On Our Lending Club Anniversary We’ve Recieved 12% Interest

Posted By Matt on May 16, 2013 | 0 comments

I heard about Lending Club from a good friend who had been investing there for about six months. His returns had been nice so I decided to give it a shot. Katy and I invested $2500 and I’ve been astounded at the interest rate I’ve received. May 4th marked the one year anniversary of opening my account so I thought I should write about how it is going. We’ve received 11.94% interest on our investments. That’s pretty epic! The S&P 500 has returned 5.44% per year over the last 5 years.

Lending Club is a peer-to-peer lending marketplace. Anyone who wants to borrow money can go apply for a loan on the site, then other people browse the list of applications and pick loans they want to fund. The lenders can invest as little as $25 in each loan. So for a $10,000 loan, there might be as many as 400 lenders. This is great because it lets the lender diversify. The term of the loan is either 3 or 5 years. Depending on the risk and term, the interest rate varies between 6.78% and 27.99%. Borrowers can apply for any reason – sometimes to pay of high interest credit cards, sometimes to do home improvement – but they have to pick a loan purpose, and they have to go through standard credit and employment checks. Lending Club manages all of the collections and verifications for less than 1%. (Compare this to the average 1.25% mutual fund.)

For my account I decided to fund loans with one kind of purpose: debt consolidation. I like this because logically, it is a great reason to get a loan. The person has high interest debt in credit card payments and can save tons of money by consolidating to a lower interest rate. Eliminating credit card debt is also something I feel strongly about. I like that reason better than, say, going in debt to buy a car, or get married, or do a home improvement project. There are probably circumstances where taking out a loan for those purposes is a good idea… but I don’t want to invest in them. (Use the comments below to correct me if you disagree.)

Lending Club’s Browse Notes section has pretty robust filters. You can narrow by rate, purpose, employment length, delinquency history, credit score, and many more. This lists each loan and lets you view all of the details. You can also ask template questions, like “why are you carrying such a high revolving credit card balance?” which the potential borrowers can answer in their own words. You then tick off check boxes next to the loans you wish to fund, and enter an amount for each loan ($25 is the default.) After a few confirmation screens you’re done. You’ll receive principal and interest 30 days after the loan is fully funded.

So far, I’ve had three loans charged off and one is currently late on a payment. The rest are paid on time and in good standing. In fact, over the last year, I’ve received payments of over $1200 (there’s no prepayment penalty and 11 borrowers have paid their loan off in full.) I’m currently getting $87 in payments every month, which I usually reinvest.

I have withdrawn $100 on four separate occasions, just to make sure I could. The process is easy and fast. They do direct deposit into your bank account.

Overall I’m thrilled with Lending Club. I will probably invest more with them in the future. The only thing holding me back right now is that it locks your money up for the life of the loan. If you are at risk of needing the money, it probably isn’t a good idea. But there is a feature powered by FOLIOfn that lets you sell off your notes if you need to. I haven’t tried it.

EDIT: It’s now been 15 months, I’ve withdrawn $500, and our annualized interest rate is 12.09%.