$1000 Growing in Lending Club

“Neither a borrower nor a lender be.” — Act 1, Scene 3, Hamlet, William Shakespeare

Ignoring the caution of Polonius (before I earned an MBA, I got a BFA), I’m diving into peer-to-peer lending through Lending Club. This is another investment I am testing out as part of the 2019 Grow Your Dough Challenge.

One of the things that attracted me to Lending Club, was that I liked the idea behind the company. Assuming a perfect world and all goes to plan: the lender deposits money in a Lending Club account, the borrower needs some money for a project or to pay off purchases, so takes out a loan, Lending Club connects the lender and the borrower financially, risk is diversified for lenders by spreading investor money across multiple loans, the borrower is able to accomplish what they need to, and the lender earns his/her money back with interest (minus the 1% Lending Club fee). I love this idea of assisting others. Investing with Lending Club and knowing I am going to help out an individual, just feels different than choosing a company to buy shares in through the stock market.

However, investing in Lending Club requires a stronger commitment than just the one year we are experimenting with for the Grow Your Dough Challenge. As the loan terms run for 36 or 60 months, it can be a 5 year obligation in order to receive payments on the loans. The liquidity of this investment is lower than the other choices I have made for the challenge. I’m also slightly worried about the default rate for loan re-payments. I’m hoping that in a year I am not wishing I’d listened to Polonius.

When starting a Lending Club account, lenders adjust the assumed risk/return (of course, actual results may be different) based on the Note grades and the percentage of each desired in the portfolio. One can choose the investments to be equally distributed across Note grades A through E or create a Custom Mix. I choose to create a custom mix and assigned different percentages for each Note grade. While doing so, it is possible to see the historic return levels for each percentage adjustment that is being made, so the investor can fine tune until he/she feels comfortable. I selected the following mix of Note grades: A at 10%; B at 20%; C at 50%, F at 20%. I skipped the D level, because the way the historical return rate was coming out, the return was slightly lower when adding in a small share of D level Notes than it was with having 20% F level notes. I may readjust these levels in time, but I’m trying these proportions to start.

When I first set up the account, I changed the Investment Amount per Note to be $100, so that I would have $100 in 10 Notes (10 different loans). A few days after signing up, I talked with Patrick from Lending Club, who asked me if I had questions about my new account. He also suggested that I re-consider my per Note allocation. By reducing the Investment Amount per Note to be $25, I would have less money invested per Note, but across a greater number of Notes, which would help spread the risk (and protect me from a larger loss on a loan default). By making this change, in the future, when I receive payments and they are automatically reinvested, $25 will be distributed to each new Note instead of $100.

I was also able to discuss in more detail with Patrick how the collections process worked. Once a borrower has defaulted on a loan, gone past the payment grace period, and the collections department gets involved — then a payment is received late — up to 40% is taken from that payment before it goes to the lender. Here are the fine print details.

“Currently, Lending Club charges investors one of the following collection fees, which is deducted from any amount recovered: 1) Up to 40% on all amounts collected on a delinquent loan (net of legal fees and expenses) to the extent any litigation has been initiated against the borrower, or 2) up to 30% on all amounts collected on a delinquent loan in all cases not involving litigation. Lending Club does not charge a collection fee if no payments are collected, and no collection fee will be charged in excess of the amount recovered. “

– Lending Club Website

There is a Refer-A-Friend bonus for new Lending Club accounts, but the requirements are more rigid than some of the other investing platforms. The lesson with Lending Club is make sure you read the fine print. Once again, I’ll quote the website.

“To be eligible for this bonus, you must: 1) use the link provided … to open a Lending Club investing account, 2) transfer funds to your account, and 3) invest $5,000 or more through the Lending Club platform within 90 days of opening the account. Bonuses can be used solely for investing through the Lending Club platform and will not be available for withdrawal or transfer from the account to which they are credited. A bonus will be awarded as an account credit within 120 days of the opening of each eligible account.”

– Lending Club (Invite Friends)

I opened my Lending Club account a week ago, deposited $1000, and so far $900 has been distributed to Notes. Below is the summary of my account.

Of all of the accounts I’ve opened as part of the Grow Your Dough Challenge, and the investments I have picked, this is the one I am most wary of. It is the one I feel I have the least amount of knowledge of the field getting started and the least control over the investment choices. I am impressed with the amount of information available on the website, the introductory emails, and the proactive customer service. I’ll continue to educate myself on peer-to-peer lending and we will see if Lending Club can surprise me with a good return (or any positive return!?) by the end of 12 months.