Getting My Feet Wet: Investing With Lending Club

Disclaimer: This is NOT a sponsored post!

I’ve written on a couple of occasions about my desire to get started with investing some of my extra monthly cash, now that I have most of my debt paid off and a small emergency fund in place. On the advice of one of my fellow personal finance bloggers, I decided to pick a few stocks and mutual funds and track them over the next few months to see if I picked well before I invest any actual money. But in the meantime I’ve decided to do a little experiment on my blog by investing some money in a non-traditional vehicle: peer-to-peer lending. Specifically, I’m going to invest with Lending Club.

Who is Lending Club?

Lending Club is an online financial community that brings together creditworthy borrowers and savvy investors so that both can benefit financially. Lending Club replaces the high cost and complexity of traditional bank lending with a faster, smarter way to borrow and invest.

How Does Lending Club Work?

Instead of paying high interest rates on a credit card or bank loan, borrowers get their loansthrough ordinary people who want to invest in their success (like me!). So, borrowers benefit because they get competitive interest rates on personal loans and investors benefit because they are putting their money into an investment with a good track record of steady returns (5.8% – 11.51% on average).

How Risky is This Investment?

All investments carry risks. While Lending Club only issues loans to people with a solid financial track record (borrowers must have a FICO score of at least 660 and a debt-to-income ratio below 35%) a borrower could default and the investor could be out some money. To better match borrowers with investors based on the level of risk the investor is willing to take on, Lending Club has grouped borrowers’ loans into 7 categories (A-G), with A being the least risky and G being the most risky. As with all investments, the greater the risk, the greater the potential reward.


 So How Will Do I Plan To Invest With Lending Club?

On November 1st, I’m going to invest $100 in four notes ($25 per note, which is the minimum initial investment amount that Lending Club requires). In the interest of diversification, I’m going to invest in an A note, a C note, a D note, and a G note. I want to be able to compare how riskier and safer notes perform, and also not sink too much money into a risky investment right off the bat. On the first of every month, I’ll post an update about how my investments are doing.

In The Interest of Full Disclosure…

I am a member of the Lending Club affiliate program, however, the money that I am investing is my own. I have always had a policy of not promoting any product or service on my blog that I don’t truly believe in, and I truly believe in Lending Club (and the concept of peer-to-peer lending in general). I think that Lending Club offers a really exceptional service to both borrowers and investors and would invest with them even if I wasn’t an affiliate.

So there you have it! I’ll do a brief post on November 1st about my experience opening the investment account and then a monthly update from there.

What are your thoughts on peer-to-peer lending? Have you borrowed or invested with Lending Club? If so, please share your experience!


Comments

Getting My Feet Wet: Investing With Lending Club — 27 Comments

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  1. While I understand your desire to start out small, having $100 is not really a valid test. If your G-grade note defaults quickly you will lose 25% of your investment and will no doubt deem Lending Club to be a bad investment. I have no idea whether this is even possible for you but I would urge you to add $100 a month for several month in order to give Lending Club a valid test. Once you get to $1,000 you start to become somewhat diversified but with four notes you could easily be unlucky and lose a good chunk of your money.

  2. I agree with Peter. You most likely will have very bad impression of P2P lending if you just invest in four loans. I have read similar low volume experiments by other bloggers with nothing but negative impressions in the end.

    I have a rule of thumb: for every 50% loss in your portfolio, rest of your portfolio need to gain 100% to just break-even. That means, early default of one loan in a four-loan portfolio (25% loss), you have little to no chance of breaking even.

  3. Risk and return go hand in hand. I think that its much riskier than what they let on or you wouldn’t be paid those interest rates. I think you should let banks be banks and just invest your money in a corporation or municipality. I see people’s credit and its very doable that somebody with a bankruptcy just 2 years ago could have a 680 credit score. That means that 2 years ago, they called it quits on all unsecured debts. I think that its way too risky for the average starting out investor.

    • Thanks for your input! I very much disagree with you, though. Lending Club has a very good track record when it comes to ROI (I can share more stats if you’d like) so I don’t think it’s too risky at all. I also take issue with the idea that peer-to-peer lending doesn’t have its place in the credit market. Of late, banks have been making very, very poor decisions about who to lend to and have taken advantage of unqualified borrowers. Thus, my ability to trust banks (or corporations, for that matter) has been significantly diminished.

      Again, all investments carry risks, but I’m much more inclined to take that risk without involving banks or corporations at the moment, out of sheer desire to thumb my nose at both.

  4. I use Lending Club and have been very happy with my returns. Like some of the other posters commented, I would avoid the G note. It isn’t worth the risk.

    The screens I use for my potential lenders is they they have had their income and other information verified as well as no bankruptcies ever. Currently I have 57 loans varying from A-D. In recent months, I have cut back on the C and D loans. My Net Annualized Return is 13.55%. I have had some people pay off their loans, no defaults (yet!), and a few times were lenders went into Grace Period.

    Good luck!

    • Investing a small amount in the G note is more to satisfy my own curiosity about its return than anything else. I have my eyes wide open and know that I’m likely to be let down, but I just can’t resist rolling the dice!

      • A small amount as in just 1 singular 25$ note? That isnt going to hurt anymore. Check out and see where defaults start to occur, I read it starts to happen toward the end of the 1st year.

      • A small amount as in just 1 singular 25$ note? That isnt going to hurt anymore. Check out and see where defaults start to occur, I read it starts to happen toward the end of the 1st year.

  5. I have been working with lending club since april, and I really like it. I think it’s plenty easy to use, and they screen pretty hard. Though I think I’m in the minority, I have had 1 paid back in full, and no defaults up to this point, on a return of 11.5%

    I think peter makes a good point about default, and I’d second against the G grade note. Those have a tendency to default more than others, according to the stats posted on lending club. I only started my lending club account with 300 bucks, and people said that wasnt enough, in case one defaulted – I lowered that risk by investing in mostly a, b & c grade notes for my first time.

    Good luck!

  6. I looked into this some, and was very interested — I think it’s an intriguing option. But as an Ohio resident, it seems I’m unable to lend through the sites I looked into (Prosper and Lending Tree). At least based on what I’ve read.

  7. I can only trade notes based on the state I live in so Lending Club doesn’t appeal to me since I would rather learn about other investment options available. If I could originate or “invest” in notes I might be more interested

  8. I’ve read several other blogger’s experiences with Lending Club and I haven’t read or heard about anyone having a “terrible” experience. I’m really interested in seeing the results you have over time. I’ve thought about investing a small amount to see how things go. With the interest rates so low at the banks, I figure even a small investment would yield me greater results then what I’m currently making in my “high interest” account.

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