P2P Lending Update: LendingClub Loan Performance (+$25 Bonus)

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Here’s an update for my person-to-person (P2P) lending activity at LendingClub, which are unsecured loans between U.S. residents. It could be to help people pay off credit card debt, home improvements, business financing, or even buying a house. You can think of it as taking out the bank middleman, which pays tiny interest on checking account balances and then charges much higher rates to borrowers.

LendingClub Portfolio
I now have made 62 active loans with $1,680.08 in outstanding principal. Most are A grade, with a decent spattering of Bs. Keep in mind that a borrower has to have a 660 credit score as well as other additional requirements just to make their lowest G grade. (Only about 10% of loan applications are accepted.) Although they do have an automated service to pick for you, I tend to pick my own loans to try and find both a combination of good risk profile and also a person who I want to help out. It’s kind of a hobby of mine. Here is a screenshot from my account page:

Performance & Commentary
The good news is that out of my two previous late loans, one of them is now current again and the other one is on a “payment plan”. I am not sure if that means they lowered the amount due, or that they are just allowing a slower payback temporarily, but it is again showing regular payments (and contact) from the borrower. Much better than reading “left voicemail. left voicemail. we haven’t heard from them in 4 months…”. I have no defaults to date.

According to LC, my “Net Annualized Return on Investment” based on my interest payments received so far is 9.14%. As an investor, I would not expect this rate to be my actual rate to maturity, but so far so good. While my goal is to get a substantially higher yield than from a online savings account, it also comes with a healthy dose of risk. Don’t put your emergency fund here!

$25 New Lender Bonus
If you are interested trying P2P lending with no risk, 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 even have to deposit anything. After you are approved, the $25 will show up in your account balance, and you can lend it out immediately.

If you’re looking to borrow at LendingClub, it’s relatively straightforward. Send in your information, and see what interest rate they offer you. Compare it with your credit card or other financing options. If you like it, fill out your application carefully (verify income if possible) and go for it. If you don’t like the rate or the full amount is not funded, you can either accept partial funding or walk away with no obligation.

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  1. Assuming no defaults, a 9.14% return on $1,680 is about $154/year. How many hours did it take you to pick those 62 loans? How much extra, compared to a good savings account, are you getting per hour of your time spent on dealing with LC?

  2. If someone is put on a payment plan Lending Club lowers their payment amount for several months, then the payment amount goes up to a level a little higher than the original monthly amount due. In the end the lender receives all of his/her money.

  3. I’ve starting using the same strategy as one of the guys that had an online siminar on LC, Scott Langmack.

    1. Look for job stability – I.E. government jobs
    2. Select loan types that historically have lower default rates: weddings, credit card refinancing…avoid business loans, house down payments or other loans.
    3. Diversify

    I also rarely select A grade loans because I’m trying for a better rate of return (11% or better). So far it’s working out for me.

  4. Just wanted to say thank you for the referral. I have been interested in p2p investing ever since you posted regarding your initial experience with Lending Club.

    I have been an avid reader of your site for a very long time and appreciate the time. Keep up the great work!

  5. I tend to stay above the 700 score for As or Bs plus making sure they have had no prior delinquencies. Below that is really taking a risk.

  6. I’m trying to fully understand lendingclub’s lender fee schedule, it says on their site:

    “The service charge paid by lenders is one percent (1%) of all amounts paid by the borrowers to Lending Club.”

    if a borrower takes out a loan for say 10k, then repays it a month later with one payment, would then lending club charge lenders 100 dollars? That would be more then the interest the lenders make that month, making it a loss to the lenders…

    along the same lines, from lendingclub’s website: “The 1% service charge impacts the lenders’ annual returns by less than 1% because it is not an annual charge. ”

    if they charge 1% of all money that is paid by borrowers, can someone explain the math to make the above claim valid? (suppose a loan that is paid on time every month for the three years)

  7. @Jim – If you just want to invest simply, they have a LendingMatch service that will invest your money into $25 increments into the risk profile that you like and takes seconds. Like I said, picking out individual loans is more of a hobby. You can help people out of debt instead of perhaps letting someone borrow $25k for a wedding if you care about that sort of thing.

    @Morp – Thanks for the tip!

    @Jason – Thanks and have fun lending.

    @TL – I agree, the no prior delinquincies is big for me as well. I don’t like to see them even past 2 years ago.

    @ace – The 1% is a flat charge, so spread out over 3 years it is not a 1% annual hit. Think ~$100 spread out over 3 years instead of $100 spread out over 1 month. If it was spread out over just one year then it would be closer to 1% annual hit.

    But yes, borrowers taking out a loan and repaying it immediately within a month is a potential scenario that may lose some money, just like them defaulting on a part of the loan. But a borrower faces their own flat processing fee of 1.25%-3.75% which is subtracted from their loan proceeds, so it is not really in their best interest to be getting loans if they plan on just paying it off immediately.

  8. I signed up using your referral code but I ran into a problem! I immediately invested the $25 freebie in a loan, everything looked fine, then I logged out. When I logged back in a few hours later it still said I had $25 in cash, and nothing showed up under My Notes!

  9. verdefinance says

    Why is it that so few borrowers have their income verified? I find that troubling. I’d like lending club to insist upon that or to shave off a quarter point on the loan if they verified their income.

  10. i see (with the help of excel), thanks Jonathan

    let me throw one more at you, it looks like the smallest fraction lending club handles are pennies (unlike prosper that calculates up to 1/10000 of a penny) is there some rounding up involved? here’s the kicker, my payments to date are 1,801.31 but a the services charges are 21.41. Shouldn’t the service charges be 1 percent of all the payments made to date, i.e 18.01? what am I missing?

  11. technology blog says

    well, that sucks, my state isn’t listed. (texas)

  12. @ Ace
    I made the same complaint to lending club, but got the usual “we’re looking into it ” response.

    Because each loan is so small the payment per month is < $1. Rounded up the fee becomes 1 cent. And if you invested in the same loan multiple times they don’t lump it together : eg you can have 3 pieces of the same loan yet you’ll get charged 3 cents when it should round down to 2 cents.

    also a side effect of this rounding is you pay the most in fees for A loans.
    And from my history a lot of A loans pay off early so you get charged the 1% of the total payment, which earns you even less.

    And we haven’t even discussed how tax reporting with 1099-OID does. Do we report taxes of all interest that we will earn over the life of the loan immediately?

  13. I got very interested in Lending Club about 8 months ago and put 20k in. I had it stretched out over about 400 loans and my average return was expected to be 13.31%. Things went very well for about 6 months and I reinvested every time I had payments in. I thought I would reinvest for a year then watch it for a year to see what the default rate was. After about 6 months, I had 14 in some for of late payment. Nothing had defaulted but they were really late and it doesn’t look good. All of these were hand selected loans and had reasonable credit (not all a’s and b’s though as I was willing to take the higher risk for the higher returns.)

    Finally I just got tired of having to check in to reinvest. So now I am just letting it pay out over the next three years. Depending on the default rate, my guess is I will do about 8%, maybe less if things get really bad. It is interesting and it was fun for a while but my time is valuable and I feel it is better to spread my money in tax free bonds and a variety of other investment vehicles. Might not get the return, but I don’t have to watch them so closely. (not that watching them actually helps! Just sort of addictive)

  14. Beyond the altruistic people-helping-people aspect, why take on this kind of risk?

    If you want substantial credit risk (and the expected return), why not invest in a low-cost, high-yield bond fund. Vanguard’s VWEHX and TRP’s PRHYX are yielding 8.62% and 8.34% respectively since inception. Both fund families also have a tax-exempt option yielding around 7%.

    I know high-yield bonds are not a direct comparison, but are probably the closest alternative from a mutual fund perspective.

    The lack of performance data with Lending Club and Prosper ultimately scared me away. I also recognize that < $2,000 is really not a large investment for you and offers the opportunity to take a closer look at peer-to-peer lending.

  15. I was looking over the math and had a few questions. I have a feeling I’m doing something wrong, but I can’t figure it out for the life of me.

    Basically what I was looking at is what is your actual rate of return. I took into account the percentage of loans in each class that will default, etc.

    But where my hiccup came is computing your actual rate of return (annual). Here’s my example:

    You invest … $5,000 at a rate of … 8.59%
    (for the purpose of argument lets say you were the sole lender to this loan).
    You get the $158.05 payment each month for three years
    That works out to $5689.80 over three years.
    Lending Club takes their 1% from you ($50) meaning you profit
    $639.80 over the three years
    On average that’s $213.27 a year
    Which is 4.27% of your initial investment.

    So it looks like to me that for the $5000 you’re ponying up, you’re making 4.27% a year.

    Is my analysis wrong? Am I missing something.

    And if not, then this doesn’t even take into account the fraction of loans that either default or payback early, in which case you lose money or miss out on interest.

  16. @Matt – I haven’t done the nitty gritty, but for one thing you’re forgetting that you are not giving up $5,000 for 3 years. Amortization! Throughout the 3 years, you are getting your principal back and can re-lend or do something else with. Halfway through, you’re only “ponying up” roughly $2,500. Near the end, you’ve nearly gotten all your principal back. So dividing your net proceeds by $5,000 is incorrect.

  17. I’ve also been lending on LC for almost a year, and so far so good. I invest a little riskier than Jonathan – my average return is about 12.5% right now. I have one loan that is 31-60 days late and I’m not sure what the deal is. Out of about 120 loans, though, one late one isn’t too bad.

    @Jim, I’ve thought about that too. I discount the value of my time though, simply because I enjoy looking through the loans and deciding who I want for borrowers. It’s pretty fun actually 🙂

    @Gretchen, did you make sure you clicked the “submit” button? That is one thing that is annoying, once you have a few loans selected to invest in, you go to the “view order” page and have to click 2-3 more buttons before you’re actually funding the loan.

  18. I created a lendingclub account in early 2008 after Harvard Business Review identified it as an up and coming trend to watch.

    After noticing the impact of the service charge on total returns, I gave strong feedback on a survey they sent me….NO RESPONSE.

    I’ve decided that it’s not a good risk adjusted use of my money. Once my last loan pays out, I’ll sweep the funds and call it a lesson learned.

    Lending club’s business model takes a bit TOO much for themselves, and I wouldn’t be surprised if they run out of lenders…They may be offering much better terms for institutional investors, but for us retail Joe’s it’s not a good deal.

  19. Thought you might like to put this up on your blog:

    “To ring in the holiday season and help you spread cheer, we’ll give your friends $64.62 to invest in Lending Club Notes!”

    Anyone that is refered by a current member throughout December gets a little extra investing cash for free

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