P2P Lending Update: LendingClub Loan Performance

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Here’s an update for my person-to-person (P2P) lending activity, which for me are unsecured loans between U.S. residents. It could be for credit card debt consolidation, car financing, 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 high interest to borrowers.

LendingClub Portfolio
I do my P2P Lending at LendingClub, where you can loan as little as $25. You can read more background in my previous update. Although they do have a 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.

I now have a total of 49 active loans with $1,548.42 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.) Here is a screenshot from my account page:

Performance & Commentary
According to LC, my “Net Annualized Return on Investment” based on my interest payments received so far is 9.06%. The bad news is that I now have two late loans in my portfolio. One has negotiated a temporary reduced payment plan, while the other seems to be dodging phone calls. Also, one loan was paid off early. But I suppose this is par for the course, you get late payments and defaults. If your interest rate is high enough and you have enough diversification in loans, you’ll still end up ahead. We’ll see what happens, even with a default my rate of return so far is still higher than what I’d have gotten with an online savings account. But the risk is still certainly there for more downside.

What really baffles me is that both of my late loans are A-rated. According to the LC stats page, out of all the A loans issued so far, there are only 12 late loans out of 943 still active. That’s a tiny 1.3% late rate with zero defaults for LendingClub in general, and yet I managed to invest in 2 out of the 12 late ones. So either I’m very unlucky or I stink at picking loans, or… both. 😛

$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. I looked at prosper and LC a while back. I felt that while the concept was really cool, I remain very wary of the effort I would need to put in to invest money. I dont like the automated tools so I would need to plow through each listing to only get a few marginal % on my investment. Unless I am investing tens of thousands my effective hourly rate is too low to make sense.

  2. Thanks for the link for the bonus. I just signed up and had already committed to a loan within a 30 minutes. It’s a very interesting experience reading the comments. True or not, some of them are really moving. I can definitely see this becoming an interesting hobby.

  3. “So either I’m very unlucky or I stink at picking loans, or… both.”

    Or the stats page is deceptive (i.e. lying).

  4. I could see the data being maybe a little bit late to be updated, but I doubt they are lying. The legal ramifications for a SEC-registered investment would be pretty serious.

  5. Thanks for keeping us updated.

    I’ve been on the fence for some time but now I’m ready to go. Those online savings accounts are paying wayyy too low.

    I read somewhere else that you should diversify among 400 loans or more. That means $10k, right? I only have $5k to start, and I see you are investing a lot less than that.

    Since default of some loans is expected, can you talk about the issue of volatility of returns when lending to less than 400 people?

  6. My first thought, when I read about Lending Club of MMB was that if ever there was a ponzi scheme, this was it.

    My second thought, after looking into LC was that the business model is sound, so I became an investor with a MMB $25 promotion code
    (Thank you!).

    The first thing I noticed was that since since loans are not issued until they are fully funded, there can be a significant delay between transferring money and starting to earn interest on it, unlike a bank where interest starts being earned when the bank received the money.

    I have also experienced further delay while a loan is in “review” status. I completely approve of a second review of borrowers, but the fact remains that during the funding/review phase, my deposit is working exclusively for LC and not for me.

    I added up the loan total for the first page of notes to be $176,550.00, time 8 pages of notes for a ballpark figure of about $1,400,000. if 1/4 of this is floating through a conservative 1.64% money market account, they make an additional $472 a month.

    I also discovered that the 1% fee that LC talks about is on a PER TRANSACTION basis, not per loan, and they round in the collecting of this fee. For example, a $0.82 payment I received was charged a $0.01 fee. For this particular $25 investment, I’ll be paying $0.36 in fees, instead of $0.25.

    Assuming that the total value of loans on their site, $49,794,875, is divided into $25 chunks, with 36 payments and a $0.01 fee per chunk payment, their fees total $746,922.96, and not $497,948.75

    While on the one hand, the cost of investing is higher than I thought when I became an investor, the Lending Club business model is profitable enough for them to be legitimate, in my humble opinion.

    The bottom line for me is that I accept Lending Club’s terms, and have scheduled small bimonthy deposits to grow my investment with them.

    Please don’t flame me if I made a mistake above, I’m not a financial professional, and I’m not even terribly clever. I welcome all constructive criticism and corrections.

  7. This is off-topic, but I figure folks might be interested in an easy money offer.

    Chase is mailing out “invitations” to register your debit card for automatic utility bill payments. They’ll give you $10 if one automatic payment is deducted from your Chase checking account by 9/30/09 and $20 for two or more. Check out http://www.chase.com/get20.

    I’ve already got water and gas/electric pulling from my checking account, since these utilities aren’t set up to accept credit cards.

  8. VerdeFinance says

    I must have the same “luck” as you too. Of the 56 loans that I have 2 are in default; plus they were loans that I invested more than $25 each into. I seriously doubt that I’ll come anywhere near my projected 8.65% forecast. I hope that Lending Club looks more closely at their metrics so that “A” borrowers.

  9. I have been lending there for about 5 months now and been very happy. I have taken a different approach from you. I also do not let them autopick. It’s important to read each loan application and see how they respond to questions and use your own criteria. I shoot for the highest rates and borrowers that seem most in-tune with their finances and financial plans and of course having the financial means to pay it off. A majority of my loans are debt consolidation/refinancing as you all know what’s happening with credit. I have loans of all grades except A as a result and 85% of my loans are C or under. No defaults or late payments so far and “Net Annualized Return” is 14.44%. I don’t put that much work into it.

  10. Max Seeker says

    I leave in Texas and can not sign up. Too bad, would be nice to try it out.

  11. Jonathan: Thanks for sharing your experience @LendingClub with your audience. You definitely seem to be unlucky in that you picked 2 of the very few A loans that are late at this time.

    @Don: the statistics page is updated daily with real time data. We are a very transparent business, filing all loans to the SEC daily and making all information possible available. I encourage you to download the loan data (available on the statistics page) and run your own numbers.

    @Sarah: we don’t make any interest on the “floating” money. We hold those for the benefit of the investor until the loan issues. We also adjust your service fees once your fractions of pennies add up.

    @yd @Cira @Sarah: Welcome to LendingClub! May your investment flourish and earn you great returns.

    @Roger: Would love to hear more about your approach, perhaps you’ll become our next webinar guest? ping me at rob [at] lendingclub [dot] com

    Rob G from LendingClub

  12. @RobG: Thanks for the clarification, and I really do appreciate the followup check before the loan is issued.

  13. I don’t think it is fair to even mention online savings accounts in the same paragraph as P2P lending, since they are completely different asset types. Savings accounts are about as risk-free as you can get (especially if you stay below the now-increased FDIC limits), while P2P loans have significant risk to principal. I would be interested in a comparison of P2P lending with junk bonds, as it seems (to me at least) that they may be reasonably comparable in their risk-to-return profiles.

    Jonathan, I don’t think that you should be too surprised that several of your loans are late. We are now in a recession, and I doubt LendingClub’s statistics take that into account, as they have not been around long enough. Expect a much poorer yield in these times. Remember, most people are only one or two paychecks away from serious financial straits, good credit rating or not.

  14. Johnathan: as a frequent reader of your blog, would it be untoward to ask if you are recieving any financial consideration from lending club for posting about the company?

    I am not against p2p lending per se, but Bill Gross’ Pimco total return with a blended rating agency rating of A- certainly seems like a better deal at 8.4%.

  15. I would love if this was available in New Jersey…….

  16. Thanks Jonathan. I’ve been wanting to do something of this sort for a while. I’m going to try it out with the $25. Thanks again.

  17. I’ve been with lending club for only a few months but so far it’s been a good experience. I enjoy searching for loans to fund, there are many borrowers whose needs and motivations I can relate to. In general I stick to only A or B loans but occassionally I dip into the lower grades, I even have one F loan (I liked the story behind the loan). So far I’ve had no defaults, but I expect at least a few will happen eventually. How much had they repaid before defaulting?

    I wonder if interest in LC will pick up now that credit cards are raising rates and changing terms. LC becomes a more attractive choice compared to the 20% – 30% interest many cards are now charging.

  18. I’ll be submitting this through other channels, but seeing as RobG saw this thread, maybe he’ll be able to push these suggestions in, too.

    I imagine it gets better over time, but the initial push of funds in to invest and then waiting out the funding cycle is annoying. It’s also time consuming and you end up with a lot of money floating with no interest. This has been mentioned above, of course.

    The entire interface is built with active multiple-tab hatred in mind, apparently, making it frustrating to flip back and forth to evaluate potential investments. Hopefully they put someone who likes to open multiple tabs on the site in the near future and smooth out some of the bumps.

    The reports on current activity really need to be broken down by status with appropriate additional details such as time left and amount/percent funded.

    The browsing interface needs to accommodate users with more screen real-estate. Filtering is nice, but sometimes it’s easiest to decide if something’s interesting at all by looking at a combination of stats. It doesn’t have to be customizable, just give the user two list views – simplified/detailed.

    Add verified and a few other things as filterable and on the lists.

    When browsing, notes in your “cart” should have an icon just like notes you’ve already invested in do.

    Just my thoughts after spending way too much time trying to decide how to distribute my load.

  19. Can anyone advise on withdrawing money out of the program? So, for example, I fund account with $200 and end up lending $100 initially. But if I want to withdraw remaining $100, can I do it? Do I have to invest what I transfer in to account? What are the options to withdraw money?

    I know too many question but I am newbie in these and would appreciate advice.

  20. Mihir,

    I think you just transfer the money out the same way you transferred it in. As long as you have a linked account and available funds, I think you can just setup a transfer. The only funds that I know of that they hold are funds that you have committed to loans. You can always ask LC through their online chat feature.

  21. Thanks Jonathan. I signed up for Lending Club. I dont qualify to Buy directly from Lending Club since I am in PA, but I can use the trading platform Foliofn and already started trading. I do agree that the delay time is longer.

  22. I’ve just had a disturbing experience with LendingClub and I’d like to share, even though this may not happen often.

    I had signed up, got the $25, and browsed around the site for a bit. I ran the stock picker, but didn’t select anything, and went on to the Browse Notes tab. I looked through a few and found one I liked, so I clicked on the Invest button, and went on to the Confirm&Submit your order page. At that point I got distracted, and I got back to that page an hour or so later. Nothing had changed, no notification of timeout or anything, and it let me click the Submit Order button. However, the note it confirmed as ordered was another one!

    I contacted customer support, and the lady proceeded to tell me I had done the selection ‘in the wrong way’. The system had gone in timeout mode and selected a note for me, based on my earlier automated screening (in which I didn’t select anything, mind!). For reasons unknown, this other loan did not show up on my Confirm&Submit page.

    To my mind, no system should time out and still let you do something like this. Furthermore, if you’re browsing around and there is an Invest in user### button on the page, I expect that I can click that and invest in that user. There should not be a ‘right’ way to go through the pages.

    So now my $25 is invested in a loan I don’t want, and I am filing a complaint with Lending Club.
    Buyer beware.

  23. does the 25$ referal still wrok?

  24. Yes, you can still get $25 free when joining as a new investor, if you use the link in the post above.

  25. Question… does anybody know if they actually enforce the income/net worth requirements for lenders ($70k income, $70k net worth, more for CA)? Seems like this would disqualify a vast majority of people. Personally, I don’t meet the requirements and would like to invest anyway. Any idea if I’d get caught and wind up in a mess? Has anybody invested without meeting these requirements?

  26. Let the buyer (or lender) beware!

    I’ve been a Lending Club lender since 3/08. In that time, I’ve invested in 68 notes. I’m supposed to be earning 10-12% interest. But according to LC, my net annualized return is only 4.68%. Why the difference?

    1) High default rate. Although I’ve only invested in low to medium risk loans, out of my 68 notes, 4 are in default, 1 is charged off, and 3 are >30 days late and headed for default. So my total default rate is somewhere between 7-11%, which is WAY higher than LC advertises as their average default rate, but consistent with the numbers on the independent website lendingclubstats.com. As was pointed out above… it is often the “A” grade loans that default. None of the loans I have that defaulted were people with prior credit problems. As others have pointed out… this economy is completely different animal than it was when most of the buyers earned their credit scores of >660.

    2) High rate of loans that don’t fund. According to lending clubs own stats, they have issued ~$57 million in loans, but declined ~$500 million in loans. So if you “buy” 10 notes, only a small percentage of those loans will actually fund. So you need to constantly be going to the website and finding more loans to invest in, only a small number of which will actually fund. I think unless they get more investors and higher percentage of loans (ie 80-90%) funding rate, the system will fail. As others have pointed out… during that time you are essentially giving LC a free “float” of your money.

    So… I’m leaving lending club when I can get my money out. Too much time and effort for modest returns.

  27. I got this email from Lending Club:
    Invest $10,000 or more and receive a 1% cash bonus, or
    Invest $25,000 or more and receive a 2% cash bonus

    The funds must be invested between today and October 31st, 2009. Your cash bonus will be paid into your Lending Club account by November 18, 2009.

    It seems like a good way to boost returns, but you may have to invest more into one loan than you normally would have.

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