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Revisiting Lending Club

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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.

Last updated on April 13, 2011.

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16 Responses to “Revisiting Lending Club”

  1. Andy Hough says:

    I’ve managed to get an 11% return from Lending Club so far even though I had one loan charged off. My loans were spread out from A to E borrowers with most being B or C.

    Everything I have invested is from referral bonuses so I don’t really have much risk. My loans are almost all paid off now and I’ll probably put a little more money in there.

  2. Peter Renton says:

    Good realizations here. Many people make the conservative choice and stick with A & B loans but that puts an upper limit on returns. I believe that E is the sweet spot with a few D’s and F’s thrown in as well as the occasional C and G.

    I have been investing for 18 months on LC (and 4 months on Prosper) and in my taxable account on LC I am getting 7.85% because I made some mistakes and I focused on A and B loans. I also moved my wife’s IRA to LC last year and that is returning close to 11%. For what it’s worth, I write a blog dedicated to p2p lending and just today I did a guest post on the Investor Junkie blog about how to improve your ROI with p2p lending. Don’t want to be presumptuous and put a link in here but let me know if you are interested.

  3. David says:

    Is this interest calculated as long term gains or short term gains? Verizon pays 5.5% yield. Just put your money in to buy the stock and you get your dividends regardless stock goes up or down. Sure there’s a chance they decrease the dividends but still higher payout than what you’re getting now. Also I’m thinking you pay short term gain interest on your returns like what you’d pay for interest from the bank. Altira grp (MO) which has been around for a while pays 6.2% dividends. Stock doesn’t move much at all, good div play.

  4. I was going to say that at this stage in the game for me, such a move might prove a little too risky, but then I realized my latest post on my site today was about me trying to recreate the monkeys throwing darts wall street journal experiment based on stock picks by my dog, so I probably have no room to even talk.

  5. Lazy Man says:

    If they lower the dividend and the stock goes down, it won’t be performing as well. Plus, the average in Lending Club is a lot better than the dividends you mention.

    Additionally, my Lending Club investment is made up of many, many individual loans, which provides a lot more diversification.

    Finally, they are different asset classes and have different roles in your portfolio. I think you can divide money amongst each.

  6. Lara says:

    I also started investing in super safe loans like As and Bs until I got my portfolio to a big enough size ($5,000 in 200 loans) to start sprinkling around some Cs, Ds, Es. I’m up to 8% returns after 2 years.

  7. Peter Renton says:

    @David, My understanding is that interest from Lending Club notes (those issued after Oct 2008) are taxed as ordinary income. So you don’t get the cheaper dividend tax rate. With some careful planning I think you can get an interest rate of 10% on your money at LC diversified among any loans, which is a higher return than most dividends even with the higher tax.

  8. Hey Lazy Man,

    I’m not sure how much you have invested and how many loans you have. The issue with Lending Club is IMHO they mis-price some of their loans. I believe A, B loans in some cases are priced too low for the risk. While other lower quality loans are priced too high for the risk. As others stated you should go with the risker loans but have many of them. This helps spread out the risk.

    The other issue someone else mentioned is the taxable rate of LC notes as ordinary income. So your 4.78% return is not really the same as other investments (say dividend stocks).

    I currently have a 10.79% return after 18+ months, over $5k invested and over 200 notes.

    For those who care, I post quarterly updated and discuss in detail my experiences and go into details about how I invest. You can start my visiting my first post:


    As Peter Renton mentions he also did a post on how to increase P2P investing returns:


  9. Lulu says:

    I was also fed up with Prosper but did get a better return on Lending Club. Right now my average is about 8% so I think that is very good. I also have been getting enough in repayments every month to be able to fund a new loan so I am just reinvesting the money.

  10. Steve Rabago says:

    I love the idea of sending photo’s of broken thumbs – we might want to add that as an option for our customers. A little ZimpleMoney update: we have broadened our family and friend offering and are now providing services to independent auto dealers making loans to customers, that site is called ZimpleAuto.com. We are helping over 1,000 members manage about 1,000 contract totaling over $65 million in combined assets.

    All the best!!

  11. Peter says:

    I’m currently making just under 10% on my account with about $2000 in there right now. I started pretty conservative as well, but then I was convinced to give some of the riskier loans a try by some other bloggers. My return has been slowly rising, and to date I have yet to have a default on any of my loans, although a couple have been late on their payments a couple of times.

  12. I agree with Peter’s thoughts that the income would be taxed at ordinary income. My thought it that it’s simply interest income, not a capital gain and most certainly not a dividend.

  13. Ryan says:

    Have any of you read the prospectus? I was reading a forum and someone mentioned it, so I looked into it. They say that they “have not been profitable since…inception.” They talk more specifics about how much deficit they are in. This got me scared so since reading that I haven’t put any more money in there which is a bummer because I really like the whole idea. (And, who doesn’t enjoy high returns like you get there??)
    Just wondering what people’s thoughts are and what people know about this.
    Here’s the link to the prospectus: https://www.lendingclub.com/extdata/Clean_As_Filed_20110107.pdf

    What I was referring to was on page 19-20.

  14. Lazy Man says:

    There’s a lot of expenses in creating a product like Lending Club. For instance they need people to write the software, lawyers to get the patents, business development folks to form partnerships, etc. Lending Club only makes a small percentage on each loan, so it takes a number of loans before they are profitable. Ebay and Amazon had big losses when they were started too.

    It looks like, “All loans made by WebBank, a Utah-chartered Industrial Bank.” The loan platform is seems to be run by FOLIOfn which is a pretty reputable company.

    I’ll try to get a representative from Lending Club to comment itself.

  15. Hi Ryan,

    I am aware of this. They are a volume play and need a specific amount of customers (on both the lending and investing) before they can be profitable.

    They also have received more VC money in the past year. I believe some of the expenses can be turned off should new financing in the future not occur. I believe my calculation on burn rate rate was a few years (3-4 if my memory is correct).

    In addition, the prospectus states they do have a backup manager to handle the existing outstanding loans should this situation occur.

  16. Hey Lazy Man:

    It’s good to have you back! We have many investors in the 4-6% range who are extremely happy with such returns. As Peter Renton puts it above, investing in only As and Bs definitely lowers your risk but it also puts a cap on what return you can achieve.

    Ryan raises a concern about profitability: at the current volume Lending Club generates enough revenue to be profitable if we were under any pressure to increase profitability over growth. It is not the case right now, and we’d rather incur the extra expenses that insure continued growth and scalability of the platform. We have $17M in the bank and considerable access to more capital if need be, and therefore are under no pressure to prioritize profitability over growth.

    Keep up the good work covering the space.

    Rob Garcia
    Sr Director, Product Strategy

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