Lending Club Review

After spending most of the last 3 years paying off most of my debt and doing a very small amount of investing, I made a goal this year to start doing a bit of investing.   H and I had a joint goal savings account for buying a home, which is technically “investing”, though the return on the account was pitiful and didnt offer us much.  I was able to fully fund a Roth IRA last year (and deal with the tax issues), but I wanted to do some investing outside of retirement funds (I have a goal for 2012 to max out my roth IRA again) and that actually earned some interest.  Lots of the larger brokerage houses want a few thousand dollars minimum to start, and I didnt really want to use that much money there when I knew H and I would have lots to pay for, like the house repairs and upgrades and the wedding.

After looking around for a while and finding stuff I didnt have the cash for that also had poor returns, I started to look at lending club.  Lots of other finance bloggers have been using it for years and I havent really read any stories about anyone getting burned buy it, so I figured that I’d give it a try with a couple hundred bucks and see what happened.  The process was fairly straight forward, as was funding your account (I used paypal).

Once your account was funded, you can simply look through some loans and select a grade (given by lending club) based on the borrowers history and filter by that.  I chose to do mostly B grade loans, with a few A and C grade as well.  You can fund however much you want to a loan, but you have to have a minimum of $25 to start.

The one thing that I did find was annoying about lending club was that if your loan didnt get funded or issued, you had to go back and pick out a new one.  While it wasnt that time consuming to fund 10 loans, repeating the same process for 1 or 2 loans was a pain.  I had to go through that sequence about 3 times for one $25 loan that I had that kept getting denied, then the other one got denied!  It was annoying.

Once everything got invested though, I started to see some returns and I’m averaging about 12%, which I consider to be really, really good.  Though I’m sure that it will go down a bit, it’s nice to have a bit of money invested and watching the returns come in every month.

Also, make sure to come back friday as I’ll be holding a cash giveaway!

Readers: Do you use a peer to peer lending provider for investments?  If so, which one, and why?  Are you worried about the risks, or do you think the risks are the same as investing in more traditional securities, like stocks and bonds?

*I’m not a financial adviser, so please see one before making any investment decisions.

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22 thoughts on “Lending Club Review”

  1. I thought you need $5000 to start. That’s why I’m sitting on the sidelines for this.

    I’m going to go back and review this. If I can do a few hundred bucks to start, I’m all over it!

    • Marina – I didnt see anywhere that you needed 5000 to start – friends of mine have started lending with as little as 25 bucks! Go check it out.

  2. I don’t think I can do Lending Club — I think I’m in one of the states that doesn’t allow it. And Prosper wants you to have a high net worth (higher than I have anyway!) so I’ve never done Peer-to-Peer lending.

    • I’m not familiar with prosper all that much, so I cant comment on that – and that stinks that your state wont let you do that. You should move to the other side of the river (though you’d probably spend more in sales tax than you’d earn in returns

  3. I’ve been thinking more and more lately about getting into lending. I think I will eventually do it, but will probably hold off until all our debt is gone (other than the mortgage).

    • I had been thinking that way D&T, but one day I just figured I’d toss a few hundred bucks in there just to see how it was doing. I have kind of modified my debt repayment plan at this point anyhow – which I probably should do a post on.

      • It won’t really be that long til I can start, maybe the end of the year or the start of next year. I want to fund my trading account again also, I withdrew all the money to pay down our mortgage so we could refinance and really want to get back into trading more. Lending Club would be a nice diversification though.

  4. We’ve been lending with Prosper since 2007 or so- since before they had to go through their licensing process. Our initial returns were great, though I think we have lost money overall. But we still have some money invested with them and just keep reinvesting it for now.

    • that’s interesting that you’ve lost money – any ideas why? Did people just not pay you back when you loaned them money? (dumb question).

  5. Good article. The only thing I would add is that if you are only investing a couple of hundred dollars you are running the risk of one default ruining your returns. While there is a $25 minimum I always tell investors to get a diversified portfolio you need at least $1,000, preferably $2,500 or more.

    I know that is a lot for some people but let’s say you invest $100 in four loans and one defaults after a few months. You have lost 25% of your investment and you will likely think p2p lending isn’t a good investment. But you may have just been unlucky. With 100 loans invested one default will only set you back 1% of your investment. That is much easier to recover from than a 25% loss.

    • That’s a great point peter – I havent had a default and am still going good, but am only a few months in. While it’s a lot of cash to put up front, it’s a great way to diversify your loan portfolio. If everything goes well with this, I plan on adding more to the pot in the future.

  6. “I havent really read any stories about anyone getting burned buy it…”

    Search the internet there are plenty of examples. It isn’t that they got burned by LC or Prosper but rather were reckless in choosing loans. I loved participating in Prosper but was told no more through my employer (FINRA stuff).

    Once things calm down around the house I may have The Wife open up an account again.

    • Interesting evan, I never even though to look there, but I guess lending club wouldnt publicize the defaults they had.

  7. Jeff,
    I think you should leave lending to the banks. Who decides what rate theycharge and who rates the risk?

  8. Most people lost money on Prosper before they revamped their underwriting process back in 2009, of course that was also when the economy went into a recession. If you had money invested in the stock market your returns on Prosper would have been better, even if they were losses. Since then the returns have been great. If you invested in every loan on Prosper you would have a return of 10%.

    It’s not that hard to setup proper criteria and then save filters to search on. I’m currently at around 16% on Prosper and 18% on LendingClub. The number of loans on Prosper is right around 600, and while I expect those returns to come down I still should maintain a fairly healthy return.

    P2P lending is here to stay, but without spending time to research the loans, you won’t have the returns that can be obtained.

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