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Lending Club Investing: My Review After Three Years as an Investor

I’ve been a Lending Club investor for three years now. Here’s an update on my experience (and returns) lending money through Lending Club.

Many years ago I wrote extensively about peer-to-peer lending and two companies in particular: Lending Club and Prosper.

In 2006, I took out a Prosper personal loan to consolidate some credit card debt and it ended up being an important step in my achievement of paying off $80,000 of debt in a little over three years.

When I emerged from debt, suddenly I had this money I had been putting to monthly debt payments available to invest. So I padded my emergency fund, maxed out a Roth IRA and began looking for other ways to diversify my investments.

As an experiment, I began making small investments in loans to other people through Lending Club. Obviously, I was pretty high on the idea and — full disclosure — I became an affiliate of both sites (meaning this site may earn a commission for referring new customers). Today, however, I wanted to provide an update of what it’s been like as a Lending Club investor for three years. I’m not singing praises to try to get you to sign up (although if you want to, you know, hey, thanks!). Rather, I hope this will be a candid look at the pros and cons to investing in other people’s debt.

What is Peer-to-peer Lending?

If you’re unfamiliar with peer-to-peer lending, it’s a way for regular people to loan other regular people money without a bank.

Let’s say you want a $1,000 loan. I invest $25 to lend you (along with 39 other people). We keep our individual investments small in case you default on the loan.

We agree on an interest rate and a term, and you begin paying back the loan. The peer-to-peer network (e.g. Lending Club) disburses the money and collects your payment each month. They take a fee for originating the loan. Then, they take the interest you’re paying on your loan each month and pay it to me and the other investors.

Peer-to-peer lending got a lot of play during the credit crisis because so many banks stopped lending, even to creditworthy borrowers. Companies like LendingClub picked up some of that slack and had some very good years.

My Lending Club Investments

I invested a total of $5,225 in Lending Club over a period of a year, beginning about three years ago. Today my account is worth $6,182.11, reflecting a net annualized gain of 6.62 percent. I’ve received $1,719.69 in interest, but I’ve also paid service fees and lost money from uncollectable loans.

An annual return of 6.62 percent isn’t bad, especially when savings accounts are paying less than 1 percent. But 6.62 percent is a bit on the low side considering the risk involved in lending out my money.

My Lending Club investing performance over 3 years.

Lending Club provides statistics based on the overall performance of the more than $2.6 billion in funded loans they’ve processed. As you can see, investor performance varies widely. Invest with Lending Club, and you could earn more than 15 percent return, or you could lose money.

LendingClub and the benefits of diversification.

Most investors, obviously, fall in the middle where I am – earning a NAR of between 6 and 9 percent. The above chart shows how diversifying your investment over at least 200 individual loans (a $5,000 minimum investment at $25 per loan) minimizes your risk.

Three years ago, I remember the average return statistics looking a little rosier, and I optimistically expected to earn a NAR of something like 10 or 11 percent. But over time, some loans don’t perform. Ask any banker. If you are in the business of lending money, the difference between making millions and going bust is whether people pay you back, pure and simple.

Successful Lending Club Investing Takes Work

With Lending Club, you get to choose which loans you invest in. If you’re lazy, you can choose from automatically generated portfolios like those shown here.

Building an investor portfolio with LendingClub.

But savvy investors create their own portfolios based on much more conservative criteria than Lending Club uses to approve loan listings in the first place. For example, you might choose only to loan money to borrowers who have verified their income or to borrowers using the money for business reasons instead of debt consolidation.

Because the other problem is, people lie. Lending Club can verify some information like credit information, but lots of the information on the loan application is simply submitted by the applicant, making it dubious at best. Still, screening is important because you come across loan apps with red flags that you can rule out.Trouble is, if you plan to diversify your investment over hundreds of loans, it’s unlikely you’re going to vet everybody to whom you lend money as thoroughly as you’d like. In the beginning I started by hand-picking loans based on why people were using the loan and their employment history. But even that’s not perfect.

An even then, you certainly cannot predict whether a loan will default.

Lending Club grades loans based on risk A-G. The higher the grade, the lower the risk and the lower the borrower’s interest rate. An A loan has an average interest rate of 5.47 percent, a G loan has an average interest rate of 23.8 percent – eek!

LendingClub performance by credit grade.

But the thing is, I’ve had as many A and B loans default as Es, Fs, and Gs. Banks spend millions of dollars on entire departments of people to predict who will pay them back and who won’t. Without that luxury, the best strategy a Lending Club investor has is diversification: Keep your investments small and diversify across loan type, interest rate, credit rating, even geography.

Finally, there’s no automatic reinvestments with Lending Club. Each month I receive principal and interest payments as cash in my account. If I do nothing with that money it sits there as cash and ceases to earn a return. Lending Club sends me emails periodically to remind me I have $X sitting idle, but I have to manually go in and find new loans in which to invest.

Even if Lending Club were to offer an automatic reinvestment option, it wouldn’t be ideal because, after all, we want to screen the loans we’re choosing!

It’s Getting Harder to Invest in Lending Club

So far I’ve presented a the big pros and cons to peer-to-peer investing: It’s a fun alternative to the stock market that so far yields a decent return. On the downside, it’s a bit risky and requires frequent diligence to vet loans and invest wisely.

The final stumbling block I see with peer-to-peer lending is that it’s becoming more competitive to invest in the “good loans”. As Lending Club has proven itself, professional investors with millions of dollars are lining up next to the hobbyists like me with a few thousand. And you can bet these institutional investors are using algorithms and analysts to find the best loans.

As a result, the least risky loans tend to get funded very quickly so investors who don’t spend a lot of time watching loans end up with riskier investments. I hope that small-fry investors can continue to enjoy and profit from Lending Club for years to come, because what made the platform cool was the fact that average Joes could lend other average Joes money without the meddling of a bank.

You can learn more about Lending Club investing or try it here.

What about you? Are you an investor in Lending Club, Prosper, or another peer-to-peer lending network? How have you done?


Published or updated on October 17, 2013

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.


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  1. Dave says:

    I was just recently searching for ways of getting a better return on my money when I came across Lending Club. I’m still on the fence about it which is why I’ve looked for reviews like this one. I’m curious if anyone can help me better understand the return numbers they share for investors? I believe most return numbers shared are return on investment (ROI) but most consumers would think about annual percentage rate (APR) or annual percentage yield (APY) numbers. Here is an example of my confusion. Lets say I have $500 to invest and I put it all in one note at Lending Club (not recommending the single note strategy). The note is a high credit quality, so low interest rate of 6.5%, fixed payments over 36 months would be $15.32 but Lending Club takes 1% so I only get $15.17. So at the end of 36 months (assuming this borrower pays) I now have $546.17, a return on my investment of 9.23%. Seems really good, right? However, the money was tied up for three years much like as 36-month CD. So lets say I opened a 3-yr CD paying 2.99% APR (might be difficult to find these days), with the compounding of the interest for three years my $500 turns into $546.20. So the 2.99% APR CD yield the same return as the 9.23% ROI (or 3.08% annualized). So, when I first started looking at the 6%-10% rate of return that Lending Club advertises I was immediately trying to compare it to an APR but after further review that doesn’t really work. Is this making sense? I guess this comes back to the trouble of re-investing. If you re-invest the payments you receive you should then make even more money but the money is then tied up for even longer. Since I haven’t actually invested yet this is all theoretical so I’m curious if anyone can share how they feel it compares to other investments in terms of annual yield. David Weliver, even your number of 6.62% seem misleading because your APY is actually only 5.77% (=(6182.11/5225)^(1/3)-1). 5.77% is still way better than I’ve been getting anywhere. Just trying to figure out if this is really as good as they claim it to be. I would appreciate any advice or clarification on my thinking.

  2. […] Lending Club Investing: My Review After … – Lending Club investing is risky, but it’s a fun (and potentially lucrative) alternative to Wall St. Here’s my review after 3 years as a Lending Club investor. […]

  3. Alex H. says:

    David (or any other LC investors really),

    I’m curious as to what strategies people use for loans that go into grace period or late. I realize that loans going into default is a reality of P2P investing, but I know some people use the Folio trading account to try and sell off these types of loans and at least regain some of their initial investment. I’ve seen some blogs mention trying to sell loans that enter into grace period at a 20-25% discount pretty much immediately and others say to just hold on to the note and hope it doesn’t default. Just curious what people are doing with these types of notes to help minimize any losses and keep their returns as high as possible.

    • David Weliver says:

      Hi Alex, I haven’t tried this, but I will say (anecdotally) that most of the loans I see go late end up being charged off, so it might not be a bad strategy. If people are buying these notes, they must think otherwise, but it seems like a risky strategy to me!

  4. Ed says:

    i have started slowly investing with lending club. i would never try an investment with 5K (needed to avoid fees with an IRA) knowing nothing about them. stated with $100 and adding $100 the 1st & 16th. Picked 4 loans and 45 days later 2 are issued and 2 are still in review. Now $50 is not much money but I would be pissed to have a large amount of money in lala land, cannot get to and earning no interest. ihave not received any payments yet so I cannot comment about that. whats with them taking 5 business days to get money into my account with an ACH. The money is out of my checking account the next day but it takes them 4 more days to post. Are they floating money in both cases. Good luck everyone. Would be interested in knowing what the rate of return is once you start to not reinvest your payments received. Just a little cautious until I see for myself Problem is it takes a while to do that.

  5. Ted Smith says:

    Lending club is shaving more money across the board that people can’t even imagine. I have recieved a loan from them and also was looking for another after I paid it off. My score is well above 710 and they were offering me 16% interest. Recently I got into the investing side of lending club but the interest rate they show for typical FICO scores is lower to the investor than what the actual rate is being offered to the customer. So in my case the loan to the customer is 16% but the rate offered to the investor is 12.99%. They are keeping 3% of the interest rate along with all the fees they charge investors. How do I know, cause I saw my loan on the as a customer and investor. I made special remarks in the application that were easily identifiable to me on the investor side. It’s highway back door robbery to investors and customers!

  6. Sam says:

    Thanks for the review

  7. Patrick says:

    One knock against Lending Club I’ve seen in reviews for borrowers is that people will have their loans “approved” but then never get the money, can you shed some light on this?

    • David Weliver says:

      Good question; sorry for the late response but I just got clarification directly from folks at Lending Club.

      When you apply for a loan at Lending Club, they do a soft pull of your credit and you provide some information about your income and loan amount. If you meet their credit requirements (FICO above 640, for one) and debt-to-income requirements, your loan listing is approved and presented to investors for funding. Meanwhile, Lending Club begins verifying your application. Depending on your credit score, this could mean verifying everything (your income, your employment history etc.) or just one aspect, like income.

      Right now, there is so much investor demand that loans are often funded very quickly — before verification is complete. But what happens is sometimes an applicant can not verify all of the income they stated on the application, and their debt-to-income ratio is too high. So even though the loan was pre-approved and funded, it doesn’t go through because verification failed. This is similar to what sometimes happens in the mortgage process — you are approved for the loan based on your credit and the home you want to buy, but somewhere along the underwriting process one little piece is missing and the bank can pull the whole deal.

  8. Chris says:

    I looked into this a few years ago, and it just felt weird at the time…maybe too new. What is your best answer to what should a person use this for? Is it something to do with savings beyond emergency fund, used in an IRA to diversify, or something more? Personally, I’m always looking for ways to diversify retirement accounts…I don’t foresee ever being able to have investment properties/real estate. Thanks.

    • David Weliver says:

      You hit the nail on the head; it’s a diversification strategy for long-term saving after you’ve started an IRA. I wouldn’t recommend anyone dump a large percentage of their assets into peer-to-peer loans, nor would I use it for savings goals under 10 years (given the nature of the investment, your money will be tied up for 3-5 years anyway…the length of the loans.)

  9. Irene says:

    David, thank you for the review! For me, it is a valuable info on peer-to-peer lending.

  10. Micro says:

    I’m really happy to see a review that has such a long history. I am currently keeping a tracking page on my own loans but since they are only 6 months old, I haven’t run into defaults yet. Do you think you will shift to higher interest loans given your history with the defaults? If they seem to default roughly the same regardless of the grade, might not hurt to go after the higher interest.

  11. C.J. says:

    I have been lending on Lending Club for about 2.5 years, partly based off your reviews. I too have earned ~6.6% annualized return on an investment amount similar to yours. I have also noticed that more recently there are fewer loans on the site, sometimes as few as 40 or so, so I too hope they balance institutional investors and the public perhaps a bit better in the future. I wasn’t too sure what you meant by the interest rate being bid down though, as we don’t bid on the interest rates on LendgingClub, like I think happens on Prosper.

  12. Anne says:

    Great follow-up David! I remember your original post about Lending Club a few years back and am glad to see that you’ve been able to squeak out a return. I tried signing up for Lending Club back when you first introduced it but wasn’t able to because of Kentucky state peer-to-peer laws. Any knowledge you have about state limitations to this would be helpful!

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