It's been a long time since I've written about Lending Club. Truth is that I've been a little disappointed by the peer-to-peer lending space. I was an early adopter and I got burned. I put some significant money in Prosper and bid on a bunch of sub-prime loans. I might as well been in the mortgage business, right? (Is it too early to make those jokes?)
I realized that I may have judged the entire industry too early. After all, it was just a baby of a couple of a years old. No one knew what worked and what didn't. After the Prosper debacle, I decided to give Lending Club a chance with a smaller amount of money. I also changed my strategy completely and started to lend the money ultra conservatively.
What were the results?
Well, I didn't lose money like I did with Prosper. To date, I've made a Net Annual Return of 4.78% on my money. I was pretty depressed by that number because Lending Club says the average is 9.68%. I am in the 16th percentile. That means 84% of Lending Club investors do better than me. As my wife can attest, sometimes I can get a tad over-competitive. With the information that so many people are doing much better than me, combined with the fact that on average they are doing much better than me, I was down on Lending Club.
It recently occurred to me that maybe I'm looking at it wrong. Perhaps Lending Club is better at coercing the people with riskier profiles to pay. (I going to take a minute to imagine them sending out emails of broken thumbs.) If this is the case, then perhaps I was doing myself a disservice by being so conservative. This seems to be true when you look at Lending Club's statistics:
The average return on A grade loans is 5.55%, while the G grade loans are 13.55%. As you can see, this factors in defaults. By focusing on the highest of A grades, it seems I was essentially putting myself in the worst performing loans possible.
I think I learned a couple of lessons.
- The first one is to make fair comparisons. While 4.78% looks bad compared the 9.68% that is Lending Club's average, 4.78% is pretty good compared to what I'm getting in my savings account. (Note: Lending Club investment opportunity is more like the bond market and obviously has risks that savings accounts do not. It is an entirely different investing vehicle with an entirely different purpose.) Even if the average was 4.78%, it is a better place for some of my cash - while still ensuring that we have a six-month an emergency fund in liquid. However, the potential to make 9 or 10% on my money in this economic environment is nice. That would compete with the average for stock returns.
- The second lesson I learned was not to discount something too early. I wrote off investing in peer-to-peer lending because of an initial bad experience - this is especially true because the failure was due to my own actions. If I had gone back and asked, what I could have done better earlier, I would have done better.
In the end I'm signing up for Lending Club was a good move for me. If it sounds like something you'd want to try, sign up for Lending Club here.
16 Responses to “Revisiting Lending Club”
Next: Happy Tax Pre-Preparation Weekend (and Personal Finance Links)