Lending Club is a platform for peer to peer lending. Like Prosper or SoFi, it allows investors the opportunity to lend money to individuals directly.
At the end of 2015, it had funded almost 16 billion in personal loans, compared with Prosper at 6 billion, and SoFi at 8 billion. Arguably the leader in the peer to peer lending game. Their platform is also intuitive and easy to use, attracting investors and borrowers alike.
Here’s the basics:
- A note is purchased by the investor in the amount they are willing to lend each borrower.
- The notes can be purchased in amounts as small as $25.00 (this minimizes exposure to loss).
- The borrowers are rated A-G based on a number of criteria, including income, credit score, credit history, and the amount they wish to borrow. The A rated being the most “safe” and G the riskiest.
- Loan terms are either 3 or 5 years.
- Once a loan is funded and approved, the borrower pays the money back over the period of time agreed upon, or, they don’t.
Four years ago I decided to try it out. I took a tiny amount of money ($500) and invested it in 20 loans. I chose loans that were “A” rated. I spread the $500 over 20 loans. I didn’t reinvest any of the returns to see how it would play out. I ended up with 3 loans that defaulted and the other 17 paid in full. The first loan defaulted after only 3 months and almost all of the principle was lost and has not been recovered. The next two defaulted after about 2 years and some of the principle was recovered and sent back to me via lending club (woo!). Overall, I returned 5.14% annually over three years.
Considering I chose the worst loans to invest in (A rated) I was very happy with it. Last summer I decided to step it up and threw a little money at it. This year, I will be adding $10,000 to $13,000 now that I have invested more time into learning about the loans, returns, and processes.
Here’s a screenshot of my current account. The return on investment includes the 5.14% I saw in the first three years.
Statistically, the best notes are in D, E, and G rated loans. The fact is, the better borrowers still default quite a lot! It’s really just basic math; total returns less the lost principle from defaults. I am currently focusing my energy on building up loans in the D-G range (some C as well).
The benefit of peer to peer lending is the liquidity. The principle is returned with the interest and is available to reinvest or for anything else! The downside is that it is all taxable.
There is a lot to peer to peer lending, platforms exist to trade notes, there are various statistics on loan performances, and a good deal of information to comb through. I would encourage anyone looking for passive income, high returns, and a higher risk tolerance to start looking into it.
Just a disclosure: I am not in any way compensated by lending club or any of its affiliates. I am not advocating or endorsing their company.