’ve started using your advice and have seen great results so far. Keep up the good work!

  • Kevin

    Andrew,

    I just stumbled upon your podcast and find it amazing. You talk about everything I think about!. Although I am just beginning my journey.

    Anyway, I live in Mass and cant use lending club, although i can sign up for Foliofn, their trading program. Would you even recommend that as an alternative? I feel like buying notes/loans others want to sell put you at a disadvantage.

    Kevin

    • Kevin, thanks for the kind words about the podcast!

      I actually wouldn’t recommend using Foliofn. My co-worker tried to sell a note on there that was in the grace period and nobody would take it for even $10. That said, I can’t imagine anything good on there. Everyone’s going to keep the winners and hold the profit for themselves.

      It may be possible to scoop up a delinquent loan on the cheap and make a strong profit off of it but that’s likely to be the exception to the rule. Better you stay away from gambling. That is unless of course, you have a strategy.

  • Noe Flores

    Hi Andrew,

    Are you still investing in Lending Club and how is it going for you?
    Thanks for all your hardwork!

    • Noe, I’ve actually been meaning to write an update. It’s going well but I’m starting to feel like it’s a lot of work for my time – mostly because I haven’t allowed Lending Club to automatically allocate my money for me. Once I do that and give it awhile I’ll write on how that performs.

      In the meantime my personal allocation strategy that I described is cranking away at 16.62% Net Annualized Return so most certainly not too shabby.

      If the automated approach works I’ll probably crank a serious amount of money in there and just let it ride, returns would be too sweet to turn down.

      • Noe Flores

        Yeah, I’ll say. Good stuff man. I’ll keep an eye out for that.
        I also was super into your last episode on Fundrise. That was super interesting and sounded like it also had some great returns too.

  • Carmen

    I am grateful for Lending Club. The investors that financed my loan are much appreciated. Because of divorce, I needed help with things that needed to be taken care of immediately. With the loan, I can manage the consolidated costs easier. THANK YOU Lending Club Investors! I am looking into being an investor to pay it forward ASAP.

  • Rich the Rabbit

    Thank you for the article. I’ve been skeptical and always wanted to learn more about these types of companies. I have a question though. How is your money secured? Do the borrowers have to put collateral down for a loan? What if the loan gets defaulted, does Lending Club eat the cost?

    I think lending is a great way to make money when done correctly. I usually don’t lend unless it meet all three of my criteria. I guess my main question is, does Lending Club meet all three of these criteria?

    1.) The borrower must have the ability to pay the loan back (obviously).
    2.) The borrower must put forth collateral equal to or greater than the amount being borrowed.
    3.) There must be a written contract that legally binds the terms of the loan.
    Thanks again?

    • Rich, you money actually isn’t secured which IMHO is one of the better aspects of Lending Club. Less pressure/restriction on the lender so easy to refinance from a bad situation. It also means a higher return for investors which keeps the ecosystem pretty strong.

      That puts a lot of importance for the investor on diversifying their loans and as a result I rarely invest more than $50 in a single loan and it’s usually a bunch of different loans at $25 each. When someone defaults, as an investor you lose your money and as a borrower it’s pretty bad for your credit. Shit happens and be it the stock market, loan market or what have you there is always a chance to lose your money. The risk needs to be there for the returns to be worth discussing.

      In terms of the criteria: 1) Yes, 2) No, 3) Yes. As an investor you actually get to see a ton of details on the person, how much available credit, time since they first got credit, bad marks on their credit, criminal issues, their job/title and a lot more. If you’re going to invest it’s your responsibility to look at this information and make a judgement call.

      I’ve either been really lucky or good at judging loans – my returns are north of 16% so I’m kinda in love with the company.

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  • Eric

    Just discovered the podcast and absolutely love it! You make my hour and a half commute fly by. And I just listened to 6 straight hours on drive (much to my girlfriends dismay haha)

    I just listened to the peer to peer lending episode and it sounds very appealing! When I looked into trying it out I saw on the site they have stipulations on who can invest based on where you reside and what your net worth is. However, at the end they say: “I will not purchase Notes in an amount in excess of 10% of my net worth, determined exclusive of my home, home furnishings and automobile and if I live in California and do not satisfy any of the above tests, I will not invest more than $2,500 in Notes.” Any idea what that means? They way i read it, it means if you don’t meet the net worth amount ($85,000 without property) in CA then you can still invest but just can’t invest more than $2,500. Any idea if that is right?

    • Eric

      I actually did a little more research and in the QA, they confirm that this is the case. If you live in CA and don’t meet the minimum net worth you can still invest just not more than $2500. I plan on starting out picking loans but have you tried out automating the investment? Any insight on how it performs and any tips?

      • Hah, that’s awesome! I’m surprised my wife can stand my voice let alone listen to it editing the podcast. Maybe we’ll work on some auto tuning so I can sound like Justin Bieber ;)

        As of today my returns are 13.44%. I basically focus almost entirely on debt consolidation and think long and hard about all the details provided about the person the loan is going out to. I try to imagine who they might be in real life. At the end of the day it’s largely a judgement call. That said, I rarely invest more than $25 into a single note. I only do more when I’m very very bullish on a specific loan.

        • America First

          Andrew,

          Did you ever set your account up to invest automatically?

          • I never did and I don’t know how I feel about it. Personally my performance has been much higher (still over 13.8%) than what they advertise which is what keeps me away.

            Laura has some interest and we were talking about letting her have a go at it, might be a good learning experience that could translate into a more refined process/article.

          • America First

            Thanks for the response.

  • William

    I’ve been a LendingClub investor for 40 months now, and my real annual return after adjusting for past due notes is right at 11%, which puts me in the top 1% of investor returns based on the average age of portfolio of notes. Despite some of the bad news this year, I’m moving my Roth IRA assets from another company to LC right now. Especially over the last several years, you just can’t beat a (fairly) steady 11% annual return on your money. Heck, the real annual compounded returns of the S&P 500 are only around 7%, so I’m beating that by over 50%.

  • Robert

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