Let's talk about Lending Club, a Peer-to-Peer (P2P) lending and investment platform. P2P lending platforms have become increasingly popular over the past several years and are an interesting form of alternative investing. The question is: Is Lending Club a good investment?
What Is Lending Club
Peer-to-Peer lending platforms popped up in 2005 and started with platforms such as Lending Club. Lending Club is a P2P lending and investment platform that allows people to either take out personal loans or to invest their own money via lending to borrowers on the platform. Lending Club serves as an alternate way for people to borrow money at better rates than a financial institution might offer.
Some reasons for borrowing money include consolidating debt, paying down credit card debt, paying medical bills, making home improvements, and funding a small business. Loan terms are either 3 years or 5 years.
Interest rates vary greatly, some as low as 8% and lower, and others as high as 20% and higher. Borrowers who are considered lower risk are quoted at lower interest rates, as you might imagine, and vice versa for higher risk borrowers.
Currently, the lowest risk category is rated at A1. After that, for higher risk comes A2, A3, A4, and A5. After A5 comes B1, and that continues to B5. Next is C1 through C5, and then D1 through D5, where D5 is considered the highest risk category.
In earlier years of Lending Club, there were also categories E, F, and G, but these have since been discontinued.
Why Invest In Lending Club
As an investor, Lending Club serves as my personal favorite P2P lending platform. I receive regular monthly payments in the form of principal and interest from the money I've lent out. This is a great passive income stream.
This is similar to receiving monthly dividends from a dividend stock, however, the risk is different. As reported on Lending Club's website, there is a low correlation to stock market performance when it comes to your investments on Lending Club. That means if the stock market crashes, your investments may not be affected on Lending Club.
How Does Lending Club Work For Investors
When investing in Lending Club, you deposit money into the platform from your bank account and can lend out as little as $25 per note. Notes are presented to you in a list, and you can filter in a multitude of different ways. If you just want to browse, you can click on each note and read the details.
Details of each note include the loan amount, applicant’s monthly income, their job, how long they’ve been at their job, their home status (rent, mortgage, own), and information about their credit history.
Credit history information includes the number of delinquent and derogatory marks in the past 24 months, as well as hard inquiries, their open lines of credit, credit utilization, and similar. As a lender, you'll want to look at each loan application closely.
One thing you may notice is how high the interest rates are. A family member asked me if I was making a 13+% return on investment, given my note allocation and the interest rate of most notes being so high; however, one must remember that there is always a chance that a borrower will default, which lowers your overall return. Lending Club also assesses a 1% service fee on all of your notes.
That is, if you were to invest in 100 notes, there’s a good chance that a small percentage of them would default, and your rate of return would drop. That’s why it’s recommended that you invest in no less than 100 notes ($2,500).
Due to these reasons, it's more likely that your return will hover between 5-8%. As of April 2020, I'm hovering between 8.5-9.5% ROI.
Requirements For Investing
As of this writing, the requirements to invest in Lending Club are as follows:
- You must be 18 years old with a valid social security number.
- You must deposit at least $1,000.
- Currently, Ohio residents cannot invest in Notes, and residents of Alaska, Arizona, Florida, New Mexico, New York, North Carolina, North Dakota, Pennsylvania, and Texas have limited investment options via the secondary market.
My Lending Club Portfolio
In the above screenshot, you can see that the vast majority of my notes are current. One note has been charged off – that is, gone default, and I will not be able to recover my money since loans are unsecured, (e.g., no collateral). I've received nearly $500 in interest since starting with Lending Club 12 months ago. My adjusted annual return (after fees and estimated charge-offs) is 8.56%, which is excellent, in my opinion.
The above shows a summary of my portfolio. You can see that most of my notes are in B-grade notes, with about an even amount in A-grade and C-grade notes. Finally, a lesser amount is in D-grade loans.
I also only lend money to those who are paying off their credit cards or doing debt consolidation. These two reasons are great for a personal loan because the borrower isn't taking on additional debt, such as starting a business or funding a home project. I feel that these people have a higher chance of fulfilling repayment over the course of the loan.
As investors are lenders on Lending Club, it's important to consider who will repay their debts based on their loan application. While you can take if they have a good credit score into consideration, oftentimes credit scores aren't an answer alone as to whether or not the borrower will repay the loan.
Thoughts On My Returns
Let me state my initial opinions in two parts: The first part is that my first-year returns of over 8% are pleasing to see. It’s a competitive number with the stock market, and it’s a much higher number than I would get with bonds.
The second part of my opinion is that the return has been gradually decreasing. Six months ago, it was 11.24%. This tells me that the performance will likely gradually keep falling until it levels off somewhere, assuming around 5-6% based on historical results. 5-6% is still a great return and very nice for earning passive income.
That said, I plan to continue using Lending Club for another year and will continue to post updates. For now, I would say Lending Club is a great P2P lending platform for the alternate market and would likely not be a good idea for primary investing.
With that in mind, I think Lending Club still provides an excellent avenue to make passive income, as you can either reinvest or withdraw the interest payments every month.
What I Read Online
I’ve heard mixed opinions on Lending Club online. Some bloggers will rave that using a solid filter to invest strictly and selectively will lead to great results all around, generally 8% and higher returns consistently. I’ve read on the personal finance subreddit on Reddit that Lending Club has been a poor idea for those that were talking about it.
I generally put more faith in those who blog professionally about finance when it comes to their opinions on investing in a new concept such as P2P lending over people I don’t know much about who post on Reddit. I also put faith in my own results, which as you can see, are quite pleasing.
The general opinion is mixed in that respect, so I would leave it up to you to make up your own opinion before considering investing in a site like Lending Club.
Wrapping It Up
As we’ve discussed, Lending Club is an alternate way to invest your money, as it may not directly be impacted by the stock market’s ups and downs. While returns may be lower than a well-balanced stock portfolio, returns may be higher than typical bonds.
This allows Lending Club to be a decent source of passive income if you have enough invested. I will revisit this post next year to write a 2-year-later review. Interested in learning more about Lending Club including knowing the EXACT strategy I use to earn the returns I've gotten? Check out my book and earn passive income along with me!