LendingClub – Investing in Peer to Peer Lending

Peer-to-Peer Loans by LendingClub

LendingClub is a peer to peer lending platform built to allow private investors to fund personal loans for individuals. LendingClub provides some background info on the borrower - credit score, limited personal information, loan use, etc - and the investor decides whether to fund the loan or not. For those seeking simplicity, LendingClub offers a diversification plan, which means they'll spread an investor's money to several individual loans in hopes of limiting the risk. The thought is that not everyone will default, so the investor is more likely to get some return on their investment. If you're looking for a more hands-on approach, you can pick and chose loans and amounts.

Account Creation & Funding

To start, investors create an account through LendingClub's website (lendingclub.com/). The process is simple. They ask for the standard info - name, email, address, social security number, etc. Once your account is created, you can transfer funds via Plaid (plaid.com). I've seen this on other sites, so it's pretty standard. The only catch here is that you must transfer at least $1000 to start investing.

Discussion with Customer Service

Full disclosure, I did not contact the customer service team at LendingClub. They contacted me. Once I created an account, the emails and phone calls started pouring in, so expect some pushy sales people once you create an account. Good news is that they go away quickly if you ignore them.

Other than the surprise calls and emails, I'm impressed with LendingClub's platform. They have an interactive account that allows you to track the loans you've made and it even provides an estimate for bad debt. You can easily browse loans and commit capital to any that peak your interested.

LendingClub Account

Potential Pitfalls

Lets be clear, peer to peer lending involves unsecured loans to individuals that, for whatever reason, cannot or are not willing to seek funding through traditional means. I'm not saying they will not repay the loan. I'm only suggesting that you consider how they found their way to LendingClub's website? 1) They've exhausted all the traditional lending options and this is their only choice or 2) they're on the cutting edge of technology and love the idea of by-passing banks. I can respect that. 3) others reasons I haven't considered.

LendingClub's website states historical returns have been between 3-8%. That's covering a period of 2008-2017, so that doesn't tell you a whole lot. The platform also states that investors with 100 or more investments have positive returns. That's not exactly a warm and fuzzy about the quality of loans. There's obviously going to be some variation depending on how risky the loan is and how you balance your portfolio. If you're looking for quality loans returning around 5%, you should have plenty of options that are low risk. If you venture into the 20%+ loans, expect some losses and plan accordingly.

Is LendingClub a good platform to invest in private loans?

If you're feeling altruistic or you're really looking hard for an investment that is not correlated with the stock market, then peer to peer lending may be an option for you.

In my very simple opinion, these are very complex investment vehicles. I would not use the automated system of investing because you're guaranteed to take losses. If you are going to invest in these loans, I highly recommend that you dive into each and every one of the loans you consider funding. The good news is that LendingClub provides historical data for you regression nerds out there.

Some of the data seems obvious. Low quality borrowers with limited ability to repay loans have received funding, and they did not successfully repay the loan. That's not too surprising. The point is to do your homework. If you feel like these loans are a good option, commit to researching the loan, borrower and how similar borrowers performed in the past.

As with all of our posts, this is not intended to provide any financial advice or solicit investments. This is only our opinion of the platform, services provided and potential risks we see. For more information please see our services page.

Author Info

Brian Carruth

Managing your investments is never easy. It's difficult to navigate the options and ensure you’ve invested your money in the best possible places. What to Invest in Today (WIT), is intended to provide clear, straightforward explanations of the platforms I explore. I started investing in stocks after graduating college in the early 2000s. From there, I progressed into bonds, options and, eventually, alternative investments. Along the way, I earned a master’s degree in Economics from Johns Hopkins University and an MBA from UVA's Darden School of Business. This blog is a way to share my experience researching new investments and tracking performance of past investments. Join me and, of course, share your experiences as well. Feel free to connect with me on LinkedIn - www.linkedin.com/in/bcarruth

Update I

I opened and funded an account with LendingClub to dive into the investing process. So far, I'm a little surprised by the number of questionable loans. Often, monthly payments exceed 20% of gross income, income is not verified, work history is questionable and loan amounts are large.

I've focused on funding loans meeting select criteria across grades A, B and C with interest rates ranging from 9% to 20%. Additionally, my portfolio will include loans purchased on the secondary market. I'm expecting a default rate between 3-10% based upon the original grade. I'll continue to update as loan payments begin to come in.

If you decide to open an account, please use my referral code - http://lclub.co/0761f0b5.

Update II

After a month of investing, the results have been mixed. I've invested in 49 loans of mixed quality. Over half of these loans were purchased thru LendingClub's secondary market I've referred to these as speculative investments.

During June, I received $230.15 in principal and interest payments, paid $2.29 in service fees and had $25.85 in payments returned.

There are four speculative loans that are over 31 days late. These loans account for $338 in principal for which I paid $196. Due to their likelihood for default, I have moved these loans to a portfolio of loans expected to fully default and eventually be charged off.

Since opening my account at the end of May, my principal has increased 10% and I expected my loans to provide 4% per month in cash flow.

I'm hopeful that at least half of the delinquent loans will become current. I'll continue to update the blog on a quarterly basis.

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