My Lending Club Interview - Answers to Many of Your Questions




As I had said in my last post, Thursday I had the opportunity to talk with Rob Garcia, a Director who has been with Lending Club since the beginning, and discuss the company and some of the things that sets them apart from their competitors and makes them a legitimate company to be considered as a strong investment vehicle in this market. Because of the length of info I wanted to report, I am probably going to break up this post into two separate ones, as I don't want to bombard you with too much info. As a preface, please recognize there are risks with P2P lending, so don't think of this as a "guarantee money maker." However, you can definitely make some serious returns and hopefully with some of these tips, find some good returns of your own. If you haven't read before in my posts, I have invested a small portion of cash in the program to give it a shot and I will be covering my experience and give updates on this blog. I personally feel this can be a great alternative investment for me in this current market. I do not represent the company, so I hope I get most of the facts right, but just be aware, I do no plan to, but I may misrepresent the company with wrong information, if so, I apologize.

So what is Lending Club? They are a P2P (People to People) lending group (been around since June of 2007) that provides short term lending for people in need of capital. The key is that, other consumers are also investors in the loan and are collecting on the interest, not a bank. You can sign up as either a lender and invest in loans yielding anywhere from 6%-19%. You can also sign up to borrow money, which enables consumers to find very competitive rates to borrow from. Either way, it can be a win win for both the consumer and the investor if all goes well.

The biggest question I got from all of you which I passed on to Rob was what is the default rate? The first thing Rob said is that Lending Club prides themselves in the transparency of their information. As I went through the different links they have, I found this to be very true. For instance, the graph below shows the total amount of loans Lending Club has issued since its beginning. As you see, out of the $25,156,400 worth of loans they have issued since June of 2007, only $677,495 (or 2.69%) have defaulted. They define default as failure to make a payment over 120 days. This was a lot lower than I originally thought and actually made me feel a bit more comfortable with my invested funds, since I did not choose that risky of loans.
total loans
Lending Club does go after defaulted loans and are sometimes able to recover the funds. They continually update their collection process with every phone call they make all the way to the final bankruptcy judgement decision. They do a great job of keeping you updated.

Now, when choosing a loan to invest in, Lending Club does a pretty good job of getting a lot of information from their background checks on individuals and disclosing this to the investor. Below is an example of someone who is looking for a $3800 loan.
loan infoAs you can see, they have their current employment, length of employment, credit score, credit balance, etc. All of the loans issued on Lending Club are 36 month (3 year loans). So one downside, is that your money is invested for a longer term. However, as I will talk about in another post, you can sell out of your position in a loan through their secondary market to liquidate your investment.

I asked Rob of loans that seem to perform better than others and he said, debt consolidation, car loans, and paying off credit cards were some that stood out as top performing loans. I did ask him ones that have not performed well and although he said nothing was black and white, he did say that a lot of wedding debt (found that funny) and student loans had some problems in the past.

Below is a picture of what it looks like when initially browsing the loans to choose to invest in. You can either choose a target investment yield and they will automatically choose a portfolio of loans for you to approve, or you can go through individually and manually choose them. As you can see, it gives the loan description, loan balance, Lending Club's value rating of the loan along with the interest rate (the larger the interest rate, the lower the value rating). It also shows how much is left to fund and the time left until the loan is issued.loan choiceTo sum things up for this first post, I asked Rob to give a couple points that separates them from competitors. First off, is that they are actually registered with SEC. Although, they haven't registered with all states, they have registered Lending Club with most states and have the SEC's blessing. This can be an added comfort to investors knowing they are going through proper channels.

The other big one was their platform. They are very transparent with their information and try to give the investor as much information about the loan they are investing in. The ease of use is very significant, as I was able to sign up, find loans to invest in and be finished all within 10 minutes.

I didn't want all the information crammed in a post, so I will stop here and talk more on another day about some positives about this program I have found. I see these P2P programs becoming more popular as banks continue to struggle to lend. My biggest concern is regulation, but so far I am very impressed with Lending Club as they are definitely a company worth looking into. It is free to sign up and if you are interested in signing up either as a Lender or Borrower. Feel free to ask questions in comments, I'll try to answer them the best I can. I can also have Rob answer any I can't. Have a good night everyone, and lets hope for some good money in the market this week.

35 comments:

  1. Anonymous Says:

    your reuters video of the day is covering up your post.

  2. Anonymous Says:

    FF: thanks for this info on Lending Club. Actually, thanks for your blog in general. I have enjoyed reading it over the last couple of months since I found it.

    Anyways, regarding Lending Club, which I can appreciate the fact that they "appear" to be transparent, I am wondering what is there to prevent them from either completely fabricating the information they present as far as credit scores, default ratios, etc.

    In light of Madoff and Saytam, it seems that fabrication of returns, books, etc can go on for years (if not decades) before anyone becomes the wiser. And then, those left holding the bag come to find their investment has been wiped out.

    I am not saying Lending Club is a scam, but in these days of financial termoil, it's very hard to buy into something new even if it may seem to be legitimate.

    From the little I know about Lending Club (all from your blog), it seems that in a worse case scenario, it could be just another ponzi scheme, with moderate to high returns and acceptable default rates being the front.

    Anyways, as always I appreciate your info.

  3. Anonymous Says:

    You alluded to there being a secondary market for the notes they issue; is there any visibility as to how liquid these are?

  4. Finance Fanatic Says:

    Anon1,
    Sure, you risk any investment being a scheme, especially in this type of market. It does give me comfort that they do register their business with the SEC so there is at least some sort of regulated terms. I know that doesn't mean much, but it is by far better than the other p2p sites. Plus, the business model makes sense in this type of market. But I agree with you, you can never be too careful in this market. This is why I am choosing to try it with lower funds first off. Thanks for the comment.

    Anon 2,
    I will go into the secondary market more in my other post, but just as a quick answer. You set the price of what you want to sell the loan for. So you can make it as liquid as you want. There are some variables that make a loan more appealing, like if the credit of the borrower has gone up since purchasing the loan. That info is available.

  5. Anonymous Says:

    I've been investing in Lending Club since October and have nothing but good things to say. I have only had 3 late payments and several of my loans were paid off early.

    So far so good, Thanks for the posts, keep up the good work!

    -Jay

  6. Anonymous Says:

    Why did California decide that it was necessary to place such a high means-test to become a Lending Club member? I just read the rules on their site, and if you live in California, you must have a $100k/year income AND $100k in net worth outside of your home and car, or just $250K in net worth outside of the house and car. That's kind of a ridiculous bar to set. I'm kind of poor, but would still like to invest in this lending service with funds that I have which I don't need for food/shelter. And I'm WAY below the bar.

  7. Finance Fanatic Says:

    Anon,
    With most alternative investment vehicles where you can risk losing your investment, the PPM usually requires a ridiculous amount of personal worth in their contracts, mostly for legal purposes. I just invested in an 2 IPO's that had similar language. Indeed, you don't necessarily have to have that worth, but as legal protection to the company, they usually require it in the contract language.

  8. Anonymous Says:

    The obvious answer to the 'high bar' set by CA is.....MOVE!

  9. Anonymous Says:

    Lending club is true scam. At first they let you ask for some amount money, after they take your amount 10 times down and charge you from your bank account, even you don't have any loan.

  10. Anonymous Says:

    Not sure I understand that last comment. Were you acting as a lender or borrower?

    FF - thanks for the run down. I just came across this company through P2P Lending search. I was thinking about throwing in 5k as a test... my calculations, including a provision for bad debt, shows a safe comfortable return (using a slightly conservative lending strategy). Personally, I can see this as a great way to augment your portfolio (from stocks, mutual funds, savings).

    Thanks again

  11. Anonymous Says:

    So it's been about 9 months since your initial post regarding Lending Club.... mind sharing your experience?

    I just signed up and purchased $500 in notes at lendingclub.com to test the waters. The process was remarkably simple and I was able to transfer funds immediately using PayPal (as opposed to waiting for them to verify my bank account). I'm curious to see how the first few months go!

    Thanks for your review of LC,
    Dan in Colorado

  12. Finance Fanatic Says:

    Its been over 9 months since my initial investment in Lending Club and I still have yet to receive 1 default. Not even a late payment. My annualized 10.5% return has remained in tact and I plan to allocate further funds to this program. I will keep you updated.

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  14. steven Says:

    Lending Club just ripped off my brother for $2,000 when he never even called this company or ever heard of them. They will not call him back and we have now had to call the FBI. Anyone even considering this company to be true is misguided and needs to contact their banks ASAP as well as the FBI. THEY WILL STEAL YOUR MONEY THIS IS NO JOKING MATTER.

  15. Anonymous Says:

    I think LendingClub is legit but that doesn't mean you will make money investing with them.

    Our account is diversified over about 80 loans. Almost all are rated C and higher. Eight accounts have defaulted to date and the percentage "gain" has slowly drifted down into negative territory.

    And you know those guys that tell you about how you got robbed buying your last new car, that they got that exact same car for thousands less. And they always do? And they do because they are so much smarter than you? These guys love LendingClub and yes, they're all making 16% and more.

    Don't believe it.

  16. Anonymous Says:

    only been on lendingclub for 2 months, so far all loans have paid on time (~40 loans).

    tough to know how it will go longer term.

    btw keep in mind the loans are 3 year loans, so when they say a certain grade defaults at an 8% rate, that means there's a 24% chance they'll default by the end of the loan term.

  17. Anonymous Says:

    I also have a lending club account. I have put money into this for loans to be made. I have a problem with their collection process, and their verification process. I provided $200 toward a 20k loan, after 1st payment, they can't find this guy. Loan was classified a B loan, which is pretty much safe. This guy's record was perfect, wanting to buy a house. Next thing, they can't find this guy, knowing who his employer is, bank acct, etc. How do I know someone didn't make this guy up, make a loan at lending club. How do I know someone at lending club isn't running a scam for who they work for. Too many unanswered ?'s. talk to their atty. and you get lawyer talk, dnacing around the question but never answering the ?. all I can say is be very cautious, and DO NOT participate in any loan for the max!!!! This co. needs to fix their holes if they are legit. My next step is FTC. If their are enough complaints, they might do their job as they claim, or get shut down for fraud!!!

  18. Anonymous Says:

    I have about 5K (176 investments) in Lending club and so far 2 are late (over 120 days). Statistically speaking, about 3-5% will default which translates around 7 defaults. I choose mostly "A" and "B" rated loans with few C and D's. Never made an investment over $25 and so far this strategy has served me well. I am expecting around $300 in returns for this year alone.

    However, I still have doubts about this whole deal... It sounds too good to be true.

  19. Anonymous Says:

    Would it be possible for someone using a stolen identity to get a loan? This might account for defaults where the credit rating was excellent. To put it another way (and perhaps I should be contacting Lending Club for the response), how carefully does L.C. verify the identity of the borrower?

  20. Finance Fanatic Says:

    As for an official update. Its been almost 2 years since my initial inception into Lending Club, and thus far, I am still impressed. Out of the 17 loans I have been issued, only 1 has defaulted.

    I maintain a near 9% return on my invested money and am set up to reinvest my interest.

    I have seen and heard of many instances where a high grade loan goes into default, which yes, does happen. Do not assume that you are guaranteed to make money at lending club. It is a P2P lending site, which incurs default risk just as a bank would. Even though a person may have good credit, does not mean they will not default on the loan. For this reason, I choose not to participate in lower than C grade loans and I diversify like crazy, giving no more than $25 to a loan... I will keep you updated.

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  22. Anonymous Says:

    If you can get 9.6 returns on these investments, why aren't the banks investing in them? They loan money for 4.5% while they could be getting 9.6%. This does not sound legitimate

  23. Dan Says:

    Banks aren't investing in this because there isn't a definite percentage of return. Banks lend a and make money on the person borrowing right? They make their money investing in companies not people people. Also, their investment is the individual person.

  24. Zach Says:

    Banks are not investing because they make more than 9.6% on their loans. This is the basic philosophy behind peer to peer/micro lending. If banks loan money at 18.5% and pay savings accounts at 2.5%, they make a 16% profit. Instead lending club let's me loan to someone at say 12% they arre saving 6.5% and I am making an extra 9.5% that is simplified as lc does charge very small transaction fees, and there is the risk of default which is eaten up by the bank. But more or less the whole idea is that banks already do this, but make it a much worse deal for everyone but the bank

  25. Aleksey Kulichenko Says:

    I am very interested in this post because I write about similar things on my blog and also invest with LendincClub. My account is 0 defaults, 1 late, 20 loans.

    One problem I have found with LendingClub is that they have recently created preselected questions that a lender can ask a borrower. You can no longer create you own questions. When a chosen question has been asked before then it is not allowed to be asked again. I am having trouble with this idea. It does save time by not having to type up the question to every borrower, but it doesn't get your questions to the borrowers. Some of the borrowers have answered the questions incompletely leaving the lender feeling like this is a bad borrower. If LendingClub can clean up the Q&A process then I will be a lot happier with their system.

  26. Arzantine Says:

    I gullibly signed on for a loan, I was approved and told when the money would be in my bank. I gave them my bank
    s routing number and account number,and SS number. they tested the numbers I gave them by taking out 27 cents. Then suddenly on the next day after it (the loan) was to be in my bank's account, they renigged and wouldn't allow it to be processed, thus they, in effect, stole all my personal information. I contacted them three times; no response! I had to change all my information with the bank and contact the SEC and IRS and credit agencies. What a stress and mess! I would not recommend them to anything other tahan a scam. They may allow certain persons who's income appears worthy for them to give themselves a good name, but I say BEWARE!!!!!

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  28. Lending Club Review Says:

    It's been a while since this was posted... From the looks of it, Lending Club has boomed and there's no sign of letting down. I've been using lending club for over a year and haven't had a single late payment. I have 47 notes, 2 fully paid and I'm getting over 13% which means my portfolio leans towards supposedly riskier loans.

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