New Investing Vehicle: Lending Club

New Investing Vehicle: Lending Club

Following up on the heels of my new investment with Betterment I have finally decided to jump into the world of Peer-to-Peer lending and began loaning out money on Lending Club (https://www.lendingclub.com/).

Disclaimer: I do have a very small amount of money invested in Lending Club however the time period that I have been invested has been extremely short so I cannot personally speak to performance yet. Always remember to do your own research and due diligence before choosing to invest. I am not responsible for any losses incurred  by anyone else's investing choices. Fundamentally I believe Lending Club to be a good way to hedge my portfolio against stock market uncertainty.

Lending Club: Become your own bank

     As a young adult I was fascinated by the idea of interest and being paid simply for having money. The real money of course is made with the banks issuing the loans so the interest paid to its savings account holders is a small drop in that bucket. We can become the bank with Lending Club.

     So what is it? Lending Club is a platform that allows you to loan money out to people who are looking to borrow. There are multiple reasons that people look to borrow such as home improvement, debt consolidation, and weddings. This platform connects the people with money to loan to the borrowers for a fee (1% of interest). Thus you become the bank and loan out your money to people as you see fit.

     Lending Club has several rankings of borrowers from A1 down to G5. They do the background investigating to ensure correct information like credit scores and income then group these borrowers into a ranking based on their assumed risk. The higher the risk the higher the reward (% interest on the loan) however be aware that if a borrower runs/files bankruptcy/etc. then you will lose the principle not paid back to you. You are now assuming the risk of the loan as the bank. To balance that you can invest as little as $25 towards a loan and spread out your money across many loans to lower the impact of one default.

Pros:

Outside of the stock market. The market goes up and down but this investment is outside of those fluctuations. For people with frayed nerves Lending Club could provide diversification without nail-bitingly watching the DOW. I'm using it to balance myself so that all of my holdings are not tied up with the market.

Low point of entry. You can invest with $25. That's all you need. Add investments as you like in $25 increments with no fee for trading.

Tools. There are plenty of fields for filtering out loans to the exact specifications that you like. Once I have some numbers to report I will be posting my own filters.

Be the Bank. It just has a nice feeling to be the bank instead of crushed by the bank for once.

Cons:

Risk. As the bank you are assuming all of the risk. No amount of filtering can fully protect you from a borrower losing a job, having medical emergencies, or otherwise being unable (or unwilling) to pay their loan. Each time you place an order Lending Club will show you an assumed rate of default and your assumed gains percentage. If you are making $10 a year but $50 worth of loans default that year, you can do the math.

Cost. Lending Club makes its money off of the interest payments from the borrowers. The take 1% of the interest off of the top. Keep this in you mind as you are looking at loans. All things considered it isn't a terrible rate but it certainly isn't free.

Automatic Investing gated. Lending Club has an automatic investment capability but it is locked behind a requirement for a $2500 account balance. Not a deal breaker but something I'm not particularly happy about.

Time to Loan Issuance. Be prepared for your money to stand around a while until the loan is actually issued. You may even lose a month of interest time  which some people will find as a deal breaker. With the pros and smaller amount that I have to invest I'm content with waiting.

Overall:

     Peer-to-Peer lending has been something that I've been interested in for years. The Lending Club platform is easy to use and relatively cheap. It allows me to invest outside of the market and possibly make a decent return. I'm allocating 10% of my portfolio going forward to Lending Club and sticking to A and B loans (for the time being). Once I have performance numbers I will post them along with my lending criteria. Happy lending!