Lending Club is just bouncing along in 2020 and not doing that great. The P2P industry is in a bit of a funk, if the share price is any indication. In fact, I updated my best passive income investments ranking and downgraded P2P to last.
But here's an overview anyway.
Are you interested in peer-to-peer lending as an investment? Lending Club is the US industry leader and has facilitated more than $50 billion in loans.
To start off, let's make sure you know the basics of this investment genre. Peer-to-peer lending (P2P) is a method of debt financing that has gained popularity in recent years. P2P platforms utilize technology and big data so people can borrow and lend money from one another without the hassles that come with using a traditional bank.
Lending Club is the premier US peer-to-peer (P2P) lending platform on the market today. The company is publicly traded (NYSE: LC) and is heavily regulated by the Securities & Exchange Commission. The Lending Club platform offers various investment and retirement accounts to qualified investors for as little as $1,000. Historical returns have averaged 3–8% per year and an impressive 99% of portfolios with 100+ Notes have seen positive returns.
Lending Club was founded in San Francisco in 2007 and has facilitated more than $35 billion in loans so far. I've lived in San Francisco since 2001 and have met with their senior management and other personnel multiple times since the financial crisis.
They've had some ups and downs, but managed to survive the downturn. Lending Club has put a lot of effort into growing their lending platform in recent years and pulled ahead of its largest competitor, Prosper, which failed to go public in 2005 and is struggling.
Recap Of Lending Club's Borrowing Process
Here's a refresher on how the company's borrowing process works. Lending Club screens potential borrowers and services the loans, assigning a grade to every approved borrower using credit and income data. Borrowers must have a FICO score above 660. Over two-thirds of loan applications are rejected by Lending Club, which should provide some comfort to investors.
After the individual borrower is approved, they are then graded, which determines their fixed interest rate. Getting approved does not mean each borrower is default-free. Borrowers with lower grades have a higher risk of default and can default, which is why a higher rate of return is required. Loans are three to five years long and range from $1,000 up to a maximum of $40,000. Rates are competitive when compared to traditional banks and start as low as 5.31% APR.
Lending Club Rates By Loan Grade
Here are the latest LendingClub base rates for borrowers, and conversely, what you can potentially earn as an investor in the loans. They range from A1 to E5. Lending Club removed grades F1 through and G5 in 2017 due to an increase in prepayment and delinquency rates on those loans. The lower the loan grade, the higher the potential return for investors. However, lower grade borrowers have higher default rates, which is why it's important to have a diversified lending portfolio.
How Is Lending Club Doing In 2018?
The company beat analyst expectations for earnings in the first quarter. Analysts were expecting a loss of 1 cent per share, but results were positive earnings of 1 cent per share. They originated more loans while transaction fees rose 12.7 percent. Revenue from the sale of loans came in at $12.7 million, a strong lead over $1.9 a year earlier. Total revenue was up 22% to $151.7 million. Meanwhile, Lending Club originated $2.3 billion in loans, up 18 percent from a year prior.
Some investors have been cautious on the company since its founder was ousted in May 2016. The industry has faced criticism for loan quality and the difficulties of growing at fast pace. And the U.S. Federal Trade Commission sued Lending Club in April 2018 for allegedly overcharging consumers and misleading them on hidden fees. CEO Scott Sanborn addressed the lawsuit on the earnings call, saying, “We believe our practices are currently in compliance,” and that the company couldn't specify if there will be changes to its business due to the lawsuit. He also noted, “We are pleased with our position as we start 2018. Last year was a time of rebuilding and transforming LendingClub.” Keep an eye on the stock and upcoming earnings for updates on how the lawsuit plays out.
As of June 12, 2018 the stock has rebounded since the brief dip that commenced when the lawsuit announcement on April 25th. Q2 earnings are expected to be announced on August 6th. The consensus EPS forecast for the second quarter is $-0.04 according to Zacks Investment Research. The reported EPS for the same quarter last year was $-0.06.
Lending Club Investing Risks
If you're considering being an investor on Lending Club's platform, it's important to know that Lending Club loans are not FDIC guaranteed. Likewise, stock investments and real estate investment are not FDIC guaranteed either. The only investments that are guaranteed are CDs or money market accounts up to $250,000 per account holder.
Here are the main risks to investing in P2P lending.
Inflation Risk: Inflation eats into real returns, but it's a risk all investments face. See: Always Calculate The Opportunity Cost Before Making Any Investment
Fee Risk: Current management fee is 1%, but it could go up or down.
Marketplace Risk: Lending Club could go bankrupt, in which case it may take time to get your loans back. But giving LC is a publicly traded company and has a positive operating profit, the chance of going BK is low.
Callable Risk: Loans can be paid off early, which sucks if you have a performing loan. But it's not so bad if you need the liquidity.
Liquidity Risk: You can't access your money until the loan is paid in full. But you can sell your loan on the secondary market, usually at a discount.
Economic Risk: We could go through another financial crisis, where defaults rise. Hence, the important of investing in higher grade borrowers.
Pros And Cons
The main pros and cons to take into consideration before investing in Lending Club haven't really changed. Further information follows including some important risks you should be aware of when you open an account.
Diversification: You don't want to have all your money in one investment and Lending Club makes it easy to diversify your money across multiple notes.
Wide selection: Easily filter and choose investments by loan type, credit score, purpose of loan, etc.
Automated Investing: If you don't have the time or know-how, let Lending Club due the investing for you based on your own parameters.
Low minimum per note: Investors can invest as little as $25 in each note.
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.
Not everyone can invest — Residents of Alaska, New Mexico, North Carolina, Ohio and Pennsylvania are ineligible. In most states, you must have a gross annual income of $70,000 or more and have a net worth of $70,000 or more. In California, it's $85,000. If your total net worth is greater than $250,000 ($200,000 in California), there is no annual income requirement. The reality is though, nobody really cares or checks because it's an honor system.
Lending Club Investing Strategy
When browsing loans on the Lending Club platform, I recommend focusing on higher quality borrowers in the A and B grade. Although you will receive a lower interest payment, the likelihood of getting paid back increases tremendously.
Focus on high quality borrowers who are looking to refinance their credit card debt. Credit card debt often runs in the 15% – 30% range, which is why to such borrowers, paying 6% – 10% is a good deal.
If possible, 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. Diversify your loans as much as possible too. It's a lot less risky to have a portfolio of 100 notes versus 10. For example, their team told me with a 100 investment portfolio, you would have still made money during the financial crisis vs. -50% in the S&P 500.
To learn more and get started you can open a Lending Club account here as I have done.
Lending Club 2020 Recap
Investing in peer-to-peer lending is a fine way to diversify your investment portfolio as your wealth grows. P2P lending is one of my key passive income investments. Lending Club is the leading US P2P platform today. The company made a lot of improvements in 2017, beat Q1 2018 estimates, but came under scrutiny for overcharging consumers with “hidden fees” in April 2018 in a lawsuit by the FTC. The stock price has recovered since the initial news of the lawsuit but the outcome of the charges is still unknown.
Since P2P is a form of alternative investments, I recommend keeping your exposure to Lending Club at no more than 20% of your overall investment portfolio. I personally keep my exposure to alternative investments at roughly 10%, which includes real estate crowdfunding, venture debt, and private equity.
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 operate.
But honestly, I much prefer the real estate crowdfunding industry. It has a real asset backed by higher growth.
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.
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