About a year ago I’ve posted my review of the Lending Club service, from the investors’ perspective.
To recap the previous article, “Lending Club” is a service that allows you to lend money to others (peer-lending, or social-lending, as it is being called) bypassing the “traditional” channels. The borrowers don’t go to banks and private investors for funding, but rather ask Lending Club members to chip in in a loan that is funded by hundreds of people like you, each participating with a small amount ($25 is the minimum).
This is a great idea. Lending Club does the credit pull on the borrower and sets the interest on the loan based on the assessed risk level, and takes a certain commission from the payments by the borrower.
So, a year have passed – how does it go?
I’ve got decent returns so far (around 6% APY), which I haven’t cashed in yet, so it may change. One note has been charged off as noncollectable already, and additional two were paid off early (within the first year of the 3-5 years original term). The charge off is a loss of the investment, and the prepayment is a loss of the projected income (I didn’t lose any money, but I didn’t earn much on it either). Considering expected ROI of 10-11% based on the notes selected, the actual barely more than half of the expected return is disappointing.
While the idea of social lending is very nice and attractive, the returns are not as high as I would expect them to be. It might be good for a “conservative” investment portfolio, where you want to make sure the cash keeps its value and then gains some. In such cases you’d probably want to stick to the A-rated notes. Otherwise the non-liquidity and the high potential of default (1 of my 30 notes, 3.33% of default, and still counting), make it less attractive than mutual funds with similar investment policies and returns.
But, check it out for yourselves, still. While disappointed a bit by the returns, the service itself is pretty cool, the idea is awesome, and if you stick to the lower-risk notes, you would probably have lower default rates and more predictable fixed income. It is available for IRA’s, too. Click here to transfer.
Your Little Advisor
PS: This is in no way an investment advice and shouldn’t be considered as such. This is only my own private subjective opinion.