Thought I would share my Lending Club experience so far, though several other financial/frugality blogs have already covered this topic as well. After one month (January) of getting my $5,000 invested and allocated, and another month (February) of letting the borrowers’ accounts set up with the one month of grace period, March was the month with the first full return.
I found that in March I had received about $52 in interest ($126 principal) across the 200 notes each worth $25. And, because I have auto-investing turned on, LC automatically bought two more $25 notes (leaving $2 left out of the $52) which will in turn start generating returns.
So far the projected annualized return is 13.5%, but the adjusted return is 11.6% because one note has slipped to grace period. Even after being taxed at my income tax bracket, this yields 7-9% return. Not bad for sitting around doing nothing!
1) I am glad I followed the standard advice to purchase >200 notes for diversification. I have not had any bizarre charge-offs (some theories say that charge-offs are more likely to happen immediately). But if one or two notes charged off, I would not sweat it because there are so many others.
2) Unlike some investors out there, I did not bother filtering excessively to try to maximize. I actually believe in the safety of diversification over many notes. I also think that if investors profile and exclude a segment of borrowers, LC will get an unnecessarily negative reputation for strict lending criteria when it was the investors, not the criteria, that prohibited lending. LC already requires a minimum credit score of 660 and turns away 2/3 of all applications.
3) However I did turn off 60-month loans (LC issues only 36- and 60-month). I thought about it, and decided that Suze Orman is probably right that a 5-year loan is a loan you cannot really afford. Lots can happen in 5 years. A lot of these loans are for debt consolidation and credit card payoff, so the temptation to backslide over 5 years seems too great. A person who plans to pay off in 3 years is serious.
4) I will probably make another lump sum investment in 18 months to create a ladder system. That way, there will be a batch of notes only halfway through their schedule when the majority of the original notes expire in 36 months. I wouldn’t want a droopy, no-returns 2-month dry spell like I saw at the beginning, would I?
It really blew me away that my relatively little investment of $5K just made me $52 last month. It is my first investment ever; having read up about P2P lending, I had no difficulty letting go of the money. And suddenly I am $52 wealthier. I have never had any income at this rate that I did not have to earn with my labor. Investing is cool!
And of course, I like taking banks down a notch, and helping other people get up a notch. I had student loans for years and would have considered this option had I known about it.
I would definitely recommend LC as relatively stable investment with solid returns, as long as you understand the exotic cocktail of risks, and have a plan about how to mitigate risks and maximize profit.
And if you want to see, oh, more than one month of data, check out Mr. Money Mustache’s review of his 2 years of LC investment data. Unlike me, he is actually legit!