Is Lending Club Bank a Scam?
For investors looking for something different, Lending Club offers the chance to participate in peer-to-peer lending. This alternative style of
investing rewards those people willing to trade liquidity for yield. The Lending Club platform itself is used to buy pieces of loans made to
borrows on the other side of the site. This Lending Club review is exclusively about the investor portion of the business.
How Lending Club Works
For readers who are already familiar with peer-to-peer (P2P) lending, feel free to skip to the next section. P2P lending connects individual borrowers with individual investors. Instead of a one to one ratio, however, sites like Lending Club chop up a loan into $25 notes and then sell these notes to prospective investors. By spreading the loan across a large pool of investors, and encouraging those investors to purchase notes in a variety of different loans, Lending Club helps to minimize the damage done when a borrower inevitably defaults on their loan.
To the borrower, this subdivision of their principle amount is largely opaque. They are presented with a loan term and interest rate, and make monthly payments according to a standard amortization table. Each month that payment is processed by Lending Club, who take a cut for themselves, and then distributed proportionally between every note holder.
Once your loan portfolio grows to around $2500 (representing at least 100 different loans), payments begin to roll in at a steady rate. Interest and principle are tallied separately on your home screen, and as time goes by the outstanding principle amount of each note declines until the loan is completely paid off. Those monthly payment amounts are immediately available to either withdraw from the platform, re-invest into new notes, or both.
The initial amount of each note is tied up in the investment until the load is either paid off, or the borrower defaults.
Because of this, your money is not easily accessible. There is a secondary trading platform for notes, but it is not
integrated into the Lending Club web page.
In essense, Lending Club sells Notes offered in accordance with a Prospectus filed with the Securities and Exchange Commission.
Opening Lending Club Account
Lending Club offers a standard individual investor account, with variants available to suit different needs, including joint, trust, corporate, and
custodial accounts. Regular individual investor account may be opened through the website. The other types require an e-mail in to customer service.
Lending Club also makes large effort to steer potential clients to use their investments for an IRA. However, Lending Club is not set up to
administer these IRA’s and instead partners with a self-directed IRA provider to offer this.
There is no minimum amount needed to open an individual account. There is also no minimum amount needed to open an IRA. However, the IRA option
through Self Directed IRA Services, Inc. incurs an annual $100 administration fee. Lending Club will cover this fee in the first year if your
balance is over $5,000 for all 12 months, and will continue to cover subsequent years if your balance exceeds $10,000.
Right now, there is no public bonus for opening a standard individual account, but there is a $300 bonus if you receive an invitation from a
current Lending Club member and invest at least $10,000 in your first 90 days. There are also bonuses available for opening an IRA, starting at $150 for a $5,000 investment and climbing to $3,000 for amount over $100,000.
Investing With Lending Club
Once you move funds into your account, you may purchase available notes. Notes can be individually selected based off any criteria you choose, or you can set up general rules or go with one of the built in automatic investment plans.
Lending Club categorizes each note into a risk grade based off the credit score and other details of the borrower. The lowest risk category is “A”, with interest rates of 7.13%. Moving higher up the risk ladder, loans steadily increase in interest rates until the riskiest grade of “G”, with returns of 26.70%.
Historical delinquency rates for each risk grade can help project actual returns across a portfolio of notes. Category “A” loans have delinquency rates of 2.41% while category “G” loans default at a rate of 17.94%. The median return for a blend of all investments after defaults and fees are taken into account is 5.8% for accounts open for longer than 2 years.
In addition to risk grade, notes can be associated with either a 36-month loan or a 60-month loan. Because of this, your money will not be fully repaid for either 3 or 5 years, unless the borrower pays off their loan early. Notes are purchased in $25 amounts.
The lifecycle for purchasing a note is inconsistent, and is based off the loan being completely funded. A borrower will apply for the loan and receive approval. After that, notes begin to appear for sale against that loan. The loan is issued once there is commitment for funding from enough investors. This can take several days in some cases, so the actual issue date of the loan is difficult to predict. Meanwhile, your funds are committed and are inaccessible, unless you back out of funding the loan before it is issued. Due to this extended process, your very first payment from the platform may take well over a month to appear.
Lending Club Cost and Fees
Lending Club’s cost structure is designed to be as invisible as possible. There are no monthly account fees, activation fees, or even commissions on investments. Instead, Lending Club takes a 1% cut of each payment you receive when a borrower makes a payment on their loan. This essentially reduces the interest rate you receive as an investor by 1%.
If a borrower pre-pays the remaining balance on their loan, Lending Club caps the amount they take to whatever would have come out for that month only. As a result, there is no penalty to the investor when a borrower repays early.
If a borrower is delinquent on payments for over 150 days, Lending Club will turn over the loan to a collections agency, consider it as “charged off”, and count the value of the note as zero in your portfolio. In the rare event that the collections agency manages to collect any of the outstanding principal, you will receive a small amount of the proceeds, but this generally does not amount to much.
User Interface
At its core, Lending Club is just a giant database of loans and component notes with a fairly detailed yet streamlined user interface. It is
possible to set up an automatic investment plan, selecting a bare minimum number of parameters, and never dive into the details of the underlying
loans. For those who want to get into the minutiae of each loan, however, there is a plethora of information at your fingertips.
For computer users familiar with the filtering tools available at most online shops such as Amazon, the filtering tools available on the Lending Club platform will be intuitive and simple to use. The site makes it easy to build as specific of a filter as you would like. Every field listed in the loan information can be queried. These can be used to assist in manual loan selection for investing, or they can be used in the automatic investing portion of the site.
For investors looking to automate their note procurement, Lending Club provides tools to set up a plan and let it run indefinitely. Because the monthly payments are both interest and principal, it is easy to fund the acquisition of new notes with the proceeds from your existing notes. You can also set up automatic transfers from an outside bank account. Whenever your account balance exceeds $25, Lending Club will automatically search for a loan that meets your investing criteria (either manually created or one of the pre-set blends), and will purchase a note in the matching loan. There is zero intervention needed once you get your account set up with the automatic plan that you like.
The account summary screen presents you with your current performance. Lending Club is very proactive in trying to make your returns look as realistic as possible, and will adjust your account value to compensate for estimated future losses automatically. Loans are separated into different status groups, which are weighted differently when factoring projected loss amounts.
The user interface is clean and simple to navigate, and without cluttering up the summary screens still allows you to dig into the details as much as you might want. There are no extra bells and whistles: this site only does one thing, but it does it well.
Lending Club Pros
Automated investing is simple to set up and walk away from; diversification is highly encouraged and also made easy through $25 note amounts; level
of detail for each loan is extremely robust; ability to tailor investments to exact parameters if desired.
Lending Club Cons
Investments are not liquid; defaults will inevitably add up and significantly impact overall returns; lack of a smartphone app; website has some
quirks such as logouts when the wrong link is clicked; some broken links on website; using a custom filter for automatic investments is not
intuitive.
Recommendation
Peer-to-peer lending can be a great addition to a well-diversified portfolio. Investors looking for a high level of detail and control over the
investments should select Lending Club as their platform of choice. Expect to earn between 5% and 9% annually at current trend levels with the
proper amount of diversification.
Competitors
Lending Club's main competitor is called Prosper. The firm managed to generate better rates for both investors and borrowers.
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