Are you considering opening a peer-to-peer lending account with Lending Club? Lending Club (NYSE: LC) is the US P2P industry leader today. To summarize, P2P lending is a method of debt financing that utilizes technology and big data so people can borrow and lend money from one another through an online platform without using a traditional bank. This genre of investing has gained popularity in recent years. Is P2P lending with Lending Club a good idea today? Let's take a look.
Pros and Cons Of P2P Lending With Lending Club
Is Lending Club a good P2P lending platform for you to invest in? Here are several key pros and cons to consider.
PROS
- Industry leader: Lending Club has facilitated more than $35 billion in loans. They're the US leader and have blown past the competition, most notably Prosper.
- Publicly traded company: They are a publicly traded firm listed on the New York Stock Exchange (LC) and are heavily regulated by the SEC. You can closely monitor the stock if you wish and track the health of the company both before and after funding your account.
- Easy to diversify: Lending Club makes it easy to diversify your money across multiple notes on their P2P platform.
- Wide selection: Easily filter and select notes on the platform by loan type, credit score, purpose of loan, etc.
- Automated investing: If you don’t have the time or know-how, Lending Club can do the investing for you based on your own parameters.
CONS
- Illiquidity: If you want to take your money out, you have to wait until each loan comes due.
- Taxed At Ordinary Income: This is the most annoying issue for high income investors.
- 1% Annual Fee: Lending Club charges 1% annually per note you own within the marketplace.
- Unsecured Debt: Unlike an auto or home loan, this debt is unsecured. Lending Club cannot collect against an asset if the borrower defaults.
My P2P Lending Philosophy
My annualized return with LendingClub is roughly 7.43% since 2014. I'm satisfied with my P2P lending returns, as it is a way to diversify my overall investments. So far in 2018, my P2P lending investments are outperforming the S&P 500.
I have a P2P lending philosophy that is comprised of three principles.
- I don't lend to people who have a history of more than two delinquent payments. Hardships can happen to anyone, but three strikes and you're out.
- I don't lend money to people who want to buy stupid stuff they don't need. There's a big difference in wants versus needs, ex. a sail boat vs medical bills.
- I primarily select notes for debt consolidation. Credit card interest rates are absurdly high. It's only wise to consolidate your debt to a lower interest rate if you can. It also feels good to help borrowers save money. The average credit card debt per household is around $15,000 according to the Fed.
More Tips On P2P Investing
I recommend selecting higher quality borrowers in the A and B loan grade. The returns are lower, but there's much less risk of default.
Look for borrowers with a FICO score of at least 680, a debt-to-income ratio of at least 30%, no delinquency history, and positive reviews.
Don't put all your money into one note. The more notes you have, the better. When I spoke with Lending Club, their team said investors with a 100 investment portfolio, would have made money during the financial crisis vs. -50% in the S&P 500.
Since P2P lending is an alternative investment, consider limiting your exposure to no more than 20% of your overall investment portfolio. My personal limit is roughly 10%, which includes real estate crowdfunding, venture debt, and private equity.
Lending Club Investing – Your To Do List
I've investing in P2P lending since 2012. Here's a helpful to do list I've put together to help you get started with P2P lending with Lending Club.
- Check eligibility. P2P lending is an alternative investment so not everyone is eligible to fund borrowers. Eligibility to be an investor depends on your state of residence, and sometimes your income too. Check Lending Club's website for the latest requirements.
- Open a free account and explore the platform. It's worth signing up with Lending Club and checking out the platform for free on your own. They've been around since 2007, and I foresee them continuing to grow over time. With interest rates rising, returns should also rise as well.
- Start small with high loan grades. If you’re a cautious, low risk investor like me, and are still wondering is P2P lending with Lending Club a good idea, start off with just A rated notes to get comfortable with the process. You’ll still make great returns and can diversify into lower rated notes over time.
- Utilize notification settings and automation. Avoid the mistake of cash just sitting in your account by utilizing notifications when your notes expire or are paid off in full. You can also use Lending Club's automated features to keep your account fully invested.
- Setup recurring transfers to fund your account. The more you regularly fund your account the better. It's easy to forget to invest each month when you have a million other things going on in your life. If you have the cash flow, automating is a great way to go.
About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $200,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.
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