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Lending Club Reviewed

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Over the last 18 months, I've spent more than a few words on peer-to-peer lending. Most of that has been about the first to market Prosper. Readers have occasionally asked me about Lending Club. I couldn't give them my opinion for a few reasons. Lending Club launched the site as a Facebook application and I'm not an active user. Beyond that, I questioned the wisdom of mingling financial information with that of a social network whose main rival seems to be MySpace. Lastly, Prosper performs the same function, so I didn't see any reason to jump into a new system.

So why am I writing about Lending Club now? Lending Club will give anyone who signs up via this link $25 for free just for opening an account with less than $1000. If you open an account with over $1000, you'll get $50 of free money. (For full disclosure, Lending Club will be giving me $25 or $50 as well, which is nice of them.) Secondly, Lending Club is now available to people who don't belong to Facebook. It has been that way for a little while. Finally, Lending Club released a couple of pieces of news earlier this week.

Lending Club has 115 active loans to the tune of $1.35 million (as of December 9th). As of yesterday, they have a total of 489 loans for $3,525,660. In contrast, Prosper has funded over $100 million in loans. Lending Club is growing fast, pointing out that it's nearly doubled the number of active loans in just a few weeks. It's posed to grow even faster due to the second piece of news it released this week. Lending Club is now able to accept borrowers from the whole United States. Prior to this week, people in California were unable to borrow money from Prosper. By going nationally, they've opened themselves up to a new audience of an estimated 108 million people.

The returns of Lending Club look intriguing. They are touting an average return of 12.23%. The borrowers have impressive stats such as an average FICO of 700 and an average 12% debt-to-income ratio. I haven't investigated the math behind the 12.23% number, but the sample size is small and history is short. It's worth keep an eye on. For now, I've started an account with a little bit of money, less than $100 and will give Lending Club a try.

[Editor's note: Lending Club informed that I got some of the numbers wrong. That's what I get for reading too quickly. I've edited this post to fix them.]

Last updated on July 29, 2011.

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P2P Lending

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11 Responses to “Lending Club Reviewed”

  1. Looks promising. Someone to compete with prosper could keep the marketplace of lending clean and even.

  2. Tom says:

    I also recently joined Lending Club. I think a bunch of former Prosper lenders are also lending on Lending Club. Curiosity drives some of it and, of course, it’s also nice to get the free sign-up bonus.

    Competition is good for the P2P lending market. It will force all the players to improve their offerings.

  3. RateLadder says:

    I agree competition is a good thing… I am also trying lending club.

  4. Cheapster Bob says:

    I find the stats a little queer to say the least. My credit rating is in the high six hundreds and the last loan I got from my Credit Union was for 5 percent interest. Even with the credit crunch I can’t see my next one being over 8 percent.

    Why would someone with impeccable credit want to pay over 12 percent interest on a loan when they can get a better rate?

    This is the mystery of the lending sites and their extravagant statistics. Is the draw of these sites the fact that you do not have to supply any collateral??

    As always, I remind the readers that only extra money you have to play with should be going into these types of investments. First money always goes into 401 or Roth, second into emergency savings account, third goes into your companies stock purchase plan for 15 percent minimum return and THEN anything left over goes into places like Prosper and Lending Club.

    Also be sure to contact the websites directly and demand current default rates.

  5. Lending Club is quite interesting from a lender’s point of view. I certainly like the ability to spread my risk across $25 loans. This can cut risk credit risk nearly in half on the same total investment versus Prosper which requires $50 investments on each loan.

    I completely agree with Cheapster that there are many investments that should be considered before P2P lending. If you are completely unfamiliar with Lending Club’s investment procedure, I recommend the video I made while selecting my first loans. Also, the potential bonus for a new lender is much higher than you mentioned.

    Lazy Man’s affiliate link to Lending Club can also bring you that thank you.

  6. Lending Club is quite interesting from a lender’s point of view. I certainly like the ability to spread my risk across $25 loans. This can cut risk credit risk nearly in half on the same total investment versus Prosper which requires $50 investments on each loan.

    I completely agree with Cheapster that there are many investments that should be considered before P2P lending. If you are completely unfamiliar with Lending Club’s investment procedures, I recommend the video I made while selecting my first loans. Also, the potential bonus for a new lender is much higher than mentioned which could increase any lender’s return.

    Lazy Man’s affiliate link to Lending Club can also bring you that thank you.

  7. Cheapster Bob says:

    Are you buying a piece of a loan for 25 dollars or is it a straight out 25 dollar loan? To me you have a huge chance of someone paying back the loan early nearly every time. In other words they would just be using your money for a cheaper pay day loan.

    I’m not sold on these but will keep an eye out for more Lazy Man articles in the future as new investment models are always interesting.

  8. Sorry for the earlier double comment… Cheapster, you are lending a $25 piece of a larger loan. Loans are several thousand dollars.

  9. Cheapster Bob says:

    Thanks for the additional information PLP. That is a better scenario then I had previously thought as I like the idea of shared risk via diversification.

    If these sites start using an interest bearing savings account/MMA for money sitting around this could be a good deal.

  10. FlyFishingAce says:

    No return on idle cash, Cheapster Bob. Any cash in a member’s account is not earning a return. I believe that is a big weakness of these programs. While one’s money is being placed in a loan portfolio, which may take a week or more, the money is not earning a return. And of course, when monthly loan payments are received, they go into the same non-earning cash account. In addition, it takes two to four days to withdraw funds, more interest lost on the funds.

    Ironically, Lending Club promotes the desirability of automatically re-investing investment earnings. Here is a quote from their 12/21/07 blog: “Automatically reinvest ““ Set up your accounts so that any interest or income you receive from investments and savings are automatically reinvested for you. This way you will start compounding your investments and they will grow at a faster rate.” But surprisingly they fail to provide this valuable investment strategy for their members. Prosper doesn’t pay interest on idle cash either, siting regulatory prohibitions. Yet PayPal seems to be able to place their members’ cash into a MMF and pay a very competitive rate to boot.

    The bottom line is that the quoted loan portfolio returns must be netted against the lost earnings on any idle cash Maximizing ones returns would take lots of time and effort withdrawing funds or promptly re-loaning funds over $25. It would be labor intensive at best and still would fall short of an effective re-investment strategy.

  11. Richard Guzzard says:

    I see that these are old comments so I thought I would add some May, 2010, info. I have been using LendingClub for one year. I invested $4,000, and received a return of 9.84%. That includes a couple of defaults. Six loans were paid off ahead of time. I am very pleased with LendingClub.

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