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Lending Club Review

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At a time when investors are making record low interest rates of little more than 1-2%, there is an opportunity to earn much higher returns through peer-to-peer investing with Lending Club.

And for would-be borrowers, the news is almost as good. They can borrow money from Lending Club investors at rates generally below those offered by credit cards. They can do so without putting up collateral and without all the red tape that comes along with borrowing from a bank.

Note: A few years back Matt used Lending Club to consolidate his debt and has been investing with them ever since paying off that loan. Over the last three years he has averaged an interest rate of over 10% on his investments with Lending Club.

What is Lending Club

Lending Club is a “peer-to-peer” lending company, matching borrowers directly with lenders.

The model removes banks from the process, enabling the borrower to pay a lower interest rate, and the investor to earn a higher rate of return. The company is the first peer-to-peer lending organization to be registered with the Securities Exchange Commission.

The company began operations in 2007 and has originated over $1 billion in loans.

According the company’s website, the latest statistics–as of November 23, 2012–include:

  • Loans funded to date: $1,348,306,700
  • Interest paid to investors since inception: $114,375,168

77.32% of Lending Club borrowers report using their loans to consolidate debt or pay off their credit cards. Can I get an Amen?

How does Lending Club work

Both investors and borrowers can go to the Lending Club website, sign up and investigate the loan programs available, including loan requirements and grades, interest rates, terms and any other factors connected with the transaction.

Loans sizes range from $1,000 to $35,000 (the maximum loan amount), and are unsecured, personal loans. If a borrower is determined to be credit worthy, Lending Club assigns them a credit grade that determines the interest rate charged. Credit grades are determined by the borrower’s credit characteristics, including credit history and credit scores, loan amount and debt-to-income ratios.

Loan (or note) listings are provided on the Lending Club website that reveal the loan grade, loan amount, and loan purpose. Investors can choose loans to invest in from the listings, deciding, for example, what loan grades and interest rate terms they deem acceptable – then they can save the filters and use them later to find and fund more notes.

How investors benefit from Lending Club

According to the site, Lending Club has over 45,000 investors who have funded more than $1 billion in loans. And they have collected over $114 million in interest payments.

Lending Club Notes ($20,000 denominations) have a net annualized return that is determined by loan grade. For an A note, the net annualized return is 5.66%, ranging up to a G note with a return of 12.07%. The nominal average interest rate is 14.21%, with an average default rate 4%, and an average net annualized return of 9.64% (Matt is currently earning at 10.23%).

Lending Club itself makes money by charging a service fee to investors and a loan origination fee to borrowers, similar to points charged by a mortgage lender.

Investors start by opening a account with Lending Club and depositing their money. They then choose the loans they want, based on the expected rate of return on investment and the level of risk they’re comfortable with. Higher rate loans also carry higher risk, while lower risk loans offer lower interest rates.

How Borrowers benefit from Lending Club

Borrowers can borrow money through Lending Club for less than they’ll pay for most other loans. Since there’s no “middle man” in the Lending Club process, they can see a loan approval in less time and with much less documentation. Borrowers can get debt consolidation loans to pay off credit cards charging, say, 15% with a loan from Lending Club carrying a rate well under 10%.

Which is exactly what Matt did. He consolidated three credit cards and an auto loan, then paid it off in seven months.

Lending Club isn’t a “no other way” lender, and there are some stipulations that keep loans primarily to higher quality borrowers. According to the website, fewer than 10% of loan applications are approved. The credit standards are pretty stiff, with a minimum credit score of 660.

This is because Lending Club likes to deal with borrowers who are going to pay off the loans. Makes sense right?

Some statistics on the profile of the average borrower from the site:

  • 715 FICO score
  • 14.98% debt-to-income ratio (excluding mortgage)
  • 15.21 years of credit history
  • 68,831 personal income (top 10% of US population)
  • Average Loan Size: $12,159

Even with the high credit standards required by the program, Lending Club offers tangible advantages for borrowers who do qualify.

As mentioned above, 77.32% of Lending Club borrowers report using their loans to consolidate debt or pay off their credit cards. How cool is that?

Lending Club Returns [February 2012]

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I use Lending Club as part of my passive investment strategy.

For more detail about my personal experience both borrowing and investing with Lending Club, read my Lending Club review.

Lending Club returns as of March 2012

An up-to-date look at my Lending Club investment account as of February of 2012:

NAR (Net Annualized Return): 9.33%

Interest received: $555.60

Amount invested: $2,056.34

Available cash: $3,683.36

Account total: $5,739.70

Overall I’m happy as a clam about investing in peer loans via Lending Club.

Who wouldn’t be happy earning nearly 10% on their money?

Here’s another investor testimonial from DFA reader Michael:

Matt,

I wanted to say thanks yet again. My regular Lending Club account is currently at 13.99% NAR. Just following the simple rules from your blog. Loved it so much that I’ve opened a Roth IRA with them as well. Received 2 of my first 6 payments. Already at 9.09% NAR.

I love it, so thanks!

~Michael

He’s beating my returns by quite a bit so perhaps I’ll get his advice on tweaking note filters to pick the best notes to invest in (you can filter out notes based on tons of different criteria).

Lending Club IRAs

Like Michael, you can also open IRAs with Lending Club and basically combine Lending Club’s predictable returns with the tax advantages of an Individual Retirement Account.

They offer Traditional IRA, Roth IRA, SEP IRA, or Simple IRA through Lending Club.

It’s easy to rollover your 401k or transfer funds from your current IRA, and there are no fees for opening or maintaining your account.

Read more about Lending Club IRAs if interested.

Peer lending outlook

Awhile back I stopped funding new notes because we needed the cash flow. A month ago we did a short sale of our home and moved out-of-state. During the 6 month short sale process, as a hedge against the unknown, we kept cash liquid.

Times have changed.

Now we’re earning more, have lower expenses, and much less debt. We still have student loan debt, so paying it off is our first priority. That said, we know it’s good to save and invest while repaying debt (whenever possible) – so, because our situation has stabilized we’re planning to start funding investments again soon.

I’ll use the available cash in my Lending Club account ($3,683.36) to begin funding new notes.

Invest in peer lending

If you like the idea of earning returns while helping people, read more about peer lending, then open an account – not the other way around. Never invest in things you know nothing about.

For a few tips and tricks on earning higher returns, read the article I wrote on finding good notes to invest in.

Start small, tweak your strategy continually, and watch your returns grow.

That’s what I do, and like Michael said, I love it!

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Passive Investment in Index Funds and Peer Lending

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Finding a sound place to invest in this tumultuous and unpredictable market is tough.

Other than investing in yourself, there are only two vehicles I recommend to people at this time.

Index funds and peer lending.

Passive investment in index funds

Index funds follow the trend of the index they’re a part of. An S&P 500 index fund follows the curve of that index. If it’s a NASDAQ index, it follows the pitch of the NASDAQ curve, etc.

If you are a savvy investor you don’t need my help, but if you’re like me – someone who doesn’t want to spend all day tracking investments – you’re probably looking for a hands off approach that pays solid returns.

I have two recommendations for investing in index funds.

1. Target retirement funds: Open an account with VanGuard (or your favorite brokerage firm), find your Target Fund based on your age and target retirement date, and invest in that fund.

2. Betterment: Open an account with Betterment and let them diversify between the best index funds and bonds for you, based on your risk assessment; it’s very hands off. (Betterment fees were recently slashed; read my full Betterment review for more info.)

My research and experience establishes these two options as the best, most passive investment strategies that yield solid returns.

Passive investment in peer lending

Peer lending connects individuals looking to borrow with those looking to invest.

It’s that simple, and is basically an alternative to borrowing from banks that allows individuals to invest in, and help, other individuals.

There are two main peer lending platforms I recommend: Lending Club and Prosper.

As an example: Bill carries a balance on four different credit cards totaling $15,000. Cindy has money to invest, is wary of the market, and likes to help people get out of debt. Peer lending connects them and provides a platform to borrow and loan money between individuals. Cindy signs up as a Lending Club investor and Bill signs up as a borrower. Bill lists his request for a loan and Cindy invests as much as she wants in his loan (along with many other investors). Once the funding is complete, Lending club sends Bill a check (or direct deposit) which Bill uses to pay off his cards. Bill then makes one monthly payment (principal and interest) to Lending Club who then applies it, in micro-payments, to each investor, every month.

It’s not totally passive because you have to choose the notes (loans) you want to invest in, but you get to invest without trying to predict how a tumultuous market will move.

It’s hands on in that you get to help fund things you believe in, but hands off enough so you don’t have to understand markets and make stock picks – you just have to pick borrowers you want to help, who have the ability to pay the money back. The peer lending platforms give you all their personal financial information so you can make an educated decision.

I have been both a peer lending borrower and investor using Lending Club.

I have been investing in peer loans through Lending Club for over two years now. To date my peer lending returns (NAR – Net Annualized Return) stand at 9.33%, which is really good compared to many investors stock market returns over the last few years.

Invest where you’re comfortable

If you’re unsure about an investment, don’t get involved.

If you don’t understand peer lending or index funds but want to invest, study them out – then make your decision.

Read more about Betterment. Read more about Vanguard Target Funds. Read more about Lending Club. Read more about Prosper.

Educate yourself and pick a passive investment strategy you’re comfortable with.

I recommend doing both index fund and peer lending investing – it’s what I do.

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photo credit: photologue_np