Mandy: Lending Club – 10 Months After with 5 Figures Invested

After 10 months, and multiple 5 figures invested with Lending Club, here are more thoughts on this alternative investment.

I’ve been thinking about and gathering notes for this article for a while now. Partly because many of you actually wrote to me with questions after my initial Lending Club review, and also because there are many chatter within our space about whether our reviews are even genuine.

The following represent what I think you need to know about Lending Club before you invest with them.

First things first. Many people, myself included, are compensated if you click through our links and sign up an account with
Lending Club. I would love to say that writing about this has absolutely nothing to do with the compensation, but the fact of the matter is that it at least subconsciously affects my decisions, whether I like it or not. Keep that in mind while you read the rest of the article.

Lending Club for the Investor

Make sure you understand every point below before you start investing with Lending Club.

Fees – Not sure if many people actually read the prospectus, but Lending Club charges a 1% fee for their service, which cuts into your returns. On top of that, if you were to sell the notes before they mature, you are charged another 1% of the note amount by the company that handles the transaction.
Keep Reinvesting – People pay off their loans early all the time, and some of the loans don’t even start. It’s not really a set it and forget it type investment that most people think it is. If you don’t reinvest your funds, the money will sit in your account collecting no interest.
Play by the Numbers – Most people think they can pick the winners from the losers, but in reality, all they are doing is making emotional decisions based on someone’s “story”. The most successful way to invest with Lending Club is to have as many loans as you are allowed so your returns come close to the average returns and just accept that. (Remember that each note needs to at least be $25 dollars, so you can only have a maximum of 100 loans with $2,500 invested).
Prime Account – If you have $10,000 or more in your balance,
Lending Club actually has a service where they will help you invest your funds. The system isn’t perfect (for example, they don’t reinvest your funds every day and their notes are generally $100 each, but it’s a good alternative for those who don’t want the hassle of keeping up with the administrative side of this type of investment).
Liquidity – Statistics have shown that selling your notes at what it’s worth takes approximately 3 days, so expect at least a week or more for your funds to get to your checking account if you absolutely need your money back (3 business days to sell, then at least 3 more business days for it to be transferred out to you). Also, imagine trying to liquidate hundreds of these notes all at once. Not exactly a piece of cake.
Default – People default, and that’s one of the biggest risks. I’ve heard others do well by selling their notes at a discount when someone is late with their payments, but that’s much more work involved.
No Long Term Track Record – Let’s face it. This is a completely new way of investing. The returns look pretty good so far (it’s published on their website and I am getting a good return too), but who knows what’s going to happen 5, 10, 20 years down the line.
Company Risk – There’s always a chance that Lending Club will go under. Although they’ve made arrangements for another company, Foliofn, Inc., to take over all the notes, there’s no guarantee what exactly will happen in terms of how easily you can get your money back. After all, this is not the same as a FDIC insurance.
High Risk Investment – This is considered a high risk investment, and definitely not guaranteed. Yet, I keep hearing everyone compare this to their savings account interest rates. IT IS NOT THE SAME. Don’t compare them that way. The Lending Club investing system can give you better returns, but it comes with more risks. Make sure you think about the consequences and are comfortable with this before you invest.

You can sign up for a Lending Club account here (and you will get a free $25 to start), but only if you are ready.

Lending Club for the Borrower

My experiences are mainly on the lending side, but a borrower with high interest debt is crazy not to at least try getting a lower interest loan with Lending Club. It’s a legitimate business, and it’s borrower’s heaven to get a lower interest rate loan. I mean, don’t go check it out just because, but if you are paying high interest debt on your credit cards, you are doing yourself injustice by not taking advantage of this new alternative investment.

And What Do You Think?

So far, my loans are working out which I’m extremely glad because while 5 figures may not be a lot of money for some of you, it is for me. What about you? Have you used the Lending Club service yet? Good or bad, help others learn from your experiences. At the very least, I will very much appreciate your thoughts as I’m a user and need to learn about it as much as possible too.

—
Related Articles at Personal Finance Blog by Money Ning: