I think 1/18 is the date I purchased 200 notes through Lending Club in 2015, so today is as good a day as any to pull the plug on that experiment. Lending Club is not a bad investment in my experience. And with my roughly 6% return over 2015, LC seems like it was a better investment last year than the stock market. So here are a few reasons why I am 86ing this investment now:
- I could use the cash flow for my new investment project (my house)
- LC interest is taxed as ordinary income whether you reinvest it or withdraw it
- I am not that good at LC
A little background on LC: LC is a peer-to-peer lending company in which I invested $5000 about a year ago. This bought me 200 $25 “notes” or loans to individual borrowers. 200 is the minimum investment LC advises to be adequately diversified against risk of borrower default.
The notes are all 36- or 60-month, and the payments made by the borrowers each month are divided among the $25 note-holders. So after the first month or so, I started receiving $50-60 in interest each month. I had set up “auto-invest” which automatically picks up a new $25 note as soon as your account has $25 in it. Since I was getting on average $55 each month, my account would automatically add two new notes, with a few dollars left over.
So where does my Lending Club account stand after a year?
Basically this snapshot is saying I have probably made $311.46 in interest on my $5000 investment as of today, after adjusting down from $593.94 to account for prior (and likely future) late payments and charge-offs. The snapshot calls the adjusted ROI 7.72%, but after tax it will be more like 6%. The snapshot also shows that I have 301 notes, up 101 from my original 200 note investment. That’s pretty crazy, that my little nest egg generated 50% additional notes in just one year. So why did I wind up with only 6% ROI, compared to the 8% and 10% tales I have heard from other financial independence and investment enthusiasts?
I am probably not that good at Lending Club.
You will notice I had 7 charge-offs in the one year; I am guessing that is a little above average! Most charge-offs happen immediately as a scam and mine appear to be no different, so this has cost me just about $175 in losses against my interest earnings. Without setbacks like charge-offs and missed payments, my true interest earnings of $594 would have achieved a remarkable 12% ROI (or a very decent 8.5% after taxes).
Avoiding charge-offs is the name of the game with p2p lending. But unfortunately I have neither the time nor the inclination to weed out “bad bets” with the filtering tools LC provides. I trusted LC’s fairly rigorous screening system to provide moderate protection. And part of this experiment was to participate in an economy in which less-than-stellar bets would also have a chance to enjoy wiping out debt or paying medical bills. So while it has been interesting, this is probably not a good long-term fit for me at this pre-financial independence point of my life.
Overall I guess you could say that even an extremely risk-tolerant, and yet carefree and spacey investor like myself could fetch a 6% ROI with LC while paying no attention whatsoever. That’s not so bad.
But I will still “pull the plug” today. Even divestment is not so dramatic with LC. I will just click a button that says “Pause Auto-invest” and $50-60 will stream into my bank account each month rather than into a couple of new notes, until all the remaining notes have been paid off or charged off (but I seriously hope the former). You can only sell notes on a sad secondary market within LC, so I will just stick it out and enjoy the cash flow. It will help with my antique house renovation: where the wallpaper is holding the wall together, so it must stay.
Does this post make anyone want to get your LC on, or off? Or buy an old house?