Reader Questions: Lending Club Peer-to-Peer Lending Q&A

Back in December, I wrote a detailed review of the “new” LendingClub, a site which lets individuals lend money directly to other individuals and earn 7-20% interest (depending on credit scores). Many of you sent additional questions about LendingClub, and Rob Garcia, Director of Product Strategy, was gracious enough to answer them. I want to thank Rob for his time and candidness, as some of the questions were quite blunt. :)

Some of my readers are concerned about your company being in its early stages. What would happen if Lending Club goes bankrupt? What would happen to our notes in that scenario? Would we be unsecured creditors of LC?
Yes the notes are unsecured obligations of Lending Club. That being said, we’ve structured the program in a way that makes it as “bankruptcy remote” as possible: all lender funds are kept in a trust account that is not part of Lending Club assets, and therefore would be off-limit to other Lending Club’s creditors. We also have a back-up servicing agreement in place with Portfolio Financial Servicing Corporation (www.pfsc.com), one of the largest loan servicer in the country, who will service the loans should Lending Club be unable to do so.

Any insight to why the income and net worth requirements are somewhat restrictive for lenders?
This comes from state regulations; most states impose financial eligibility requirements for clearing new types of securities offerings. We are hoping that some of these requirements will be lifted as the program continues to build its track record. As pointed out in a recent Javelin study, the average annual return for Lending Club lenders has been 9.05% over the last 18 months, with little volatility. If we continue showing that sort of track record over a long period of time, we hoping the financial eligibility requirements will become unnecessary.

Do you expect to add more eligible states soon?
Yes. We are actively pursuing registration in states where the offering has not yet been cleared. Note that residents of most states who haven’t been cleared for the main offering can already buy notes on the Note Trading Platform from FOLIOfn.

Can I just take the current $25 bonus and run? [See below]
You certainly can, although we’d love you to try Lending Club.

Is there plans to fund via PayPal or some other more instant form of funding? I saw a loan I wanted last week, but had to wait 4 days for my bank deposit to clear and missed it.
We do offer this capability, but only to lenders who do not have a linked bank account. Once a bank account has been linked, it is a lot more cost-efficiently (although admittedly longer) to move funds by ACH.

Any plans to pay interest on idle cash?
Not immediately. Believe it or not, there are lots of regulatory challenges for a non-“deposit taking institution” like Lending Club (basically not a bank) to pay interests on idle funds. It is in our interest to do so to attract more lenders, so we are looking for a way around (along the same vein as what PayPal is doing) and are confident it will come through.

I have several old loans from Lending Club still in repayment. However, after the new regulations, I am no longer eligible to lend due to both my state of residency and income. Any idea what might happen to my loans? I don’t want to ask Lending Club in case they close my account…
No worries; we’re not closing anybody’s account! All “old” loans continue to be serviced and all lenders get their monthly payments credited to their account irrespective of their state of residence. The new restrictions only restrict the ability to buy new notes.

– End of Interview –

Follow-up Updates and Comments
Here is a excerpt from the Executive Summary of the noted Javelin study, which notes both pros and cons:

If an individual had invested $10,000 on June 1st, 2007 in a representative group of loans on the site, the value of that individual’s account at Lending Club would have grown to $11,594 by November 2008 (assuming reinvestment of payments received). That return would have outpaced other common investments or indexes such as the Standard & Poor’s 500 Index ($6,289), the Nasdaq Composite Index ($6,605), 1-year CDs ($10,678) and 6-month Treasury bills ($10,501). This comparison factors in Lending Club’s 1% service charge but does not include fees and other transaction costs for the other investments. This comparison does not factor in differences in liquidity between Lending Club notes and the other investments or indexes. Notably, Lending Club notes can only be sold through the Note Trading Platform that was made available recently (on October 14, 2008) and there is no assurance that liquidity will develop on that platform.

Over the last few months, we have seen credit card companies canceling inactive cards, reducing credit limits, and raising rates on lots of borrowers. As a result, I have definitely seen a rise in loan volume at LendingClub.

As a lender, I’ve tried to take advantage by slowly investing in lots of small $25 loans to folks with squeaky-clean credit histories and good job histories, and now have about $1,000 lent out. I understand there is risk involved, and will report my results. I do wish the PayPal funding option was always available, as the convenience would be great. Also, another reader pointed out that if they accepted PayPal, one could fund with a credit card for the rewards.

If you are interested in lending, you can still use this special $25 lender sign-up link to get a free $25 to try it out with no future obligation. There is no credit check and you don’t have to deposit anything. After you are approved, the $25 should show up in your account balance, and you can lend it out immediately.

Comments

  1. Are all loans 36 months? I signed up for the $25 bonus and chose a loan to lend just to try it out. I will be getting 36 payments of .79 cents for the next 3 years on this bonus for ~28.50…a solid profit of 9%..haha :)

    I don’t like the idea of having money locked up for 3 years. If there where 1 years loans out there (which i havn’t looked into too much as all the ones i clicked on were 36 months) i would be more likely to invest a little bit of money for the returns.

    Derek

  2. Nice interview. I’m glad to hear Lending Club is considering and working toward providing interest on idle funds.

  3. Thanks for the great post. I read through the Javelin study and noted that it was paid for by LendingClub and there was no way for them to independently verify that the data they were given was complete and accurate. So you do have to take the 9% avg. return on faith. Even given that, however, it does seem like a great alternative to other investments at the moment on the lending side and on the borrowing side it seems like a good alternative to credit cards, which by and large are becoming very complicated and full of unwanted surprises (i.e., fees and rate hikes) lately.

  4. All the data on their loans is available publicly, so the performance data can be verified on our own. I think the better part is the commentary by Javelin, which does point out both pros and cons I didn’t consider before.

    Here the last part of the executive summary, which I added into the post:

    If an individual had invested $10,000 on June 1st, 2007 in a representative group of loans on the site, the value of that individual’s account at Lending Club would have grown to $11,594 by November 2008 (assuming reinvestment of payments received). That return would have outpaced other common investments or indexes such as the Standard & Poor’s 500 Index ($6,289), the Nasdaq Composite Index ($6,605), 1-year CDs ($10,678) and 6-month Treasury bills ($10,501). This comparison factors in Lending Club’s 1% service charge but does not include fees and other transaction costs for the other investments. This comparison does not factor in differences in liquidity between Lending Club notes and the other investments or indexes. Notably, Lending Club notes can only be sold through the Note Trading Platform that was made available recently (on October 14, 2008) and there is no assurance that liquidity will develop on that platform.

    So far, it looks like it takes only a few days to sell a loan on the secondary market if you are asking for par or below.

    I still need to try the secondary market, and see if I can catch any “deals”. Many with good loan histories were actually asking a premium! I’ll may also try and sell a loan to try it out.

  5. The Personal Finance Playbook says:

    Great post. I am planning on trying this out at some point. Keep us updated on how it’s going. It seems like a good way to deploy some extra cash.

  6. dk from Lending Club says:

    @Derek – All loans are 36 months. However, when we relaunched last year we also opened a secondary marketplace for the new notes funded after the relaunch.

    The secondary market allows you to sell off your loans before the 36 month maturity date, adding liquidity to the process and solving your problem of feeling “locked up”

    DK
    Product Ambassador
    Lending Club

  7. When a bank account is added, they withdraw $1 to verify. This may seem silly, but do we get the dollar back?

  8. their lenders requirement is kinda crazy..

  9. As DK said, you can sell your existing loans through FolioFN (see my older post linked to above), so you’re not locked in for 3 years if you don’t want to be. There is a 1% fee to sell, I believe.

    The lender’s requirements can be annoying… but it’s all due to state laws and SEC requirements.

    Yep, you get the $1 verification deposit back after you verify the amount at the LC website.

  10. Is there any plan to allow a teen under 18 yrs old to open a lending club account (as lender) ?

  11. Why on Earth would anyone want to use PayPal to fund an investment account!? Yes, it’s instantaneous and you would be able to fund that hot note you wanted on LendingClub. Just keep in mind that you would be giving up 1.9%-2.9% of your deposit in PayPal fees (depending on the volume of LC’s PayPal account). So your 11% B-rated note just took at least a 2% hit, before LC’s cut. That’s significant. You just forfeited 2% for a four day ACH waiting period, how is that worth it?

    Your best bet is to fund in chunks via ACH and wait the four days for the funds to clear. I think having to wait to buy something is a great side affect of this. Maybe you will realize that that investment wasn’t as sterling as you originally thought.

    For full disclosure: I’ve dealt with PayPal far too frequently for far too long in my past. As such, I thoroughly loathe everything about them.

  12. I like peer-to-peer lending and I use Zopa here in the UK.

    I am worried though that low interest rates are sending a lot of people racing in without understanding the differences between P2P and savings.

  13. I’ve seen another site like this a few years ago and it didn’t make sense to join. This site and the current market condition has changed my mind. The ability to sell a note so I don’t have to keep it for 3 years is a huge advantage. Before we were getting a lot of desperate loans when there’s plenty of money to lend by banks. I was not interested in lending to this group. Now there’s a lot of good payers that are having trouble getting a loan because the large banks are afraid to lend. The risk is much lower now, understanding there’s still risk and it’s good to spread out your investment so not one note is more then 5% of your investment. So if your note default you’ll only loose not more then 5%.

  14. There haven’t been any new states added since December 8, 2008. I hope more come through with the registration soon. The markups currently on the Folio secondary market are so high that I would like to be able to participate directly instead.

  15. Here’s more updates about problems I’ve encountered with LendingClub:

    1. Their link to report bad borrowers don’t work.

    2. Email or call LendingClub and you won’t get a response. All your calls goes into voicemail.

    3. If you have identity theft protection that puts you on fraud alert
    protection thus requiring LendingClub to take an extra step to make a call to the number on the credit report to get verification before issuing credit, LendingClub will not do this. You have to expose your credit to identity theft by turning off fraud alert before you’re allow to borrow money. So this is another loop hole identity thieves can use to abuse LendingClub.

    Security and customer service is weak at LendingClub.

  16. I’ve invested a little bit of money in LendingClub and have been pleased with the experience so far (just a few months).

    Contrary to BuffetFan, I’ve had a good customer service experience. I emailed with a couple of questions when I was getting set up and received both a prompt email response *and* a follow-up phone call to make sure all my questions were answered.

  17. Brandon says:

    I’ve been interested in starting to get into the Trading Platform but I’ve been browsing notes on there and people’s pricing seems to be flat out crazy. Does anyone else feel this way? There are a ton of people trying to sell notes for people whose credit scores have gone down and they are trying to sell notes above the face value? I just don’t understand who would buy that. Who is going to pay more for a note that has increased in risk? It isn’t like one or two people are doing this, it seems pervasive. Every once in a while there is a good deal, but I have not seen many. Am I missing something? Are others finding the trading platform to be more lucrative?

  18. Aaron Dalton says:

    Brandon – I understand your bewilderment/frustration.

    My theory is that some sellers hope that buyers who don’t understand the platform will be duped into paying a premium for a poorly-performing loan.

    (This would be the cynical Mark Twain – or was it PT Barnum – theory that no one ever went broke underestimating the intelligence of the public.)

    On the other hand, I can understand the small premium many sellers are trying to charge for loans that are performing OK and where credit scores are steady or rising. Consider that consumers in a number of states still are unable to originate loans through Lending Club. For those consumers, the trading platform is the only point of access and they may indeed be willing to pay extra for entry to the peer-to-peer lending marketplace.

    I will also say that if you screen very carefully, you can probably find a few (very few) attractively priced loans. Generally I’m talking about a very small discount on loans where the credit rating is steady or a small price premium on loans where the credit rating has gone up (which seems reasonable since the loan is theoretically a bit less risky now).

    Of course, if you’re a real gambler, you can always try your luck and pick up heavily discounted loans where borrowers are more than 30 days late on their payments. If the loans go into default, you’re probably out of luck. But if the borrower recovers (which apparently some do), you could make a hefty percentage profit on your purchase.

    Good luck with the trading platform! There are plenty of notes for sale there and hopefully some more sensible pricing will soon prevail!

  19. Brandon says:

    I agree there are some deals to be found on the trading platform. It just takes a while to weed out all the noise. Perhaps some additional or more nuanced methods of searching, sorting and ranking notes would be helpful. I think I’d probably just play roulette with any money I was considering throwing into the over 30, and certainly the over 120 day late loans. I’d be interested in seeing some statistics on how these things actually play out. Do you know if any exist? I think if I had was the person defaulting on one of those loans, I’d go to the trading floor and buy up as much of it as possible before I started paying it off. I wonder if there are protections against that. Seems like buying your own loans for penny’s on the dollar could be quite profitable.

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