My Experience With Lending Club P2P Investing

Peer to peer (P2P) investing is something that has been taken off over the last decade and two of the most popular sites are Lending Tree and Prosper.  
Lending Club provides a way for investors to earn a return by helping to fund borrowers who are looking for better terms than what is offered by many traditional banks. Lending Club acts as the intermediary, handling the transaction, collecting fees and figuring interest, processing payments and taking care of all the legal stuff that comes with lending money to someone.
While I have never used Prosper and probably never will, I currently and unfortunately have some IRA money "invested" with Lending Club. I'll dive into that later but first, let's learn a little about Lending Club (Prosper works the same way). 

How Lending Club Works

The idea behind Lending Club is fairly straightforward. Investors can invest in notes of $25 denominations. You can decide how many notes you want to go toward a borrower. The money is used to fund a loan for a borrower. With your contributions, plus the contributions of others, it is possible to raise funds for the borrower. The borrower receives the money, and begins making payments. The loans are three-year loans and five-year loans.
When the borrower makes payments, your portion of that is distributed to your account by Lending Club, who figures which portion of the payment should go to all of the investors. As investors build up cash in their accounts, they can either use the money to reinvest in new notes, or they can withdraw the money to their own bank accounts. In the case of an IRA, you can withdraw from the Lending Club platform and then transfer your money to another IRA account for a fee. 

How to Borrow from Lending Club

Borrowing from Lending Club is quite similar to the process of a traditional bank. This means that, after setting up a basic account with Lending Club, you will need personal information, including name, address, phone number and Social Security Number, among other information. Lending Club will check your credit report and verify your identity. Just as with a loan from another bank, your credit history will be one of the deciding factors in what sort of interest rate you end up with. You will need to review loan terms and confirm them, as well as set up your funding for loan repayment, and acknowledge the Truth in Lending statement offered you. Lending Club takes you through the process, step by step.
As part of your effort to borrow money via Lending Club, you will be asked to specify what you want to use the money for. Crafting a statement that shows that you are responsible, and that you are using the money to help you advance your financial situation whether you are consolidating debt, paying for college, or financing a home business can help you draw more investors to your cause. Once your loan is fully funded by investors, you will receive your loan money.

Investing with Lending Club

If you want to earn an investment return, you can do so by investing in the notes as mentioned above. You will need to set up an account and you will need to fund your account. Then, you can start looking for people to help fund.
You can search by credit rating, or by using other parameters. When you identify someone that you want to invest in, you can add that note to your order. It helps to consider the the credit rating, as well as the story behind the need for a loan, when making your decision. Once you are ready, you confirm the order and assign the note to a portfolio. Just remember that this represents a risk, and you could lose money if the borrower does not pay back the loan.

Risks and Rewards with Lending Club

There are two main risks of investing with Lending Club. First, you are locking up your money for 3 years or 5 years depending on the note. It's a long time to be committed to these investments so if you need liquidity, look somewhere else. The greater risk, in which I cannot stress enough, is a borrower defaulting on their loan. When a borrower defaults (fails to pay his loan), you lose your money that was invested in that loan whether it be $25, $250, or more.  
The reward is that you can earn on extremely highly rate of interest from your loans - as long as your borrowers pay. Interest rate returns can stretch from 6% to over 20%. 

My Experience with Lending Club

Before I invested some IRA money with Lending Club, I had always been intrigued about P2P lending. By being an investor, you are essentially being a bank as you "lend" out your money to people as you invest in their many different loans. Each loan is held by a different borrower with a different story. You never know who these borrowers are, but you do get some limited information on them. Some of the information that you do not get is costly. I'll explain later.
I originally got hooked into Lending Club when they offered me $3,000 to open and fund my IRA account with them. The interest rates on the loans back then went up to over 30%! The more risky the borrower, the higher the rate of the loan that was offered and vice-versa. Lending Club has since eliminated the highest returns because too many borrowers were defaulting. 
So, I opened and funded my Lending Club IRA account and got my $3,000 bonus. Using their automated system, I invested in over 700 different notes, at various small increments. Some were $50, some were $100, some were in even invested in $200 notes. This was done purposely to diversify my "investments", to not put all my eggs in one basket or at one risk level. Some notes were in safer, low rate investments, while others were in higher rate investments and some were in between. My account was very risk diversified. When everything was invested, the estimated average rate of return on my account was 22.5%. WOW!  
It was somewhere into the first month of investing with Lending Club when I saw that one of my 700+ borrowers had defaulted on their loan. Now, default risk is something that I knew going into as an investor, I just didn't think it would happen so soon. When someone defaults on their loan, Lending Club emails and calls the borrower to try to collect the money for you. Sometimes this works, but in my experience going into 18 months as an investor, most times it does not work. So, you lose 100% of your investment in that note. 
As time went on, more and more people started to default on their loans. While I was receiving a decent amount of interest from the borrowers who did make their monthly payments, my overall return was dwindling because I was losing money from all the defaults that were happening. So, I was still earning my high interest, but this was offset by the defaults. Every month that passed by there were more defaults, so my real rate of return went down and down and down. 
Eighteen months in, my calculated rate of return is still over 20%. However, my real rate of return has dropped down to 5%! Each time I check my portfolio, there are borrowers in default. Typically, I'll see anywhere from 5 to 10 notes that are in default at any given time. It's not a good feeling. 15 months ago, I stopped reinvesting my interest money into Lending Club notes and started transferring the proceeds out of Lending Club.  
Here's the problem. 
As mentioned, one of the biggest risks, or I should say the biggest risk of Lending Club as an investor is having your borrower default on you. After all, as an investor, you are trusting that the borrower will repay his or her loan. That doesn't mean they will. And, their not paying isn't very enforceable. Their credit rating might get demolished, but it's not like they are going to go to debtor's prison or have some wiseguy come to their place and collect the money that is owed to you. 
Borrowers can default (not pay) for many reasons. What if the borrower dies? What if they move out of the country? What if they simply choose not to pay? According to Lending Club, they can try their best to track down the borrower and they can send notice to the credit agencies that this person defaulted on a loan thereby smashing his or her credit rating. But the buck stops there. And so does your "investment". 
What good is a credit rating to someone who is dead? Or someone who leaves the US. Or someone who simply doesn't care about their credit rating. 
A rather morbid example is this. Let's say Jane Doe had a terminal condition and was not likely to live for another 6 months. She could become a Lending Club borrower by filling out the online application and come up with some bogus excuse why she needs the loan. There are various reasons a borrower can list like 'home improvement', none of which is enforceable or verified. Jane might have a great credit score, a verified bank account, a job, and all kind of positive things on paper that make her a great borrower. She lists her loan for the maximum dollar amount of $40,000 on Lending Club so investors can help fund her loan because she looks like a good credit risk on paper. Enough investors invest in her loan and She gets $40,000 sent to her bank account.  Once she receives that money, she can do whatever she wants with it. Jane likes to travel and since she knows she doesn't have much time left, she travels around the world. She then gives away the rest of the money to her family. Jane passes away peacefully 3 months after getting her loan money.  
Yes, a sad example, but this is the kind of stuff that happens or at least what is told to you. As an investor, you don't know who these borrowers are. Lending Club does not do a health check on its borrowers and they don't have to. Once again, you are trusting someone you do not know to repay you. And in that, anyone regardless of how they look on paper, can and do default. 
I've had borrowers die on me according to the staff at Lending Club. I've also gotten a lot of other excuses why borrowers defaulted. Plenty of excuses, plenty of my money vanished. And there's nothing I could do about it. Out of the 700+ notes I have invested in, 20% of them so far have defaulted in the 18 months that I have been an investor.   
In present times, I still have an IRA account with Lending Club and I cannot wait to close it. Since I am still invested in loans, I cannot do anything until those loans expire or if a borrower happens to pay off their loan in another 18 months. Each month, my rate of return drops lower and I suspect it will go negative by the time I close my account. But you never know. Meanwhile, Lending Club has been picking small fees out of every transaction that occurs no matter what happens - repayment or default. 
In the end, they are the winners. 

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