Investing on Lending Club: My review and experience

I discovered Lending Club by accident. I had a good friend who I went for a jog with one day and he told me that he got a new job at a company that specialized in lending and…he lost me. I figured that I got the gist of it and could disregard the rest of the description of my friend’s new job while focusing on the trail around me and the pace on my watch. Yes…I am a bad listener and potentially a below-average friend. However, I did go back later that evening for a quick online search to understand more about the company that he was working for (and to answer my wife’s questions about it) and found myself typing in “lending” and hoping for my trusty Google autosuggest to do my work for me. Instead of Lending ___ where my friend had taken a job, I stumbled across Lending Club, which would immediately pique my interest and add one more financial experiment to my rapidly increasing list of mini-ventures.

What did I learn? I need to be a better listener and more importantly, Lending Club is pretty freaking cool.

What is Peer-to-Peer lending?

Peer-to-peer lending through platforms like Lending Club and Prosper is a method of individuals offering loans to one another without the traditional headache of going through a large, established bank. At it’s simplest level, peer-to-peer lending is the same as if your friend needed you to spot them $12 for lunch and promised to pay you back. Only, with online peer-to-peer lending, you won’t seem like a shitty friend when you ask them to tack on 9% to that loan because you are worried about the risk of them paying it back. Peer-to-peer lending online is just like that, but it allows you to purchase a percentage of a loan taken out by a stranger, then receive future principal and interest on that loan from them until it is paid back.

What is lending club?

As a peer-to-peer lending platform, Lending club is an online marketplace where investors can lend directly to borrowers. Borrowers get the benefit of lower cost access to credit without going through the traditional banking system, while investors are able to invest their money for a return by providing micro loans that pay a steady return as the loans are paid back. The platform is built on technology to manage the loans and pass the savings along to borrowers, while providing attractive returns for investors that are adjusted for the amount of risk that the investor is willing to take on. To sum it up, when someone needs a loan, they apply through Lending Club and you team up with a bunch of other investors to give them that loan. You then own a part of the loan and get paid back alongside the other investors, with interest.

How does Lending Club work for borrowers?

As a borrower, Lending Club will ask you to complete a short loan application at Lending Club uses their technology to assess the amount of risk associated with the loan and they will give it a credit rating. One of the benefits of taking out a loan through Lending Club is that it does not have an impact on your credit score because they are not a traditional banking institution. After applying for a loan, Lending Club will provide the money to you as the borrower and allow investors to select that loan to invest in. The borrower will pay the loan back to Lending Club on a payment plan the same way that they would a loan through any other bank.

How does Lending Club work for investors?

As an investor, Lending Club allows you to browse and select loans that other people have applied for and you are able to invest in “notes” in $25 increments. Let’s say that a borrower takes out a $10,000 loan to consolidate their credit card debt. Once approved, Lending Club will offer the loan from that borrower in the form of 400 different $25 notes to individual investors. As an investor, you can choose to purchase one or multiple of those notes. If you purchase one $25 note from this loan, you will be entitled to 1/400 of the principal and interest repayments from the borrower, which will be paid to you in monthly increments. As the loan is repaid by the borrower, the money will go back into your account in the form of the monthly payment and you can choose to withdraw or reinvest the money that you have earned (both the principal and interest).

Browse view of Lending Club notes for investors
Lending Club available notes for Investors

One of the great benefits of Lending Club for investors is that you have the ability to diversify your investing portfolio across a number of different notes and loans. You are able to select from loans that are graded from A-G. These interest rate on loans will vary based on the grade, with A grade loans returning in the 6-7% range and G grade loans returning near 30%. By diversifying your portfolio between low risk, lower interest loans and high risk, higher interest loans, you can align your investments with your own goals and comfort level. This can be done manually by browsing loans, or by automating the process, selecting the percentage of your portfolio that you would like to have allocated to each grade of loan.

Lending Club note interest rates and risk levels
Lending Club note interest rates and risk levels

My experience with Lending Club

As I mentioned earlier in this post, I stumbled across Lending Club one evening and was immediately intrigued. If you are a regular reader of this blog, you know that I am always one for testing out a new experiment in wealth building, so I put $200 into Lending Club and decided I would move $200 from my Digit savings account to backfill it. Thus, my career as a loan shark/banker/peer-to-peer lender had begun.

I got through the surprisingly easy registration process and immediately started browsing through loans to determine where I wanted to invest. At this point, I will admit, I started to get a bit overwhelmed with all of the information that was coming at me. I believe that “it’s easy” is probably the biggest misconception of peer-to-peer lending. Sure, it’s easy to set up an account and deposit money into it. But it’s easy in the same way that online poker is easy. Anyone can do it, but it takes a bit of strategy to really win.

I truly enjoyed a few hours of going through the granular details of loans and learning about the people who were seeking those loans. I felt like I was the bank for once, being the person who was able to choose who seemed credit-worthy and who exhibited more risk. It feels a bit uncomfortable, knowing that you are making decisions based on the financial behavior of others, but once you learn to look at it like a market, it becomes pretty fun.

I bought into some individual notes for a month or two, then decided that my modus operandi is definitely far more automated and less time consuming than what it required to truly excel at finding the best investments on Lending Club. I set my account to automatically deposit $25 per week from my checking account, then automatically invest in notes based on a predetermined mix of A-E grade loans. This does two great things for me. First, it allows me to pull money out of my checking account in small, regular amounts without really noticing the $25 per week that I’m missing. This is a great method of automatically saving and taking my own tendencies out of the equation. Second, it allows me to know that my money is being invested, even if it is at a slightly lower rate of return, with very little time required on my side. Even a 5% return is fine with me for a lack of time and a relatively small amount of money doing the work.

How much do you make with Lending Club?

It is still fairly early on in my Lending Club experiment, especially because I started with a small amount of money and have not been dropping large deposits in on a regular basis. However, I’ve been pleasantly surprised at the way that Lending Club has grown my money. Over the course of a little over a year, I have an adjusted account value of $1,011.70 (which is the projected value of my account after everything is paid back) and an Adjusted Net Annualized Return of 11.67% (which is how much I can expect to make after payments, service fees, charge offs and recoveries). Even if this amount ends up changing over time because of account repayments from my borrowers, this is still a very solid return that outperforms most other investment products. This is all happening after less than 10 minutes of work per month, as I’m simply checking in on my account to make sure that it does not need to be adjusted and nothing catastrophic has happened. Pretty solid passive income, if you ask me.

How much you can make with Lending Club
Account Snapshot with Lending Club

How to lend through Lending Club

As always, make sure that you do your own research and that you are comfortable with where you are putting your money. You will definitely get better returns through Lending Club if you have a full understanding of how the platform works and how best to allocate your funds and diversify across different types of notes. If you feel that Lending Club is a good option for you to save and grow your money, you can sign up here and receive a $25 bonus when you get started (aff).

Let me know in the comments if you have any questions and feel free to share your successes or challenges with Lending Club!

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