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Lending Club Offers Good Returns If You Invest Wisely

By Peter Anderson 24 Comments - The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited November 8, 2012.

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I signed up for Lending Club a few months back on a whim to try and see how it would perform. I’d been hearing about it quite a bit on personal finance blogs, and the returns that people were claiming to receive seemed like they were almost unrealistically good. There had to be a catch, it piqued my interest.

I started my investor account out slow. I took the $25 bonus Lending Club gave me for signing up (which you can get too) and added about $75 to that for about $100 in loans.   I went into my account and hand picked 4 $25 loans to send out.

Purchasing investments in Lending Club is pretty easy.   First, you link your bank account to your Lending Club account, and transfer any funds you wish to invest to your Lending Club account.  Next you click on the “invest” tab in LC. On the invest page you can get as involved as you want with choosing your loans, or you can let the system choose loans for you. If you choose to allow the system to pick for you, you can just choose what type of investor you are (conservative, moderate or aggressive), and it will then give you a  mix of loans to fit your personality and level of risk you’re willing to take on. The higher the risk, the greater the rewards, but also the greater the risk of choosing a loan that will default.

My Lending Club Strategy

Personally I chose to hand pick the loans that I gave out to help minimize my risk. I went in, searched only for loans with an A or B rating (good to decent credit/employment),  and only chose loans that were ones that I could agree with (for example, people who were consolidating debt to get out of debt or paying off high rate credit cards).  I also chose loans for smaller dollar amounts, below $10,000 because in my opinion those loans are probably going to have a lower rate of default (because of the lower monthly payments).   So again, my strategy for Lending Club was to purchase loans that were:

  • Less than $10,000:  Lower loan amounts means a lower monthly payment and a lower risk of defaulting on their loan.
  • A & B credit rating:  I’ve only invested in loans that have either an A or B credit rating (good credit).  That means I’ll have a lower return on my investment than someone with lesser credit, but it’s  trade off I’m willing to take.  I may sprinkle in a few C class loans soon, but not more than a few.
  • Zero delinquencies:  When you view borrower’s profiles you can see from their credit report if they’ve had any reported delinquencies on their account.  If they have, I skip their loan.   If they’ve been late in the past or missed a payment – they’re likely to do it again.
  • Debt to income ratio below 25%: I like to invest in loans where the borrowers have a lower DTI ratio.  Because of that I know they’re better able to afford the loan.
  • Loans over 60% funded:  When other people have invested in the loan,  a lot of the times that means that they’re a better risk because others have done their due diligence and agreed to invest.
  • Borrower answers to investor questions: Sometimes you’re on the fence about lending to someone, it can make the difference how the person answers questions on their loan request page.  As an investor you can ask the borrower questions about their employment, debts, delinquencies and so on.  Their answers can help sway me one way or the other.

Because I’m a conservative investor, my rates of return aren’t as high as some people’s, but I also feel like I have a lower risk of default on my loans. So far I haven’t had a single default, and my rate of return is hovering around the 11% range – that’s much better than my old  high yield savings account!  Since I’ve been happy with my returns so far, I’ve increased my loan total to $500 over the months I’ve been investing.  I plan to keep on increasing that slowly over time as long as my success continues.

Lending Club By The Numbers

I was interested in just what the numbers were for Lending club as a whole, as far as amounts invested, number of defaults, how many people are declined, etc.  I found these numbers on the Lending Club site:

  • 82.80% of investors have earned between 6% and 18% net annualized returns since inception
  • Funded Loans (10,097) $96,195,875
  • Average Interest Rate 12.70%
  • Declined Loan Requests (96,063) $961,010,942
  • Annualized Default Rate 2.39%
  • Interest Paid to Investors $6,645,705.02
  • Average Net Annualized Return 9.65%

To be completely honest I was surprised by how many loan requests are actually declined by Lending Club for various reasons.  In fact, the minimum FICO score to get a loan is 660.   That makes me think that they’re actually pretty serious about making sure that those with a high probability of defaulting on their loans are weeded out before they are even able to get a loan.  The default rate was also lower than I thought it would be – again tribute to the fact that they’re cutting out undesirable borrowers before they even begin the process of getting a loan.

One of the most important numbers that I see above is that average net annualized return of 9.65%.  That means you’re getting a return that’s a lot higher than you’d be getting at your local bank, in a CD or in most investments.  Yes there’s always the risks that are involved with something like social lending, but I believe the risks are manageable.  If you choose good borrowers to help out that have verified incomes and credit, and you diversify your loan holdings, in the long run you’ll come out ahead.

So why not give it a shot?

Ready to sign Up For Lending Club And Start Investing?

lending club signup

Have you had any experience with Lending Club? Tell us about how you’re doing with your account, and how you manage the risk of peer to peer lending in the comments!

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Last Edited: 8th November 2012 The content of biblemoneymatters.com is for general information purposes only and does not constitute professional advice. Visitors to biblemoneymatters.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.

This article is about: Investing

About Peter Anderson

Peter Anderson is a Christian, husband to his beautiful wife Maria, and father to his 2 children. He loves reading and writing about personal finance, and also enjoys a good board game every now and again. You can find out more about him on the about page. Don't forget to say hi on Pinterest, Twitter or Facebook!

Comments

    Share Your Thoughts: Cancel reply

  1. Lakita (PFJourney) says

    I’ve been looking very closely at LC and I’m considering giving it a try myself. Are there minimum requirements to be an investor?

    Reply
    • Peter Anderson says

      I think you can invest as little as $25. I like to spread my investments around, never more than $25 in any one loan – to diversify. :)

      Reply
  2. Investor Junkie says

    @Lakita:

    I mention the investor requirements on my review:

    http://investorjunkie.com/lending-club-review
    Investor Junkie´s last post ..When Should A Late Customer Get Cut Off?

    Reply
  3. Roger says

    I thought interest rates were down pretty much across the board. Why are these people willing to pay these relatively high rates of interest?

    Reply
    • Peter Anderson says

      In general a lot of them are trying to consolidate higher interest rate debt into a lower rate, usually credit cards. So if they can consolidate a 15% card and a 20% APR card into a 10% loan, most are happy to do it. Others are just wanting to get a loan for a home improvement or something at a lower rate than they were able to get through their bank. You can usually find out why people are willing to pay the rates they are by reading their loan request documents, and seeing why they’re applying.

      Reply
    • Lulu says

      Interest rates on savings are down but not on debt. When I started with Lending Club three years ago I got a loan for 8% interest and used it to pay off credit cards that were at 21% and 19%.

      I paid off my loan on time and never missed a payment and decided to become a lender as well because I was pleased with the site.

      People are willing to pay the ‘high’ rates at LC because it is generally still lower than the rates on their debt.
      Lulu´s last post ..Monthly Financial Update: March 2010

      Reply
  4. Kristin, Certified Financial Planner says

    Nice write-up, and I’m intrigued by Lending Club myself. You made one statement that I have to strongly disagree with, though:

    “When other people have invested in the loan, a lot of the times that means that they’re a better risk because others have done their due diligence and agreed to invest.”

    While I realize that you are only putting $25 at risk, this is a HORRIBLE investment philosophy. It’s this very thinking that has helped create the real estate, stock market and dot-com bubbles of the past decade! Relying on someone else to do your due diligence is a bad idea; figuring that since others invested that THEY must have done their own due diligence is a worse one. You are putting your own money (all $25) of it at risk, so you are the one who needs to make sure that the investment meets your objectives and is as advertised.

    Reply
    • Peter Anderson says

      If you’re using others investing in the loan as your only cue if it’s a good risk, yes – it is a horrible idea. However, for me it is only one of 6 or 7 criteria that I’m placing on each loan. Also, I think these loans are a bit different from stocks, real estate or other investments in that with each loan the borrower has included detailed information about their employment, credit history, their, outstanding debts, etc. If you browse the notes that are available you’ll see the ones that aren’t as good of a risk have a harder time having their loans funded by investors on the site, and as such have less people investing in them. I think that’s a good cue to take a look at – even if it is only one of many cues.

      Reply
    • Hank says

      James Surowiecki talked about this very topic in his book, “The Wisdom of Crowds”. The premise of the best selling book and its research talks about how large groups of people are collectively smarter than an individual. So, in a way, Peter’s thinking is reasonable. I also read another account that said the faster a Lending Club loan “fills up” with lenders is a good sign that the crowd thinks the loan is a safer investment.

      Reply
  5. MyFinancialObjectives says

    Nice write up, I tried to apply for the Lending Club but it is not allowed in my state… go Figure. Such an excellent opportunity, you would be wise to take advantage of!

    Reply
  6. Matt Jabs says

    Great write up Pete… I have a similar system in place. Right now my NAR (Net Annualized Return) is 11.51%. As of right now I just invest all the money earned from the affiliate program… seems to work great. Oh yeah, and it’s awesome to be ONLY an investor with Lending Club and no longer a borrower! :)
    Matt Jabs´s last post ..Job Loss – Save Money or Get Out of Debt?

    Reply
    • Peter Anderson says

      Once again, congrats on dumping that particular debt! :)

      Reply
  7. Darren says

    Yeah, I also have an account with Lending Club, and my note was just paid back in full recently. My net annualized return was around 6 percent, which is not as high as others report, but I’m pretty happy with it.

    I don’t remember the criteria I used to select the note originally, but I think I just chose a note based on the borrower’s high credit score. With that said, I like the criteria you used to select your notes, and may use that as a guide when I reinvest my money.

    Also, I agree with you in that if you’re only using the percentage of the loan that’s been funded as your criteria, then that’s not a really smart idea. However, if you’re using this criteria along with the others, than you would in fact be doing your due diligence. Thanks for the post!
    Darren´s last post ..Rich Dad Poor Dad by Robert Kiyosaki | Book Review

    Reply
  8. Jeff says

    Appreciate the write-up. I’ve been a lender on the P2P side for several years and am finding myself attracted yet again to the cash flow aspects of regular monthly repayments and the returns. I hope more people join up for borrowing and lending as banks are soooo 20th century. Now is the time for the people to decide on who receives a loan and at what rate… true peer lending in action is the best market dynamic!

    Reply
  9. Carlos Frank says

    Hmmmm. Going do some further investigation into this. First thought that comes to mind is “NO”, I’m not going to put someone else in debt when I speak so much on debt freedom. However you make great points and the scripture “I will be the lender and not the borrower” (paraphrase) comes to mind! Thanks for the write up Pete.
    Carlos Frank´s last post ..Coupon Mama Shows You How to Make a Dollar Out of 15 Cents!

    Reply
  10. Social Lending Network says

    Thanks for sharing your results to date. I’m glad that you included borrower responsiveness as a criteria. This is probably one of the most important qualitative measures of whether you want lend to a borrower. If they are not easy to communicate with now, imagine how they’ll be if they ever have problems repaying their loan.
    Social Lending Network´s last post ..A Bright Spot in the Ongoing Credit Crunch

    Reply
  11. Al Smart says

    Good post, thank you! I’m always looking for investments.
    Al Smart´s last post ..Tamiya RC Autos

    Reply
  12. John | MoneySavingTips.org says

    I checked out LendingClub, but haven’t tried it yet. The one thing that worries me is the default rates. I would imagine that the chance of default would go up over time since most of the loans are currently new.

    Reply
  13. Paul says

    I started investing in Lending Club about a year ago and so far I am more than satisfied. I started out small and gradually invested more and more money.

    I tend to be very blessed when I invest in different things (stocks, IRA, etc.) and so far Lending Club has been even better than I expected. Initially I chose risky notes to get the better return but diversified and chose some more conservative notes as well. Currently I am getting a 15.89% return on investment.

    I was skeptical as well when I first started but at this point I am feeling more and more comfortable with it. While I would not put more than I could afford to lose in it, I still think it is a good investment.

    Reply
  14. Ken Feyl says

    I would point out that LC’s reported 9.65% return is awfully misleading, because it is an average over all investors in the system. Thanks to LC’s explosive growth, most investors are still rather new. That means the 9.65% is heavily weighted towards newer loans, many of which will default later on. By definition, yield declines as loans age.

    A more accurate analysis would look at the average loan return at maturity. I won’t post any links, but several other blogs and sites have done this and found much more modest yields, typically in the 3% range.

    Reply
  15. cheapskate sandy says

    This is a great summary. I haven’t invested in Lending Club, but I do invest on Prosper which basically has the same principles. I have a combined rate of return of 9.09% and only lend to A or higher status. I lend to students and debt consolidators and avoid start-up businesses. My loans have an average age of 179 days and so far, no defaults. I’m hoping to lend at least $250 a year in this method with no hopes of getting a penny back so that I am not disappointed once someone does default.

    Reply
  16. Dan - BankVibe says

    Nice coverage of lending club Peter! We have done extensive coverage of Lending Club on our site as well.

    To be honest, I am surprised this concept hasn’t gone main stream yet, especially with how abysmal banks have been over the last few years. P2P lending seems far more efficient by cutting out the middle man that banks use for these same types of loans/investments.

    When you begin with LC start small like most of you have already mentioned…there is no reason to rush it, then when you get more comfortable you can move more of your savings into this arena.

    What’s also fascinating is what non-profits like KIVA are doing. Basically they are taking this same concept and helping small business owners in developing countries get loans through the same P2P interface. Although this is more of a charitable cause so don’t expect much interest on your investments with them. Def worth looking into though if your looking for a charity to get behind.

    Reply
  17. eyeks says

    I’ve been a bit more aggressive in selecting my notes on LendingClub – having moved a decent sum into it as part of my fixed income portfolio in my IRA. My NAR as of today is 14.31% with more than 750 notes and counting. I’ve seen my 1st default and 8 notes are late. Check out my blog at: http://bit.ly/c42V52 where I detail my <10 minute process of buying the notes. Do comment! Cheers,
    \eYeks

    Reply
  18. Kyle @ The Penny Hoarder says

    This is quickly becoming one of my favorite ways to invest. Honestly, it’s a lot more fun than picking stocks and I like knowing that I’m helping someone as well.

    Reply
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