My Lending Club Experiment

Since my plan is to become a full-time investor (early retiree, capitalist, lazy bum, or whatever you choose to call it) I am constantly searching for new methods to stretch my capital as much as possible.  For the past 10 years, I’ve kept 90% of my money in stocks – both individual and mutual funds.  I’ve kept the remaining 10% in cash.  That strategy has had reasonable results, although not stellar given the overall growth of the market since 2000.

Recently I’ve been investigating 4 new investment strategies:

  1. Bonds
  2. Real Estate
  3. High-Yield Dividend Stocks
  4. Peer-to-Peer Lending

Today I’m taking the plunge into peer-to-peer lending, by investing $5000 into a diversified lending portfolio at LendingClub.com.  I will get into the details of why I feel comfortable with Lending Club in another post, for not I’m going to focus on describing my initial investment.

Lending Club offers a variety of ways to invest your money, ranging from AA-rated loans, where the returns range from 6-8% with very low risk to G-rated loans, where the returns sit around 22% but have a much higher risk of default.  But what I really like about Lending Club is that it has a minimum Note purchase of only $25.  This allowed me to take a small initial investment of $5000 and diversify the risk across over 100 Notes.  Now, if I have a default or two, it will not be a big deal, I’ll still do better than most investment opportunities offer, like dividend stocks.

Because diversifying is so popular (and for good reason!), Lending Club makes it very easy to do this without having to spend hours on each inidividual note.  They have created 3 packages: Low-risk, low-yield; medium-risk, medium-yield; high-risk, high-yield.

Since I’m risk-tolerant, I went ahead and put in $2500 into the medium risk and $2500 into the high-risk.  Here is what it looks like:

Medium Risk:

 

and High Risk:

Over the course of the next several months, I’ll be documenting my Lending Club experiment on this blog.  I’ll likely increase my investment to $10K soon, with some low-risk investments as well, so I can better break down performance across loan types.

If you are interested in getting started with Lending Club, click on the banner below.  Using that link should give you an initial $50 bonus, which is something I was not aware of when I opened my account. :(


Good luck!  And if you join, make sure to follow this blog so we can discuss performance results.


11 Responses to My Lending Club Experiment

  1. Mike G says:

    Hey BNL – I’ve been on Lending Club for 6 months now and although I did have one default, I’m seeing 11.7% annualized return.  I know there are a few REIT’s with similar dividend payouts, but LC seems to have way less risk.  Good luck with your experiment.

    • Thanks Mike,
      I hope to have similar results.  If I start to see proof that I can expect those types of returns consistently, I will probably build up to 5%-10% of my total invested assets into Lending Club

  2. WOW just what I was looking for. Came here by searching for lending
    club

  3. Charles says:

    One thing about Lending Club that you may want to be aware of is that if they go bankrupt then you do not own the notes. So there is potential for you to lose your entire investment with them. In that way, it is like investing in a SINGLE stock (i.e. investing in Lending Club stock) which effectively eliminates the diversification you may think you’re getting.

    • Charles says:

      oh very entertaining blog by the way.. up to this point at least :-)

    • Yes, and no.

      There is definitely risk that if Lending Club went out of business, then you would see a significantly reduced return, quite possibly a negative return. But the notes wouldn’t just disappear with the borrowers walking away debt free. Lending Club has set up provisions for protecting investors if they were to fail. It’s not ideal, but it’s also not the same as investing in a single stock.

      Here’s more: http://kb.lendingclub.com/investor/articles/Investor/What-happens-if-Lending-Club-goes-out-of-business

      • charlie says:

        That’s a nice feel-good statement on their website but it has no legal bearing. There would be no motivation nor legal requirement for Lending Club to use a backup service should they go bankrupt. Lending Club owns the notes, not you. Should they need the money they can legally sell the notes you’ve put your money in and you would have no recourse. You’re banking on Lending Club staying solvent. In effect your invested in them as a company.

        That being said, if it were available in my State I would likely risk up to 5% of my portfolio in them. But I would consider that like a 5% investment in a single stock.

  4. charlie says:

    from the link you posted:

    “If the underlying loans are determined to be part of the Lending Club’s bankruptcy estate, PFSC may not be able to make payments on the Notes.”

    • charlie says:

      it’s not a matter of “IF”. They would obviously be determined to be part of Lending Club estate by any halfway competent attorney.

    • charlie says:

      In other words, just as with investing $ with a single stock, there is an undeniable risk (as small as it may be) that your investment goes to 0. That was my point in comparing it to investment to a single stock.

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