Lending Club Review for Borrowers and Investors

by Neal Frankle, CFP ®

You may have heard of Lending Club and to help you decide whether or not to use them, I’ve written an extensive Lending Club review.

They claim to be the biggest player in Peer-to-Peer lending. They could be right. As of 5/13/13 they’ve funded $1.7 billion in loans – with $140 million funded just last month.

Peer-to-Peer lending is an industry that matches people who have money with people who need to borrow money. The people who need money pay interest to the people who provide the loans. The interest rate borrowers pay corresponds with their credit history. The better the credit history, the lower the rate they pay with Lending Club.

Borrowers flock to Peer-to-Peer lending because they can often borrow money cheaper than from other sources. For many, it’s a great way to solve debt problems. A typical situation is one that a person has a need to borrow money through Lending Club at (let’s say) 7% in order to pay off credit cards that are charging 15%. The borrower shaves some interest off their payments and the lender makes a lot more than the bank is paying….theoretically. So while this investor hopes this is going to be one of their best investments, the question remains; Is it safe?

Before I answer that question, I need to walk you through the steps of how peer-to-peer investing through Lending Club works. As an investor, you open an account and deposit your money. Then, you select loans you want to invest in based on how much interest you want to earn and how much risk you are willing to take. Each loan is ranked by perceived risk. An “A” ranking is the most secure and an “G” ranking is the least secure. These ranks are awarded based mostly on the borrower’s credit score. This is the part I am a little uncomfortable with.

Don’t get me wrong. I love companies like Lending Club for borrowers. It’s a great business idea. And if I needed money and/or I needed to find an alternative to credit card usury, I’d be the first in line to apply for a loan. If you owe money, you could potentially save a huge amount by refinancing your debt through Lending Club.

But I’m cautious when it comes to investing with this or any other Peer-to-Peer lending firm. I did a little digging and came up with questions. Then, I spoke to Rob Garcia, Senior Director of Product Strategy of Lending Club to get his take on my concerns.

1. Default Rates

Your investment performance with peer-to-peer lending will be a function of how many loans in your portfolio default. That’s why the default rate is critical. When you invest with Lending Club, the notes are usually for a minimum of 3 years. Loans are ranked “A” through “G” to approximate the risk of default. Some time ago, I read on the site that the default rate for Lending Club is averaged for all loans 120 days or older. Sounds good, but my understanding is that the default rate for consumer loans increases with age, even for those who have high credit scores. (I looked on the site and couldn’t see any details about default rates per se other than that the overall default rate is 3%.)

Most Lending Club loans are for 36 months (minimum) and they have far more new loans than old. That’s because they are growing quickly. Lending Club is doing a good job of growing the company. As I said, they issued over $140 million in loans last month alone. So my fear was that the actual default rate may be different than the 3% the site reports. Here’s why:

Say I open an account and make 100 loans in my first year, 200 loans in my second year and 500 loans in my third year. I “invest” as little as $25 per loan so I can easily get lots of diversification. Let’s say that the defaults are zero in year one, 5 in year 2 and 15 in year 3. If you just look at the results for the third year, my default rate is 15 out of a total of 800 loans or 1.875%. That’s not too bad, right? Well that’s not accurate is it? Here’s why. If those defaults are all from the first batch of loans, we’ve got a real problem. If that’s the case, the default rate is 15/100 or 15%. You see where I’m going? The default rate of all loans over 120 days may not mean a lot. And remember that if the loan defaults there is a good chance you’ll lose everything – not just the interest. Ouch.

What would be more helpful would be to know what the default rate is per loan quality per year. They might show this on the site and I didn’t see it but I did look pretty hard and didn’t find it. Also, they might show it in the prospectus but I’m pretty sure most investors aren’t going to look that hard even if they do present the data there. To be fair, the site has a clear risk disclaimer suggesting that investors read the prospectus. They highlight the risks of borrowers failing to repay the loans. When I evaluate mutual funds, I look at the yearly performance. Why can’t I have similar information with peer-to-peer lending?

I brought this up with Rob and he made a pretty convincing argument. First, he told me that in order to even be considered for a loan, borrowers have to have at least a 660 credit score or higher. That weeds out about 50% of all the applicants. Next, potential borrowers can’t have any late payments on their credit report for the last year. That dismisses another 25 % of the applicants. In all, Rob told me that only 10% of the people who apply for a loan at Lending Club actually get funded.

The average Lending Club borrower has:

  • A 706 FICO score
  • 15.8% debt-to-income ratio (excluding mortgage)
  • 14.6 years of credit history
  • $70,794 personal income (top 10% of US population)
  • Average Loan Size $13,076

He went on to say that investors who are most successful at Lending Club are those who buy at least 100 notes (minimum investment is $25 per note) and the site shows statistics for investors with 800 notes ($20,000 total invested). His argument is that these people with a very large number of notes diversify away the risk of having any one bad note impact their overall portfolio. His experience was that if a loan was going to default, it would typically go sour before the end of the 9th month. This is of course no guarantee. But if true, it sort of takes care of my concern over the aging of the loans.

Rob wasn’t done. He also told me that Lending Club uses debt collection practices on all borrowers who default. This runs the gamut between making nice reminder phone calls, to working out a payment schedule to legal recourse. It’s nice to hear if you’re a lender, you still have a chance of collecting after the loan defaults.

2. Continuity

If Lending Club were to go out of business, what happens to the money you lent the borrower? How are you going to get your money back? Do you suddenly find yourself in the personal debt collection business?

When I spoke to Rob about this he assured me that Lending Club was solid. But even then, the company does have a plan “B”. They have an arrangement with a large established debt collection firm (Portfolio Financial Servicing Co) that would step in should Lending Club step off. That was also reassuring to me .

3. Lots of Work

I was worried about having to do a lot of work to find good loans. It takes time to go through the hundreds of available loans to find people you are comfortable loaning money to. Everyone has a story and you have to be able to read between the lines to determine who is full of it and who is a legitimate person. Oh, and by the way, with all due respect, who’s to say you know what you are doing?

Assuming you aren’t a skilled loan underwriter, you may keep selecting people with a good story but may end up shoveling money towards the worst risks possible. On this front, Rob informed me that investors can pick their own loans. But they can also use tools on the site that selects loans based on filters investors select. Mr. Garcia said that when investors use those tools, it doesn’t take much time at all to get a diversified portfolio of loans.

I was thinking about introducing Peer-to-Peer lending to clients about a year ago. Before I did, I put my own money into the system. I will tell you that Lending Club has done exactly what they said they would. They are a very professional outfit and I haven’t been disappointed by their service. But are personal loans good retirement income investments? Rob Garcia was able to answer my questions. He is smart and thorough. If that’s any indication of the people at Lending Club, I’ll be the first to admit that I’m impressed.

Again, I feel very comfortable with peer-to-peer lending for borrowers, and Rob answered all my questions. For investors, there are more risks involved with Lending Club but a well diversified portfolio can make sure the burn is not as bad as the overall gain if a borrower defaults.

At the end of the day, it takes years to really know the ins and outs of any particular investment and that’s the case with Lending Club and other peer-to-peer lenders. My experience tells me that while Lending Club seems to be a reputable firm, there is still reason to go slow. Think back to the golden age of real estate when uneducated investors threw money at homes they couldn’t afford for reasons they couldn’t explain. The reality of real estate came home to roost and many people got smacked down pretty hard. They same thing happens to many investors who put their money into investments they don’t fully understand.

This is not a simple investment and the risks are different than commonly perceived. For borrowers, this is a slam dunk. If you need money and you are paying high rates, Lending Club is a company I can endorse. But if you are looking for a “safe” way make 9% – don’t kid yourself. That’s because anytime you are offered rates that high, the risks are high as well.

I also want to be transparent – I am affiliate of Lending Club and I advertise their services. They pay me when people borrow or lend using their system.

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{ 156 comments… read them below or add one }

Monica November 11, 2014 at 5:02 PM

Hi,I am Monica, currently living in Indiana USA, I am a widow at the moment with two kids and i was stuck in a financial situation in May 2014 and i needed to refinance and pay my bills. I tried seeking loans from various loan firms both private and corporate but never with success, and most banks declined my credit. But as God would have it, I was introduced to a Man of God a private loan lender who gave me a loan of $90,000USD and today am a business owner and my kids are doing well at the moment, if you must contact any firm with reference to securing a loan without collateral, no credit check, no co signer with just 3% interest rate and better repayment plans and schedule.

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Paul June 30, 2014 at 5:33 PM

I am a lending member of the Lending Club. One thing that you did not talk about was the time notes spend in the approval process. You are asked to buy notes before the loan is approved. I have had notes sitting “in review” for up to 31 days. That is 31 days during which my money is not earning money. (Note: you can search for note that have been “Approved” but that does not stop them from going into an “in review” state after being fully funded.

To be quite blunt, I believe that the Lending Club is making a lot of money on the interest rate float from In Review notes.

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Neal Frankle, CFP ® July 2, 2014 at 5:53 AM

This is indeed issue. One solution you might consider is to only participate in those loans which are already 80% or more funded. Would that help?

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Paul July 2, 2014 at 8:44 PM

No, that would not help. I have had many 100% funded notes “in review” for weeks after they were 100% funded.

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Jack August 20, 2014 at 5:28 AM

I have found that selecting only notes with Review Status = Approved has cut down on the amount of time my 25 bucks is sitting there making nothing. I also really stay on top of it– any time $25 becomes available, I immediately purchase a new (Approved) note.

As a result (I’ll assume), the net annualized return claimed by lending club is pretty close to my actual net annual return. For me, this is easy to calculate since I only did a one-time investment (about 2 years ago). To be specific: LC’s claim is 9.55%, and my calculation is 9.27%.

I imagine it wouldn’t be difficult for them to factor the time notes are being reviewed, making 0%, into the net return calculation.

Speaking of which, does anyone know how to calculate annual net return when you contribute to an investment more than just one time? I’m picturing a website, where you fill in how much you invested on which dates, and how much the account is worth now, and it spits out what return you’re getting. Short of being able to calculate that, I guess I will just assume, after I start making monthly contributions, that my actual return is about 0.25-0.50% less than what LC claims.

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Alex June 27, 2014 at 2:06 PM

I currently live in a state that does not allow direct loan funding through LC but I have been intrigued by the concept. I know my state is eligible to trade notes on the secondary market but I was wondering if anyone has had success creating a LC account within a out of state entity?

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Todd July 11, 2014 at 11:43 PM

I also live in a state that does not allow me to purchase notes directly. I have been trading on the secondary LC market since 2011. I have a very diverse set of notes and have been tweaking my buying/selling parameters over time.

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Jerome June 13, 2014 at 5:53 PM

I have almost $8,000 on a high interest credit card and a credit score of 663. After reading all of the negative reviews I was reluctant to try Lending Club. But I decided to give them a chance anyway. Afterall, I had nothing to lose by applying. But I have to say it was the easiest experience I’ve ever had in getting a loan. The online application took only a few minutes and I didn’t have to send them any supporting documentation. I was approved for a loan within 24 hours and the money was in my account within 4 business days after my initial application. The interest rate was far lower than the interest rate on my credit card. I will be debt free in only 36 months or less! I am definitely happy with my decision to try Lending Club.

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Neal Frankle, CFP ® June 14, 2014 at 1:02 PM

It’s great that it worked out for you. Of course not everyone has the same success but I believe that if you are in debt this is certainly something to try. Thanks for sharing and congratulations.

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Brian June 13, 2014 at 7:41 AM

I have an extremely high credit score, and an income above 160,000.
I am a home owner and have never defaulted on a payment. Yet I’m in a cycle of a rotating 20,000 credit card debt. I would be looking for an interest rate of 5% or below. What is the range on loan interest?

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Neal Frankle, CFP ® June 14, 2014 at 1:03 PM

I don’t think you could get 5% but you might! I could be wrong. Why not register and give it a try?

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Jim Carnicelli June 15, 2014 at 7:45 AM

To the best of my knowledge, loans through Lending Club are unsecured by collateral like your house, which is part of why they have higher interest rates. It’s a trade-off for borrowers. You could get a home equity loan, where the portion of your house (or condo) that you own (equity) is collateral, at a 4-5% APR, I believe. But if you default on it, you lose your house to your lender(s).

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Chris March 25, 2014 at 6:51 AM

I have been investing in Lending Club for about a year… $1K at first, then boosted it to $10K. Debating now whether or not I want to increase to $20K. So far, LC says my return is over 15%. I estimate it may be a little lower than that, but definitely over 10%. As far as liquid, not if you want it tomorrow, but as long as you plan ahead, you can always sell your loans and cash out (a portion would be quicker and easier to get than the whole thing). I have some concern about increasing defaults over time, but for the most part, I feel my increasing account balance from interest being earned is enough to keep me safe. If my rate of return stays over 10% past the second and third year, then I will know I have a winner. Also, saw someone mention that LC was losing money (as a business). They did in the early years, but they are making a profit now, aren’t they??? Thank you.

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Monica M. March 24, 2014 at 5:27 PM

After reading all the reviews, we were very worried about using the Lending Club. After checking YouTube and other sources we decided to give it a try. What did we have to lose. It was the most easiest process I have ever done. Within 30 hours we were fully funded. By the next business day, the money was in our account. Thanks to those of you who wrote a good review. If it hadn’t been for those, we may not have got all our high interest loans paid off. We are saving about $300 a month in monthly payments. Thanks to all the investors who helped us get fully funded. We won’t let you down.
Monica M.

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Neal Frankle, CFP ® March 25, 2014 at 7:42 AM

Glad it has worked out for you. I think it’s a great way to go for borrowers.

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Emmanuel January 10, 2014 at 10:01 AM

Neal,

I like your analysis of the defaulting risks.
Since it’s misleading to take into account young loans, the best solution is to consider only loans that are mature enough to be fully paid.

Considering the 17,425 36-months loans issued before the 10th of January 2010, the default rate is a rather high 13.24%. But the median duration for defaulting is 10 months, so 28% of the due payments were already made.

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Neal Frankle, CFP ® January 11, 2014 at 12:41 PM

So, if that is the case, what is the calculated return according to your analysis?

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Bill November 23, 2013 at 12:35 PM

I just applied to lending Club for $6000. and was turned down immediately! Seems I owe too much for my income, but the whole Idea is to get out of high credit card rates, so looks like there is no solution. my Fico is 720.
Thanks for the info on Lending Club!

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Neal Frankle, CFP ® November 23, 2013 at 6:52 AM

“M” hmmm……sorry. I don’t know what the rep said to you of course but the site is very clear about the origination fees. I have never seen a complaint like this and I think it’s because they are pretty good at disclosing this – at least on the site. Still, the rep should have double reinforced it. And just in case, it’s always smart to ask to confirm.

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thomas November 18, 2013 at 10:50 AM

i want to borrow 6000 dollars i have a job 28 years making 57 a year not including overtime which has avg. about 10000 a year
so my last 3 yearsi have made 80,71,67, and this year im on track to make 65 my credit score is about 740 as of nov. 1st 2013
i want the loan for 2 years my questions are do you think i qualify ok? 2nd i read alot about fees what are they and how much are they? and what would my monthly amount be?
and 4th is this safe for the borrower?i see alot of post about the investers but not the borrowers thank you

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Neal Frankle, CFP ® November 19, 2013 at 6:41 AM

Thomas, have you put up a loan request at LC? That’s the only way to know if you will be accepted into the program. Also, there is no charge to apply for a loan. They only charge if the loan request is issued.

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Neal Frankle, CFP ® November 12, 2013 at 3:25 AM

Thanks Ken. I wonder if even in the B tranche…..have there been any disappointments? I agree with your approach and assessment. I also don’t think yields will be quite as good but it might be a good fit for people who are comfortable with the risk. I’m interested to know about your continued experience. Thanks!

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Rick Burleson November 5, 2013 at 8:55 AM

I tried with a different company and they had the loan funded but this fell through because I couldn’t provide a pay stub. We pay ourselves by electronic transfer from our business weekly. I sent the w2s and also the bank statement from last month and told them I could also send the business bank statement but they said NO. No stub, no loan. I guess there’s no way to get around this.

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Neal Frankle, CFP ® November 6, 2013 at 7:30 AM

So Rick…..did you ever give LC a try? Did that happen here as well?

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Rick Burleson November 6, 2013 at 9:37 AM

No, I haven’t tried with LC but I did read that they required a paystub also. I could start printing with my quicken and it would give a stub with ytd, etc. but it would be a major hassle to go back through the whole year to set that up. Sometimes we pay ourselves a couple of times or more a week,,,commission and all different amounts. Maybe I’m tech challenged but it seems a daunting task.

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Neal Frankle, CFP ® November 7, 2013 at 12:30 AM

Hmmmm…….I get it. You might want to give them and/or Prosper a call and see if they can work with you on this.

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David October 20, 2013 at 6:37 AM

I guess my buggest road block as an investor is the investment is not liquid. I understand also the diversifying small amounts into many different loans, but the issue here is multiple maturities. I can find a nice dividend paying fund that diversifies its investments, pays me about the or better return, but is liquid if I need the money for emergencies.

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Neal Frankle October 20, 2013 at 9:51 PM

David. This is a good and very important point. I would not consider these investments liquid. Smart thing to point out. Thanks.

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Diane October 11, 2013 at 10:24 AM

This was the most painless loan I have ever applied for. Those people at Lending Club are terrific in my book! I applied for a loan on the 6th sent in all my paper work and received daily e-mails that my loan was being funded. I have to admit I was skeptical also from the reviews I had read. I received and e-mail on the morning of the 9th that my loan was fully funded and that was my official notice that the money would be in my account with 2-4 business days. The money was in there on the 10th (4days) Hooray for Lending Club! They did not try to designate what bills I had to pay off or anything. I have no intention on defaulting on my loan, I need to keep people like this in my corner! I am on my way to becoming debt free! Thank You Lending Club!

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Neal Frankle October 13, 2013 at 12:14 AM

Glad to hear your experience. I have been a huge advocate of this service for people in debt if the cost of existing debt is higher than the offer from LC. It’s sort of a no brainer in my opinion. For investors, I am still rather cautious. That’s because not every borrower is as responsible as you.

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Andre September 10, 2013 at 3:31 PM

This company is in the news as highly successful. It looked worth investing in it. Before doing so checked out their SEC filing and noticed that this company has produced losses of close to 12 million dollars each year since 2009, racking up a shareholders deficit of over 50 million. Where do they get the funds to stay in business?

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Neal Frankle September 7, 2013 at 11:33 PM

I am sorry to hear about the trouble you had. I know that LC does a pretty good job of vetting the borrowers so they do ask for a lot of information when they feel it would protect lenders. One question – what makes you think that the reason they opted not to lend you money was based on your Hispanic name? Could it be that there were other reasons? People usually turn to LC or other peer to peer lenders when they have some difficulty getting conventional loan. Nothing wrong with that of course, but I think LC only funds 1 in 10 (or fewer) applications.

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Gary King August 16, 2013 at 2:49 PM

I took a loan and they took their fee so I didn’t not get that money. Yet they are charging me interest on that fee for the term of my loan. How can someone charge you interest on money you never reeived? Plus I never was asked if I want to just pay the fee up frond and not finach it. That is a gotcha here at this place. They also take the payment from your bank each Month and I hate that. Never know what I have in the bank and have to remeber each Month around that date they are going be taking their paymnet. So those two things suck

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Neal Frankle August 19, 2013 at 1:41 AM

Gary. Sounds like Lending Club is just acting in accordance with the agreement. Are you saying you are paying for a loan you never took? This sounds unlikely to me. I’d like to hear more.

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Quincy August 20, 2013 at 5:52 AM

You borrowed the money and immediately paid for the service with some of that money.

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Reuben July 10, 2013 at 9:09 PM

LoL @ this ‘article’… My credit score is under 620 (596) and I have 4 late payments (5 days) in the last year and I STILL got the loan, a small one, to consolidate the CCs!!

This loan will cut almost in half the monthly payments I make and I will pay it off in 3 years (who knows when I’ll pay off those CCs).

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Haley May 16, 2013 at 6:26 PM

I live in Canada, what are my investment options that are simular to LC and Prosper? Thanks!

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howard May 14, 2013 at 10:37 AM

about the default rate, about the diversification, this is not stock we talking about where the winner can win so much more money than the loser, in other word, you are not really diversify here, because it will take lots of lots of winner to make up a loser, where in stock, it only take a few winner to make up all the loser, because when the stock is a winner it goes much much higher, however you winner in the peer to peer model only got back the principle and interest, there is limit gain here.

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Neal Frankle September 11, 2013 at 12:22 AM

Great point. In a way, yes you are right. It is closer to bond investing. And t is like buying unsecured bonds – risky.

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Dwayne April 18, 2013 at 4:48 AM

I have a couple of loans through LC and am currently trying to do a settlement with my credit card companies as I lost my job. However, I am NOT even thinking about that for LC. I have every intention of paying off (on time) my loans. If a big bank has to take a loss, oh well. But I don’t want to “stiff” the small private person who is just trying to beat inflation. .

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NewHorizon April 19, 2013 at 9:03 AM

I don’t have any data to cite, but borrowers like Dwayne seem to be quite rare. Wouldn’t it be wonderful it this weren’t true? For one, borrowers would then be facing lower rates.

I don’t think borrowers think about who’s affected by a default beyond themselves and the small lenders.

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Sandra J April 16, 2013 at 7:39 AM

I have noticed the number of available notes to “browse” is way down. Today there were only 235, usually there were 700-900, and for a while considerably over 1000. Any idea why this is happening?

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Peter Renton April 16, 2013 at 10:48 AM

The number of available loans is way down at Lending Club from a few months ago because there are many more investors now and the loans are being funded much more quickly. There are actually many more loans being added to the platform than ever before, usually 250-300 new loans every day but the average loan is being fully funded within 24 hours today. So the whole platform is much more dynamic than it was a few months ago.

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Sandra J May 10, 2013 at 1:41 PM

Thanks Peter – that is very helpful, and explains why the borrowers never seem to answer any of the questions I click on anymore! I guess they don’t have to.

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Dave E April 15, 2013 at 1:46 PM

Hi Neal. Thanks for your article on lending club. First of all what are notes? and do i have a choice of just leaving my money in my Lending Club account and watch how things goes within the community or does my money i transferred from my bank goes automatically into buying these notes soon as it hits my lending club account . As an investor, should i decide to pull my money out of Lending Club at anytime do i have to sell my notes first or can i just hit a transfer button and get my money back to my external account if i need to use my money for something else? Thanks.

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Julie May 10, 2013 at 7:37 PM

Dave,

I’ve been with LC for close to 5 years. Notes are each individual loan. None of your notes will be automatically invested unless you have a Prime Account. If you want to pull money, you need to sell your loans first. Also, remeber that your notes are being paid daily, so your account accrues balance and interest that have to be re-invested. Or, you can let the balance build up and pull it out at any time via an EFT transfer back into your bank. I’ve done it several times when I’ve wanted to use funds for other things.

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Jay April 11, 2013 at 5:50 PM

I am interested in lending at least 800 notes at $25/each. How many 36-month notes available on Lending Club to invest at any given time?

In order to earn $800/month, it would take a $100k investment at 10%.
I understand that it may take a while to fully fund my investment. Can anyone tell me how long it could take to fully fund 800, 2,000 and 4,000 notes?

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Peter Renton April 12, 2013 at 8:41 AM

The answer to that question is it all depends. Lending Club are adding 300-400 notes a day so it would be theoretically possible to be fully invested in 800 notes in 2-3 days. However, most people do not invest in every note. They do some filtering, whether it be by loan grade, loan purpose, income or many of the available credit criteria. I can tell you that I would spend at least 4-6 weeks investing in 800 notes.

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Matt Baily September 19, 2013 at 10:47 AM

Jay, I have invested in LC and I think it will take you a really long time to get 800-4,000 notes funded. You can click and put your money in a lot of notes each day, but more than half will come back as denied funding. For instance I started with a small amount of $2,500 and it took almost two month to fund the 92 total loans (notes).

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Ryan April 11, 2013 at 9:23 AM

As a new investor, I was very interested in learning about LC and found your article very informative. After reading your article I decided to sign up for an account. Come to find out that since I live in Texas I am only able to trade loans on the secondary market through the FolioFN program. I am hesitant to invest since it seems like the secondary market mainly consists of notes other investors think will go into default. What is your opinion on investing with LC if you can only use the FolioFN program?

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Neal Frankle April 11, 2013 at 1:35 PM

I would check out to see if they might be a better solution. If not, I would pass.

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Julie May 10, 2013 at 7:31 PM

Ryan,

I’ve been investing and selling in the secondary market for over 2 years, almost 5 in LC. I’ve found that many investors monitor the notes credit rating. The minute is shows any drop, no matter how small, they put it up for sale. Those are the notes I buy. I generally purchase all mine on the secondary market. The accrued interest is immediately deposited to your account, where if you buy a new loan, the first payment doesn’t come in for over a month. LC takes monitoring; if you don’t want to monitor, it’s not the right financial vehicle for you.

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Brandon April 8, 2013 at 10:14 AM

I do not recommend Lending Club.

I’ve had 200+ loans for over a year now, and have had steadily climbing default rates. I hand picked my loans, using a filter and all are in the A-C range with high credit scores (most over 700-750). I’ll be lucky to break even after the 5 year mark with the amount of loans that are detonating. Im almost to 10% default rate. I expect it to continue rising with the amount of loans they keep expanding, they are adding more and more bad loans to keep up with demand, you can see their charts on how much they are rising each year. Walk away, you’re not going to get 10-14% returns, be happy with 0-5% from these guys.

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Julie May 10, 2013 at 7:15 PM

Brandon,

Are you using the secondary market to manage your “poor loans”? I’ve been invested for almost 5 years. I sell them for a partial recovery, before they get to the default stage, generally as soon as they go into he Grace period.

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Neal Frankle August 29, 2013 at 5:21 AM

Well done sir. I like the diversification. I’d like to hear more about your experiences as time goes on. As I said in the post, I have some concerns about the aging of the notes. Let’s hope your good experience only increases!

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Brad April 4, 2013 at 12:25 PM

Does anyone know when Lending Club plans on releasing/filing their 10-K? I thought it was due 90 days from year end which would have been the end of March.

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Peter Renton April 6, 2013 at 3:27 AM
Chris March 26, 2013 at 4:13 PM

Peer to Peer?
Are you kidding me? This is a bunch of rich snobs cashing in on the desperate.
Too bad it is not p2p, people willing to help out without maximizing profit. There may be a few people willing to help out, unlike Corporate America, and people that have a few X-tra bucks. Just help out and break even, or even 2%, cripes what have the banks paid you?

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Mike In Pennsylvania March 26, 2013 at 5:33 PM

Chris,

Banks aren’t paying enough to even keep up with inflation, so everyone – including you – should be finding ways to earn more. Our retirement depends on it.

Many folks receiving these loans are remodeling homes, buying cars and engagement rings, going on vacation, starting or improving businesses, and refinancing credit card debt at lower rates. This all helps them and the economy. Most borrowers are not desperate – they are just trying to maximize their own returns.

Many of the lenders could just invest elsewhere with less effort but have decided to do some of it at Lending Club. And as with any venture for profit they wish to make a decent return. You can’t expect people to “just… break even” on their nest eggs.

Remember… the banks are pretty tight with money these days.

I also make interest-free loans through Kiva. How about yourself? (For as little as $25 you can also help …)

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Antonio March 26, 2013 at 12:30 PM

I just wanted to pose a simple question.

If I invested 10k right now in LC, and I average 2% roi, so that means I would make $200 dollars in one year? That doesn’t sound that great for the risk. Is this an accurate statement?

Why not just put the same money in xxxx Bank for 1.19% and make a guaranteed $119 dollars? I just am fearful of risking money when the returns are not really any better than a bank. Thanks.

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Neal Frankle March 26, 2013 at 4:28 PM

The goal is to earn substantially more than 2% of course but there is risk. So you wouldn’t compare this to a bank account because it has much less risk. LC offers the opportunity for much greater returns but as I said and as you’ve seen, there is some risk.

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Julie March 25, 2013 at 11:48 AM

Mike. See my post of Jan 7, 2013. My 2012 end-of-year statement showes $1795 in loan interest, 0.28 in late fee income (from former charged off loans), $0 charged off loans and $99.43 in service fees. Net was $1696.20. I’ve only had 8 charged off loans and none in the past several years. I dispose of a loan on the secondary market as soon as it goes into the grace period (at a minimal discount) before it goes late or worse. Even if it become current again, I still dispose of it. That way I don’t have to take too deep a discount. I spend 5-10 minutes several times a week monitoring this. I think this is necessary to maximize LC profits.

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Daniel March 25, 2013 at 3:18 PM

Julie,
my own experience at Folio (secondary market) has not been as positive as yours. Notes in “Graceland” and beyond almost never have buyers if priced near the cost. They only sell at deep discounts in my experience. Of course, once the lates correct themselves, the notes could sell closer to cost. LC’s estimate on lates’ cure rate is around 50%, but my own experience is somewhat lower than that (more like 30%).

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Sandra J May 10, 2013 at 1:45 PM

Julie, how do you decide what to price the loans at that you are selling?

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Julie May 10, 2013 at 7:12 PM

Sandra,

It depends on where the loan is. Once it goes into the grace period, I price it just pennies under the loan + interest. Seems like so many of the “for sale loans” are asking a premium. If is goes current again, that is when I’m most likely to sell it. I’ve just sold a couple like this over the last couple of days. If it get’s worse, then I just keep dropping the price until it does sell. Your current asking price is only good for about a week, so you have to keep looking at the progress. I’ve even sold Chapter 7 loans, at a deep discount mind you, but it’s better than defaults. I just posted something several weeks ago about the secondary market on this blog, but it must not have been approved. It’s a great tool to manage “poor loans” rather than just accepting that some of your loans will default.

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Mike In Pennsylvania March 24, 2013 at 10:13 AM

My 2012 year-end statement shows that I earned $973 in interest but I also had $876 in charged-off loans. After $56 in service fees, I had a net profit of $42.

I invest $50 per loan and have currently been selecting mainly A & B graded loans that result in stimulus to the economy, such as home improvements and business expansion/purchase. I do have older, lower-rated loans. Out of all the defaulted loans since Jan, 2010, ten had ratings of A or B while 28 had lower ratings. I expect this ratio to change since I started to invest only in the A/B loans.

In 2010 with $5000 invested, I had $654 interest with losses of $253. In 2011 with $6000 invested, it was $687 interest with losses of $349. In 2012 with $10,000 invested, it was $973 interest with $876 in losses.

I’ll give them another year but if this keeps up I am going to bail out and put my money elsewhere.

It’s amazing how many people stop paying very soon after they receive a loan. Maybe there are good reasons that banks aren’t anxious to lend money.

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Deb March 25, 2013 at 1:52 PM

I see that your investment continues to grow over time ($5k, $6k, $10k). Did you add more money in increments, reinvest the payments you received or did you take any money out over the years?

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Mike In Pennsylvania March 26, 2013 at 11:11 AM

Deb, I added money in increments to total $11,000. I showed the approximate yearly averages above. During my 3.5 years, I have netted $860.

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Mike In Pennsylvania March 26, 2013 at 11:18 AM

I have not withdrawn any funds…

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Deb March 26, 2013 at 12:22 PM

Thanks Mike. I’m not sure I see the upside in this investment. I have other Mutual funds that have made way more than this over the last few years.

I’m still considering it, but don’t know if it is your selection strategy that didn’t work out for you or the system itself.

What happens if the borrower comes back in a couple of years and decides to pay back the loan, even if it is written off or does that never happen after the write off?

Todd March 24, 2013 at 6:33 AM

Interesting article, however you didn’t explore the issue of state laws on interest rates which limit what a person can charge another person on a loan.

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Neal Frankle March 24, 2013 at 11:34 AM

Some states restrict investing or borrowing with LC. I think I did a good job of delineating those states in the post.

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Joel March 23, 2013 at 9:49 AM

If a LC Loan goes into default what type of collection methods besides a negative credit report are employed to get an investors funds returned to them. If a partial return of equity is recovered by means of collections is the investor compensated.

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Neal Frankle March 23, 2013 at 11:37 PM

Joel, they turn over non-performing notes to a collection agency. Besides harassing the borrower, I’m not sure they have any real power.

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Angie March 22, 2013 at 11:46 AM

Hi Neal,

Do you know if the LC loans show up on the borrowers’ credit reports? (Even if they’re making payments). I’d hope the LC loans do show up on the borrowers’ credit reports (just like any other loans they have) to prevent them from going out and borrowing more and more.

Thanks,
Angie

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Neal Frankle March 23, 2013 at 11:46 PM

I believe they do. I know that LC reports to the credit bureaus when there is a problem with the loan so I would assume that they report when a loan is taken out.

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John March 20, 2013 at 12:33 PM

I figured i’d chime in with my experience on LC.

Started back in late 2009 with a small amount, i think a $100, just to test it out and see how the process worked. After a couple months i seen the payments rolling in so i started depositing more money here and there and things were going well. I don’t recall what year is was but LC had a promotion going that you’d get 1% on any amount (over 200/month) you automatically deposited after you invested it, so for a year i was doing auto-deposits earning more on the money i put in then leaving it in savings. I am sitting on over 225 notes now, 7 have been charged off and this took my return from 13% to 9%. I have started using Folio more to try and dump the dead beat notes early on, better to get 30 cents on the dollar for a note with no payments in a couple months then to watch it default.

I mainly stick to debt consolidation, i also look to see if the borrower’s revolving debt is close or greater to the amount they want to borrow. The idea is they are paying off debt and not taking out more then they need.

A couple years ago you could type up a question for the borrower and depending on their response (if i got one) would determine if i lent them money. Now you can only select a question from a list to send. I have noticed that borrowers are getting lazy and don’t even bother to answer the question asked.
Example, asked “List out the debts along with interest rates, balances, and minimums you wish to pay off”, responded “chase and citibank”. So flipping helpful, no money for you.
I have to wonder if LC is getting more investors so some of these borrowers don’t even have time to respond because their loan is approved and funded very quickly.

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Gene March 19, 2013 at 10:15 AM

How does one take cash out – no such details on the LC website. Are there any limitations / penalties based on timing, percentage of total investment, … ?

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Neal Frankle March 19, 2013 at 1:04 PM

You can sell the notes if that is what you are asking. You can also get a monthly income from the notes. Is that your question?

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Julie March 20, 2013 at 8:22 AM

You can withdraw any cash that has accumulated in your account at any time. There is no restrictions. I just withdrew an amount that was over 10% of my investment. It was ACH deposited into my checking account. There is a “transfer” link on the site that deals with depositing/withdrawing funds.

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edg March 6, 2013 at 12:05 PM

One thing you should take notice of. Lending club survived the disastrous metldown of 2008/2009 when people were desperate for money and banks weren’t lending a dime. You can look at the records of some long term loans and some people are still paying them back. I can’t think of a worse period of time economically than those two years except for the great depression. Secondly, even with the recovery, the banks have been notoriously tight with their lending because of their near brush with death and even people who should get loans aren’t receiving them. Money seems to winding its way to big companies and financial instrumetns, not ordinary people in need. Age old adage–hit em where they aint.

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Vinnie B February 26, 2013 at 12:34 PM

I am in the process of investing with Lending Club but I am very concerned as to why you have not been able to obtain the answers to two very important questions.
1. ( December 5th, Ms A.) Will the borrower’s credit be affected if they default on a LC note and how will it be effected?
2. (February 9th, Michael Miller) How is the money repayed if the company goes bankrupt.
My question is if the company states that the loan has gone in default how can I track that there ever was really a borrower and that the money didn’t just go to the company?

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Neal Frankle February 27, 2013 at 2:34 PM

I could give you my answer but I asked LC to respond. Of course every time they turn around they have to run their answers through their lawyers. That’s why there has been a delay.

According to the LC site (as I understand it) the borrower’s credit is negatively impacted if they are late or default.

If the company goes bankrupt…here’s what they say:

What happens if Lending Club goes out of business?
Lending Club is a financially sound, well-funded, established company led by a seasoned management team. Notwithstanding, to protect investors and borrowers we have taken steps to ensure continuity in the unlikely case Lending Club stops servicing the loans for any reason. Specifically, we have entered into a backup servicing and successor agreement with Portfolio Financial Servicing Co. (www.pfsc.com) that would ensure the servicing of all issued loans.

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Jeramie February 18, 2013 at 3:59 PM

As a potential investor, what would I need to know about paying taxes on profits I (might) make here? I’ve never invested before and have no idea how that works at all. Thanks for any insight.

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Neal Frankle February 18, 2013 at 10:18 PM

Interest income is taxed at income levels – the highest possible rate Jeramie. Good question. Thanks.

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Travis February 24, 2013 at 8:28 PM

I have a follow up Question to that. Does Lending Club and Prosper send you a 1099 or W-2 form every year or…?

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Neal Frankle February 26, 2013 at 5:54 AM

They do.

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Keith March 28, 2013 at 4:15 PM

Neal, I can’t believe that more people haven’t brought this up. The interest that you earn is taxed as income. For most of us (paying over 25% in Federal income tax), that is a serious hit and we would be much better off paying long term capital gains on other investments. This would have been a good topic to include in your review. This issue alone may be the one factor that turns me completely away from LC. I’d love to hear what others have to say about this. Thanks!

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Neal Frankle March 29, 2013 at 3:14 AM

Keith, I think you bring up an important point. LC is a fixed income investment with risk. Equity investments that are taxed at lower capital gains rates are an entirely different kind of investment with very different kinds of risk. This certainly would have been a good topic to address – with your permission I’ll whip something up on that.

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Keith April 4, 2013 at 5:42 PM

Neal, absolutely, please discuss this topic. Thank you for your response.

Keven February 14, 2013 at 7:55 PM

I read in one of the agreements for signing up with LC is to have a net worth of 70k. How binding is this? What would happen if I created an account and invested with less than a 70k net worth?

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Neal Frankle February 17, 2013 at 9:03 AM

I believe the $70k pertains to your income and not your net worth. Those hurdles are there to protect you. I would adhere to them Keven.

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goldmint February 13, 2013 at 12:36 PM

Been investing in LC since 2010, avg rate 13.5 with defaults my return is 9.25 annualized. I fund new notes mostly in the B & C categories which is 60% of my notes. I even borrowed a loan to test out the funding process from the borrower side, LC charges 3% loan origination fee which is deducted from your loan proceeds. If you invest just make sure to diversify across mulitple loans, ie. if you invest $10K then $25-$50 only per note. I just log in once a month and fund new loans, very simple investing.

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Michael Miller February 9, 2013 at 12:42 PM

Could someone please explain to me if the company goes bankrupt, how the money is repaid by the borrower. And if the note is sold off to the secondary company and the company goes broke how the burrower repays the note?
Michael Miller

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Neal Frankle February 10, 2013 at 8:17 AM

Michael – great question. I have asked Lending Club to respond. Let’s see what they say.

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Dan Hyslop February 6, 2013 at 6:51 AM

Neal,
What are the fees incurred when you invest with Lending Club?
Dan

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Neal Frankle February 6, 2013 at 11:15 AM

Nothing.

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Daniel March 25, 2013 at 3:43 PM

Not quite true, Frank. LC charge a 1% service charge on all notes purchased by buyers (investors). They also charge a service fee on sellers (borrowers). Afterall, that’s how LC generates income.

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Chris March 25, 2014 at 6:59 AM

Yes… LC does charge 1% fee to investors, although the interest rate they show for loans may already have that 1% deducted (not sure).

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Josie January 24, 2013 at 6:52 PM

Neal I have never heard of LC. I don’t understand how it works.
I want to get rid of some credit cards and I received the LC letter in
the mail. If I wanted 9000. how does it all work paid in 36 months.
They also said there was a one time fee. Please if you can please
tell me how it works. Thank You

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Neal Frankle January 24, 2013 at 8:07 PM

Josie, the post tries to explain. What don’t you understand? Have you clicked over the site and tried to sign up?

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Kate Gravitt January 17, 2013 at 3:24 PM

I am curious to know why borrowers would not pay back a LendingClub loan IF it helps them square away their debt? And if balances on department store cards are eligible to be paid off?

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Neal Frankle January 18, 2013 at 6:48 AM

Kate. I’m not sure what your question is.

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Julie January 7, 2013 at 12:28 PM

Nice article. I’ve been investing with LC since March 2008. I started with a small amount ($500) to test it out and now have over $12,000 invested in about 400 loans. I’ve only had 8 default over the 5 year period, mostly because I sell those that go into the grace period on LC’s secondary market. I also buy most of my loans on the secondary market, all with at least one-year of payment history, no late payments, etc. I originally started with only $25 loan increments, but have expanded that amount. My current interest rate is 12.68. I would never invest everything into this form of investment, nor put my IRA and/or 401k, but I find it perferable to the terrible interest rates that banks and credit unions are offering. It all depends on how risk-averse one is. It’s just one more piece of my financial future.

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Crystalee Beck (@delighted2write) January 10, 2013 at 4:22 PM

Julie, do you prefer 36 or 60 month loans? I’m brand new to LC, and am figuring out best practices. And how do you buy the secondary market? Do you have to have a PRIME account to do that?

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Julie January 15, 2013 at 11:27 AM

Crystalee, I originally stayed with 36 months loans, but have added 60 month loans during the last couple years. They have a higher interest rate, so the return can be better. You don’t need to have a PRIME account to use Folio, the Note Trading Platform. Just click on the link “trading account” and you will need to provide some initial information. Once you are approved, your can buy/sell notes there. Folio’s software is more cumbersome than LC, but like anything else, I’ve eventually gotten used to it.

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goldmint February 13, 2013 at 12:23 PM

Julie, you said you buy your notes on the trading platform and sell you poor notes and earn 12.68%. LOL yeah right. All notes with a solid payment history sell at a premium, and the problem notes are at discount and nobody buys them. Your rate is the avg rate of the interest on the notes, yields and rates and your return are completely different factors. Based on what you said, I believe you are losing money buying loans at premium and selling loans at discount.

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Julie February 26, 2013 at 8:06 PM

Goldmint: I sell notes as soon as they go into the grace period, so they don’t always appear poor. Many times they become current again, but I sell them anyway, at a very minor discount. I learned the hard way that charged off loans trash your return and haven’t had one since the 1st year I invested. I disagree that ALL good notes sell at a premium. I never buy at a premium. One just has to be patient for the investor who wants his money out of LC. And many investors sell at a discount when the credit rating dips, even minutely. Happy investing!

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Jim Carnicelli January 6, 2013 at 8:40 PM

I wonder if you have an opinion about the relative value of Lending Club’s 60 versus 36 month notes.

I signed up for their PRIME service to automate my investments and they’ve been sluggish about getting my money applied to 36 month notes that they asked — kudos to the an account rep that noticed — if I’d like to open up my preferences to include 60 month notes. Naturally, I did because I don’t want my money to sit idle for a long time.

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Chris January 4, 2013 at 4:32 AM

Neal,

Great article, I’m considering consolidating my credit card debt into one with a lower interest rate. Unfortunately, I just received my Discover Card that I applied for last week which has a 0% APR for 15 months, but with a credit limit of $4,000. Sadly that is not nearly enough to consolidate the roughly 15k I have. Would you recommend applying for a loan through Lending Club? My concerns are that since I just applied and was approved for a new credit card, current creditors may look down upon that and may possibly lower the limits once I initiate a balance transfer if I were to be approved by the lending club, I cant imagine two new forms of credit can look good. (correct me if I’m wrong). I do have a good credit score, over 700, no late payments either, I believe those were the two criteria needed to be met. Also, if I were to be approved, my utilization would drop dramatically aswell, no? I may be way off base here…

If you have time to get back to me that would be great, or anyone else for that matter, thanks all for your time.

Best

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Neal Frankle January 6, 2013 at 6:51 PM

Chris, All your points are good ones.

Multiple inquiries are a negative but low utilization is a positive. You have a great credit score and history so it sounds like you would be a prime candidate for Lending Club. While the application to LC may be a slight negative I don’t think it’s going to be a deal killer for you. At the end of the day, it depends on how much you would save to see if it would be worth it. What is the rate you currently pay on the debt you have not been able to refinance?

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Chris January 6, 2013 at 11:32 PM

Neal,

Thanks for the comment. With the discover 14 month 0% APR card I was able to transfer 5k and left with roughly 10k on my last CC. Although it is similar to the rate of interest to that of the lending club loan, I went ahead and applied with the thought in mind of dramatically decreasing my utilization and freeing up a couple cards with what will have zero balances. If I choose to accept and am approved, I will have the loan to pay back but have two of three credit cards now with zero balances.

Would it make sense to go forward with the loan? Mainly I would like to decrease my utilization rate because soon enough I will be on the hunt for a mortgage and want the best possible rate I can get. So ultimately, with this new loan, would my utilization drop since I am freeing up my CC debt? Or really would it end up being a wash? Since I’m literally using a loan (debt) to pay off a debt….let me also add I thought it may be nice to have a safety net with those freed up cards in case of emergency.

Thank you so much again for your time.

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Neal January 7, 2013 at 1:09 PM

This is getting beyond my pay grade. In your shoes, I’d talk to a mortgage broker and see which would be best when you present yourself to a bank for a mortgage.

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Rhonda February 18, 2013 at 4:09 PM

Here is how your credit report would look. Because 30% of your score is calculated based on your balance to limit ratio on your credit cards, you are far better off having a new “installment” loan showing on your credit report than a maxed out credit card. That maxed out credit card can have a 25-225 point difference on your score.
You need to keep your credit card balances between 10-30% of your limit max to get the best affect on your score.
The 30% balance to limit ratio is the second most critical category of you score. The first is of course your payment history at 35% of your score.
The inquiries are 10% of your score and typically can affect your score by 3-15 points.

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Mary January 2, 2013 at 9:08 PM

Neal, Thank you for your article. You answered many questions I had. I also really appreciate all of your comments. I’m a newbie here just looking at Lending Club for the first time. I’m encouraged and thinking of taking the plunge.

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Neal Frankle January 2, 2013 at 11:36 PM

Mary – glad to help. Let us know how your experience is. I’m looking forward to it!

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Quincy December 19, 2012 at 7:00 PM

“I read somewhere on the site that the default rate for Lending Club is averaged for all loans 120 days or older. Sounds good, but my understanding is that the default rate for consumer loans increases with age, even for those who have high credit scores.”

This point has been misinterpreted. After an account becomes delinquent the probability that that it will default increases as time passes. This is a technique used in accounting to record projected losses from defaulted accounts. The way it is written here implies that the older the loan gets the chance of default increases regardless of payment history. That is not correct.
Very well written otherwise. I have been investing with lending club for 2 years now and despite the few defaults I am happy with the returns. One of my defaults was due to death of the borrower.

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Neal Frankle December 20, 2012 at 11:10 AM

Thanks Quincy and I’m glad that your experiences have been good. I was referring to the overall default rates on consumer debt – not Lending Club specifically. They may be doing a better job on underwriting than credit card companies.

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Ms. A December 5, 2012 at 9:30 PM

This is awesome information here! I thank the author for writing this article as well as everyone who made comments. I read every single word of everyone on this site because I am very green at this buying notes thing and I want to know all that I can find out before taking the plunge. Does anyone know if the borrower’s credit is affected if they default on a LC note? I don’t remember reading that LC reports the status of the borrowers LC debt to the 3 major credit agencies. I look forward to your response(s).

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Neal Frankle December 6, 2012 at 5:39 AM

Ms A – Thanks for the nice words….. I asked LC to respond to this but my gut tells me that they absolutely would report any defaults – that’s the stick they use to get people to pay I imagine. Thanks. I expect LC to respond shortly.

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Jim Carnicelli December 6, 2012 at 7:07 AM

Take a look at your own credit report. Their intent is to track every loan you have or had had in recent years and your payment history for each. Credit cards are loan devices, if you think about it. Your credit score is based on these credit reports. Your credit scores (and reports) get used by lending institutions to determine your eligibility and what your loan will cost you (APR). I can’t imagine LendingClub would not participate in this very standard practice for consumer lending.

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Neal Frankle December 7, 2012 at 1:53 PM

Here is the official response for LC:

Borrowers are notified, prior to receiving a loan, that a negative credit report reflecting on Borrower’s credit record may be submitted to a credit reporting agency if Borrower fails to fulfill the terms of Borrower’s credit obligations.

Lending Club reports such activity to the credit reporting agency, however, the impact, if any, is determined by the credit reporting agency’s procedures and application of the bureau’s proprietary credit scoring process.

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Daniel November 29, 2012 at 10:43 PM

Neal:
you are welcome, and your article is thorough, and accurate. Good work!
Jim:
Yes, the default rate falls over dramatically after first 10 months (my own experience is more like first 6 – 8months). There was a graduate student’s thesis about Prosper (around 2009) also mentioned this phenomenon, ie default curve would peak in the first 6-10 months and tapper downward after (flatline after 24 months – personal experience). The prevalent thought is that there are borrowers on the edge of financial solvency (not quite reflect by their FICO yet), and are grasping for loans to stay afloat or splurge before things blew up. I have notes with sterling credit histories that have made only one or two payment before “going rogue”.
Of course, defaults in the first months of a loan hurts much more than later half of a loan. Can you do anything about it? Stick to A notes, put no more $25/ note. Once you get more comfortable with a few defaults, expand to B, C and maybe even D notes, sell the ones that are taking FICO dive or frequent “Graceland” on Folio. Real LC result/feedback take time, say 12 months, to manifest themselves.

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Neal Frankle November 30, 2012 at 2:46 AM

Great tips. Thanks!

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Daniel November 29, 2012 at 1:34 PM

I’ve been involved P2P loans since 2007 – with Prosper first, then now Lending Club. It started as a “hobby”, and evolving into a more substantial investment option. A few thoughts:
— in the event LC bankruptcy, it is correct that the company’s funding investors would get the first crack at recovering assets, before the note holders like myself do. My concern has largely subided given how much LC has grown. Its profitability is little in doubt compar to just 12 months ago.
— LC’s official ROI (return on investment) is on the “rosy” side. Using my own crude method of calculation, I usually end up 1 -2% lower than theirs. That said, it is hard argue that LC has been delivering excellent ROI for me.
— Seconday market – Folio provides some fluidity to get one’s money out of notes if needed, also, so far, I am able to sell off the “stinkers” for 10 cents on the dollar rather than nothing.
— LC’s administration has been efficiently responsive to my questions/concerns through the years, and I am not a “big shot” financier.
— most of defaults occurs in the first 10 months of the notes.

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Neal Frankle November 29, 2012 at 8:55 PM

Daniel….thanks. Great feedback. I was worried that defaults increase in the 2nd and 3rd year. LC says that it has been the first 10 months but it’s great to hear from someone who has no axe to grind. Thanks….

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Jim Carnicelli November 29, 2012 at 9:07 PM

Are you saying you think that more defaults happen in the first 10 months than happen in the remaining 2 years? I would guess that there would be a gradual growth of default as time passes, with a drop-off in the last few months of a typical loan. Maybe a bell curve.

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Neal Frankle November 29, 2012 at 9:38 PM

That was my thinking as well.

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Jim Carnicelli November 21, 2012 at 8:53 PM

I spoke with a representative today about the default rate.

He explained how to calculate the default rate like this. Take the “Avg. Interest Rate” and “Net Annualized Income” columns as your starting point for each of the loan grades. Subtract 1% from the average interest rate, because 1% is their take. Now subtract the net income from that. What remains is the default rate. Using the “D” loans as an example, 17.01% – 1% – 11.78% = 4.23% of each dollar loaned out has been defaulted on over the whole history of LendingClub. The default rates per dollar loaned at this moment are:

– A: 0.75%
– B: 1.75%
– C: 3.17%
– D: 4.23%
– E: 4.96%
– F: 6.48%
– G: 8.47%

I really appreciated your blog post. It helped reassure me that this was worth trying out.

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Neal Frankle November 21, 2012 at 10:28 PM

This is good info. The only issue I still have is the “seasoning” of the defaults. In other words, what is the default rate per year of the loan. My hunch is that as loans get older, the default rate goes up. If the company is growing big time (which they are) that default rate would be masked somewhat.

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Jim Carnicelli November 29, 2012 at 9:02 PM

I went ahead and put $10k in, taking advantage of their November special to convert to their PRIME program for free if one had at least that much invested. With PRIME, I’ll just rely on them to automatically invest my principal in loans based on a simple spread I chose across risk grades and reinvest interest in more notes.

I asked my account rep at LendingClub if I could direct their PRIME staff to automatically sell notes at face value after some fixed number of months in order to unload them before most defaults typically happen. He said they don’t offer that option, but that I could manually sell notes off, myself. It wouldn’t apparently interfere with their ongoing reinvestment process.

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Neal Frankle November 29, 2012 at 9:39 PM

Jim – not sure if that is the way to go. Given the default rate, if you disperse your notes in small increments, wouldn’t it be better to just hold on? I am sure you’d take a big hair cut on selling those notes at the highest risk point. Maybe I am missing something….

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Jim Carnicelli August 7, 2013 at 8:18 AM

I’ve chosen to just hold onto my notes thus far. A few have defaulted. I haven’t found anyone wants to buy them when they are even a little late, even at 50% or greater discounts. Perhaps because there are plenty of new notes to buy.

L. Taylor November 13, 2012 at 3:51 PM

How do you sell Lending Club? I thought I was locked in til the notes mature.

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Neal Frankle November 14, 2012 at 1:36 AM

They have a secondary market company. The sight has more info on this.

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Jim Carnicelli November 21, 2012 at 9:04 PM

I spoke with a rep today about this. He explained that you can sell your notes at any point. You set your price and wait for someone to buy at that price. You can change your price. You should expect the price your note will fetch to decline roughly linearly as time passes and as the debtor makes payment. The rep explained that on average, it takes about a week for a note to be sold at its face value, which is encouraging if you need liquidity. I was worried about that, too.

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Jason Jacks August 1, 2012 at 6:13 PM

Its possible to substantially lower your default rate if you use the right selection strategy. I’m sure as time goes on the p2p lending services will get safer as better strategies by investors and policies by the companies are implemented.

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John February 14, 2012 at 10:56 AM

I heard about Lending Club a little over 2 years ago and decided to put in some money. I invested $1k, distributed it amongst $25 notes (a mix of 3 and 5 year timeframes), and left it alone. I had read a few articles suggesting that with P2P lending (or really, I guess with any kind of lending) your initial returns may not be indicative of longer-term returns. So I also decided I was going to hold off on putting in any additional money or reinvesting my returns until my initial batch of loans had been out for at least 2 years.

For the first 18 months, things seemed to be going GREAT, my net return was around 13%, everything was getting paid on time, hurrah.

In the past 9 months, I have noticed a definite slide in my portfolio performance, with my net return now standing at around 8%. I’ve had 3 notes charged off within the past 6 months (out of 42 total), and there are a couple more that are in some state of lateness right now–I’m anticipating I will probably see several more chargeoffs before all is said and done. I have also had 5 notes paid off early. While this at least means I can’t lose money on those notes, it also means they are not offsetting the bad loans as much as they might have otherwise. There also doesn’t seem to be much of a pattern in whether or not the riskier loans are the defaulters/late payers–I have “A” grade loans that seemed very solid go into late payment about as often as the “riskier” C-D loans.

I’ve made a bit over $600 back at this point, and unless things really go south, I don’t see myself coming out of this with a net loss, but I also don’t think it’s quite the money maker they are spinning it as. In the current economic climate I’m not too upset, there aren’t really a lot of good investing options out there right now, savings account interest rates are way down, etc. If I come out with a 5% return (which I still think is possible), I’ll be happy. However, I probably won’t be putting a lot more money in any time soon, or if I do I’ll be counting on a MUCH lower return rate than what is initially projected.

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Lisa Gibbs September 25, 2012 at 7:33 AM

I am considering investing in Lending Club and it has been 7 months since you posted this comment. Have you had more loans default? What is your current experience?

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Neal Frankle September 27, 2012 at 2:55 AM

Lisa, I would not base my decision on one person’s experience. I suggest you go to the site and review the stats for defaults. It is still there.

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Dave October 1, 2012 at 5:22 AM

I have had s similar good experience with a small investment in LC. I have had no defaults in two years. I do sell my notes after 6 to twelve months to decrease my default rate. I spend about three hours a month reading the loan requests. I try to make loans to people that are looking to replace credit card debt that have a good profile and have a B or C rating on LC. I plan on tripling my investment in LC but I am more cautious now that I understand they operate in the red every year. I may increase my resell after four months from now on. Kudos to Neal for having this great article; this has been really useful.

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Philip March 19, 2013 at 7:15 AM

Of course the operate in the red… they’re holding debt, issuing notes for funding from investors, and ear-marking incoming interest and fees for note-holders… They have no (0) debt in their balance sheet for admin or operations, rather they operate in the red as they fund more loans than they (LC) can cover of their own cash-on-hand. That said… they do have cash on hand, they do generate income of their own, and they do move a lot of their product. One shouldn’t fear that they are “in the red,” rather they should fear S/T and L/T debt both gross and ratio expressions.

PrudentInvestor January 18, 2012 at 5:10 PM

Folks on the Investor side should note that they are -NOT- buying the underlying debt. They are buy a Note from LendingClub, which is matched to the loan.

Those loans are NOT pledged to secure the Lending Investment.

If Lending Club goes bust, the loans are still serviced, but the money goes to ALL creditors — FIRST to secured creditors of the Lending Club, and THEN to unsecured creditors. Investors in the LC Notes are UNSECURED.

If Lending Club goes bust, the loans may be collected but the money does not go to the investor directly.

Why is this important? LendingClub operates in the red EVERY year, and only survives by selling stock. If it stops selling stock, it’s over.

Why is that important? Because if LendingClub can’t offer any prospect of making money, it will not be able to attract folks to buy STOCK, and if they can’t do that, they business is done, and investors in the LC Notes are out of luck.

You did NOT ask: What assets are pledged to support the preferred stock offerings that keep getting sold, lately? I would be that THOSE FOLKS will get their money back, FIRST, and the loan investors LAST.

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Neal January 30, 2012 at 7:38 PM

Prudent, You raised a good question. I asked Peter Renton of Social Lending Network this question. This is how Peter responded:

Yes, these are unsecured notes from LC/Prosper, not the borrower. This is why I study the financials of both companies closely. Most of the VC money they have received is equity, they have very little debt on their balance sheet outside the lender notes.

If I see a build up of other debt I will become concerned, but I don’t think that will happen. Both companies are well aware of the fact that the big investors want to see them profitable.

If the firms were to go under right now, I would guess that investors would receive at least 75% of their investment and possibly more simply because there is no debt on their balance sheet. It is always something to keep in mind but I don;t lose any sleep over the possibility of a bankruptcy. Both firms have enough capital on hand to see them through to break even.

Peter Renton
Publisher
Social Lending Network
http://www.sociallending.net/

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NewHorizon June 8, 2012 at 2:14 PM

“…but I don;t lose any sleep over the possibility of a bankruptcy.”

Well Prosper is defending a class action lawsuit which seems to be relentlessly – albeit slowly – progressing against them.

So anyway, let’s say Prosper *does* go BK. Do the borrowers’ repayments find their way back to the individual lenders?

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Nick January 14, 2012 at 8:37 AM

I have been investing with lending Club for the past few months. I am not financial analyst but to mee I find the approach is simple and straight forward. I do not put more than $25 in any one loan and try to spread it in different groups. I think this is a far easier concept to understand than stock market and mutual funds. As in any business act with caution, asess you risk tolerance.
Another comfort I feel is even when I lose money invested some of those I feeel better to know it went soe ordinary guy trying/ struggling rather than stolen by some croks disguised as bank executives.

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John September 20, 2011 at 6:21 AM

Great article, these were my concerns going in as well.

I maxed my first year to $1000 just until I learned the ins and outs and I can not wait until january when my personal promise is up and I can invest more (I realize I should just put more in now, but rule #1 is stay disciplined).

Overall I have found that I am very care about loan reasons and only give loans to people who would be paying monthly for something anyways (such as a car, or credit card debt).

Someone who is used to paying $500 a month on credit cards and can now pay $350 is a lot more likely to repay.

I also only invest in loans <5k in total.. again if the monthly payment is only $100 – $200 then its easier for them to make vs. it being closer to 1K / month.

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Peter Renton May 5, 2011 at 7:31 AM

Neal,

Good article and I agree with many of your points. Here is my response to your three main points:
I did a study of default rates on my blog in January which shows a breakdown by grade of defaults.
One other thing I would like to say about defaults. Not all defaults are created equal. In your example above you stated a 15% default rate. This does not mean you lose 15% of your principal. Far from it. Because borrowers are making principal and interest payments all the time, the defaults that you get in year 2 and year 3 of a 36 month loan will have far less impact on your investment than a default in year 1.

2. Lending Club has an agreement with a loan servicing company in case of a bankruptcy, so investors will not be left on their own. Having said that, no one knows exactly what would happen in a bankruptcy of Prosper or Lending Club, there is no legal precedent. But I think a Lending Club bankruptcy is highly unlikely given their growth rate.

3. I have $100K invested in peer to peer lending and I do about half an hour of work each week on my investments. It doesn’t have to be hard. There are automated plans offered by Lending Club and Prosper, but I chose to do quantitative analysis where I invest in loans that meet my strict criteria. All this analysis and filtering is done in Excel.

I agree that p2p lending is still a somewhat speculative investment. But I think it is good for more than play money. It is a diversification into an asset class that consumers can not have exposure to elsewhere. This is why I recommend people commit 2-5% of their portfolio to it.

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Rudy February 5, 2012 at 9:42 AM

Dear Peter,

Your response is as interesting as the article. Regarding your 3rd topic, it would be interesting to see your excel analysis.

Thanks,
Rudy

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Peter Renton February 6, 2012 at 3:32 PM

Rudy, It is a pretty simple process. I just download the CSV file of the in-funding loans and load into Excel. Then I take my filtering criteria and use Excel’s data filtering capabilities. The 800 notes or so are usually reduced down to 10 or 15 that I then invest in.

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Alex February 7, 2013 at 4:55 PM

I just discovered about this peer-to-peer lending program. Is this something you can do with smaller amounts of money – 5K to 10K – or is it something much more? Feel free to send me an email about this. Thanks

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Neal Frankle February 7, 2013 at 9:50 PM

You can certainly invest larger amounts….but I strongly suggest you go slowly at first.

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alex February 7, 2013 at 9:58 PM

Well that’s why I ask. I dont have much, but I have enough money now I want to invest in something worthwhile. I hadn’t heard of this method till today. Are these long term loans generally? Or does it range?

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Neal Frankle February 10, 2013 at 8:28 AM

The loans are 3 to 5 years.

Chrissy March 19, 2013 at 12:49 PM

Hi, I’m looking for a loan for my credit card debt, would you say I should try and request a loan from this place? I’m new to all this information and was skeptic at first, so I started diggin more. Well, why not join the forum, …It all sounds good but not quite sure.

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Chrissy March 19, 2013 at 12:52 PM

Never mind, I got denied anyway.

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