If you have been following Lending Club like I have, you would have noticed that it just became available to MA about 2 weeks ago. Lending Club is a social lending microfinance company that is positioned to seriously disrupt traditional bank lending.
They put borrowers directly in touch with investors and allow the investors to fund borrower loans with small, diversified “notes” per borrower. Because individuals lend the money and are willing to accept the measured risk after diversification, there is no reason to charge borrowers an artifically high interest rate for total-loss insurance like traditional banks. At the same time, this model allows investors to get in on the relatively lucrative consumer lending scene previously accessible only to banking corporations. So with my $5000 I funded $25 for 200 different peoples’ loans, with an understanding that the small percentage of people who will definitely default still leaves me with a much better return than a savings account (or worse, cash, where it is now). How cool is that!
Seriously, Lending Club has everything I like in an investment, and in a company in general:
- diversification (both within this investment and as a supplement to my other investments in the stock market)
- high interest rates
- helping other indviduals
- sticking it to the banks and their scheming ways
Mildly political statement: I understand that traditional banks are necessary and do some things very well. However I also think that this model is an improvement for a certain slice of consumer lending which has always been punitive for borrowers: short-term credit pay-off or debt consolidation. Additionally, it has bothered me for some time that banks have had a monopoly on securities and have so much power and influence that they are “too large to fail,” taking bailouts and changing nothing. I am hoping that this emerging market will disrupt the system just enough that banks are forced to re-think their products and overall importance.
But now, onto the fun playing with money part!
I chose $5000 because LC recommends an investment of at least 200 notes to ensure adequate diversification to offset losses. Many convincing colorful charts there. So this investment has a bit of a steep barrier to entry and is not for the faint of heart.
Almost as if reading my mind, the account setup process (before you even commit any money) had this staggering statement to which you must agree:
Actually I found it to be a highly ethical consideration and a clever way to pre-screen investors. It makes you think twice without coming off as judgemental. It warns you of the legal peril without sounding like a weasely disclaimer. Baller.
Then I chose from one of the pre-blended allocations provided. They rate the borrowers A-G (a descending credit-worthiness scale). So one allocation was an A-B blend (low risk, low reward); one was a C-F blend (high risk, high reward), and a broad A-G blend (middle of the road). Which one do you think I chose? Crazy though I usually am, I went with middle of the road rather than bold and zesty. But never total safety for me!!! That much I can assure you.
And that is all I can report for now. My deposit is still pending. I set up auto-invest, so my cash will fund whichever loans come up in the associated allocation once the check clears. But I hear there is another feature with which you can ask individual borrowers 1-2 questions and choose which loans to fund individually. While I find that interesting, I don’t really have time, and figure it’s none of my business. What I would find much more interesting would be the ability to send anonymous words of encouragement to borrowers – especially those past due – but who knows if they would even want that? But I figure paying off debt is like running a road race – you happily take whatever cheers and water are directed at you.
If you are interested in learning more about the LC process, Mr. Money Mustache has written about his LC journeys extensively with historical ROI records and other analysis. And if you are super interested in investing yourself, feel free to let me know as LC offers a bonus to new members (you) who have been invited by current members (me). I would be happy to hook you up!