I was looking at my Lending Club account a couple of days ago and I realized that I passed a milestone… I’m averaging over 7% on my Lending Club loans. It’s not just a little over 7% either, it’s a whole 7.2%.
When I did my May 2012 Lending Club report, I had a 6.71% return. That’s a pretty good gain in a short time. I wish I could tell you that I found some fantastic secret in that time, but I didn’t. In fact, I had largely ignored my Lending Club account leaving some dead money in it. That’s why you see that I have $300 in funding when I should have put it to work awhile ago.
What is actually happening is that my A and B loans that I made a few years ago in hopes of having minimal risk are coming off the books as they get paid in full. After looking at the global Lending Club returns for each grade, it became clear that those low risk loans were also by far the lowest returning… even when accounting for defaults. The E and F grades return an average of around 13% after accounting for defaults according to Lending Club. A full quarter of my loans are still in the A, B, and C grades. I have another quarter in D grades which return about 10.5% on average. I then have 40% in the E grade which returns 12.31% on average.
I only have 9% in the F grade which returns 13.5% on average. The reason I have so few F grades is that I like to lend to people with 700+ credit scores or above. It’s hard to find someone with a 700+ credit score who is willing to get a F grade loan and pay over 23% interest. In fact, I don’t even know how I had 9% in that category. However, armed with the knowledge that F grade loans perform so well, even after accounting for defaults, it’s something that I’ll look to add exclusively to my Lending Club portfolio for awhile.
In the short term, the 7.2% return is making a great case for getting a bigger slice of my portfolio… even if we don’t know if that rate of return is trustworthy. I didn’t expect very good returns in this economic environment of high unemployment. I am happy to be proven wrong. I’m strongly considering opening up a Roth IRA account with Lending Club to try it from scratch (no A and B loans bringing down my average returns) in a tax-free environment. I have to look into how that works at Lending Club.
If this sounds like something you’d be interested in, sign up for Lending Club today and start earning more interest.
what is Lending Club become a Ponzi scheme later ? they might doing good NOW, do not know about the future ? it is not a bank, no FDIC.
do this type of company has over sight from the government ? from FDIC, or SEC. do not know what to make of it ?? even though it has over sight from Govt, it could still turn into a Ponzi scheme later.
you give them the money, they promise you a above average return with the risk that you are taking, sound familiar anyone. I am not saying that the problem would happen now, but it could blow up on you years from now such as Allen Stanford , he is selling CD ( certificate of Deposit ) and promise a 5% return as well and go on for Years and Years, i believe it start on 1985.
Lazy Man says
Lending Club isn’t a Ponzi scheme. You lend money to other people so that they can use it in a business or pay off their debts. Lending Club isn’t reinvesting it in a Ponzi-like way. The future is always unknown and the returns are NOT guaranteed… I just gave some averages and I pointed out that calculating a rate of return is difficult or perhaps even impossible.
It does have oversight from the SEC, but again, it can’t turn into a Ponzi scheme, because the system is open and transparent.
Tony @ A Young Investor says
I’ve heard about this from many people. But my big question is, if a lot of people start investing in Lending Club (lending money), won’t that drive down returns?
Lazy Man says
I suppose if there are a lot of people lending, the best loans may fill up quickly, but the lending rates don’t get bid downward like a reverse auction.
When a borrow requests a loan, Lending Club assess risk factors and rates him/her on a grade from A to G. These have firm interest rates associated with them. For instance if I lend money to a grade F person, I think I get 23.63% in interest for that loan. It doesn’t matter if another lending person would want to give him/her money at 20%. There is a rather large default risk to take into account, so getting a 23% return is very, very, unlikely.
I’ve read quite a bit about Lending Club on your site and several others. What a great idea whose time has come. I was excited at the idea of opening a Roth Account with Lending Club too and then I learned that since we live in Ohio, we are not allowed to invest with Lending Club. I wonder why Ohio’s laws are different than the states that allow their residents to invest with lending club?
Lazy Man says
I think there are a few states with those differences. Lending Club is a very new investment vehicle, so perhaps Ohio is trying to protect it’s people from making any mistakes until it is more proven.