Lending Club Experiment: Done

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:

  1. I could use the cash flow for my new investment project (my house)
  2. LC interest is taxed as ordinary income whether you reinvest it or withdraw it
  3. 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?


Lending Club snapshot one year out

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?


3 thoughts on “Lending Club Experiment: Done

    • I saw that as well! It’s a shame, p2p lending seems like a good idea. But I saw a lot of defaults on my notes – it could have been because I did not filter enough on my own, or maybe the lending policies were not tight enough in the first place.

      • The prospect of defaults didn’t bother me nearly as much as the taxes and fees. Lending Club takes 1% and all of your income gets taxed at the normal rate. Compare that to the stock market. My Vanguard fees are around .2% and the taxes are much friendlier. The capital gains tax is way lower than the normal rate, and it only kicks in when you sell. Granted, you could start an LC IRA, but I’ve already got an IRA.

        There is another way to make money using LC. Their stock is trading at $4, down from $19 when the company went public in December. If you truly believed in the business model and the company (apparently their board is a who’s who of old Wall Street sharks), now is the time to buy. I’m not going to do that because it would be rank speculation on my part, but it is food for thought.

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