As promised a month ago, here’s the review on the peer-to-peer lending platform: LendingClub.com.
I’ve reviewed the platform from an investor side, as I don’t need a loan, and do have some money that I’m willing to invest in this volatile and unsafe product.
So, to keep it simple, I’m just going to describe the steps needed to successfully finish the process of investing of $500. Since the investment matures in 36-60 months, the review doesn’t include the analysis of actual return on the investment, but I hope the projections will be close to the real returns.
Opening the account:
To open an account you need to sign up on-line at the site. Using the link you will get a $100 bonus if you invest $2500 or more. If you prefer, you can go and sign up directly on lendingclub.com, and skip the referral bonus.
Once signed up, you need to link a bank account. In order to link the account you need to provide your routing number, account number and your SSN (other financial institutions require SSN when signing up). Once submitted, you’ll have to verify the account. The verification is done by a small debit from your bank account. Once you see the debit, go back to your LendingClub account and enter the amount in the appropriate field.
Note: You can only enter the amount twice. If both times the amount didn’t match – the account will be blocked, and you’ll have to change to another account and restart the verification process. Problem: In this case the money debited from your account won’t be returned (unless you insist with the customer service, which is very responsive).
Good: The user interface is very clear and clean.
Bad: No error message is presented when you enter wrong amount, or the account is locked. You can continue trying entering amounts and not understanding why it does work forever. So, if it doesn’t work after 2-3-4 times – change the account and start anew, or call the customer support. Also, using debit to verify account is a bad practice, in my opinion. If everything goes as it should without the problem, the debited amount will be deposited to your account on LendingClub, but it’s so small – that you can’t invest it. So you would probably want to withdraw it back. All the other online banking/investment sites that I dealt with verified banking account with a deposit, which most of them also left on my account after the verification was complete.
You have two different options to transfer money to your LendingClub account: wire transfer and regular ACH transfer. Both a free on LendingClub, but wire transfer would probably cost you in your bank. If you wire more than $1000, LendingClub promises to add $25 to compensate you for the wiring fees in your bank. I used the ACH transfer for my $500, which is free on both sides. For wire transfer it takes 1 day, for ACH it took 3 business days for the funds to appear. Reasonable enough.
Good: providing fast option and compensating the costs.
Bad: the fast option (wire transfer) is only for incoming funds. You can only withdraw through ACH transfer.
The investment is in form of notes. The notes are backed by a single loan each, given to a certain person. The notes are ranked (A through F). The higher the rank (A- the highest) the more creditworthy the requester is, and the lower interest on the loan will be. On the site, you can choose an automatically selected blend based on the overall return rate you want on your investment, or you can select the notes one by one manually. You have to invest at least $25 per note.
If you select per note, you can see the credit report summary of the requester (credit score range, debit/credit ratio, employment and home situation, etc), and you can also ask the requester questions (or read the questions others asked and the responses the requester posted). The requester is anonymous to you, throughout the whole process (you never know who is the actual person getting the loan, and the loan management is done by the LendingClub for you).
Note: once you select the note, it doesn’t mean that you’ve actually made an investment. The loan has to be fully funded (by investors like you), and LendingClub has to approve it. Some loans don’t get approved (LendingClub claim that most don’t), so the money put in a note can find its way back to your account as available cash within a week or so. In this case – you’ll have to repeat the process and find another note. It took me ~30 days to fully invest $500.
Good: you have an option to select the loans you want to participate in based on whatever criteria you want. You can choose loans based on the risk (the more risk of default – the more the interest rate is), or based on the need (requester specify what the loan is for – debt consolidation, tuition, business, etc).
Bad: when investing large amount of money, selecting each note separately is difficult, and selecting pre-arranged blend hides the data you would have used for consideration. Providing blends not only by risk but also by other criteria, would have helped.
Once selected, you can assign notes to portfolios to help you track them. For example, you can create portfolio of notes to mature on August 2013, or portfolio of debt-consolidation notes. For each portfolio, you get the aggregate data on all the notes in it. Specifically interesting are the projected return rate, that is the calculation based on the notes’ average rate, LendingClub fees, and the risk of default and the expected monthly income.
Good: Gives you an estimate on your income. The rates are fixed, so the only variable is the defaults (unless the loan is paid in full early).
Bad: The defaults risk estimation is just that – estimation. Don’t think there’s much to do about that, except for diversifying.
Notes that you’ve invested can be traded. They cannot be traded freely on a stock exchange or to an external investor, but they can be traded within the LendingClub, on their provided platform.
Good: You don’t have to wait for 3-5 years for notes to mature to get your money back, you can sell your notes (similarly to bonds sales on a stock exchange). You’ll get less than you would had you waited for the notes to mature, but faster.
Bad: the trading options are very limited.
The idea of peer-to-peer lending is very good, in my opinion. Especially in the hard economy like we have now, it is good for people to have choices other than banks for their lending needs. As investor – it is another tool to diversify your portfolio with a fixed income asset. The income would be, usually, much higher than from a savings account, a CD or a money market account. But, it comes with a higher risk, and you have to diversify in order to minimize the risk of being hit by a default on the loan.
The investments in the LendingClub are not insured, and you can loose money there. You can read all about the risks and limitations here.
Good luck, and invest wisely
Your Little Advisor