Lending Club beat my expectations

by Rocket Finance

I didn’t expect this result.

When I opened Lending Club accounts for my wife and I over a year ago, I intended to lend out a little bit of money here and there, but not risk any real cash. For me, Lending Club was a diversion. Looking at borrowers and reading their stories was fun, but I figured that the bottom line on P2P lending was that it might be a fun way to lose a lot of cash to strangers. As a result, I only lent out a relatively small amount of money. And I really got nervous when Lending Club went “dark” for a few months as they cleared up some paperwork issues with the SEC.

Therefore, I was very surprised as my one year Lending Club anniversary passed a week ago and every single loan that my wife and I had made during 2008 was current! Neither account had registered any defaults and neither account had registered one late payment. As with any investment vehicle, our results might not be typical . . . but with the stock market down over 40% during the same time period, our small retirement savings taking a beating, and our online savings account APR’s plummeting, it was nice to log into an account that stayed in the black all during the last year.

With most P2P lending platforms, borrowers are rated for credit-worthiness and their APR’s reflect the risk that is assumed by the lender. The higher the risks, the greater the potential payout. Lending Club loans have a term of 36 months.

So far, my portfolio’s rate of return is 10.57% – tame by Lending Club standards, but pretty good compared to almost any other place where you can let your money sit these days. My strategy was primarily to stickĀ  with low risk borrowers and then to bid on just a few very high risk loans. At the time, I figured that making high risk loans was like pouring money down the drain, but even if they all defaulted, I still had enough money in conservative loans to break even and I would not have lost anything. If most of those risky borrowers had defaulted, my rate of return would have probably been around five or six percent. Mrs. Rocket took a riskier approach than I did, and she beat me with an average daily rate of 11.69% interest on her loans. Her strategy was to mix average risk loans with high risk loans.

Since Lending Club loans can be as small as $25, lenders have the opportunity to manage risk in very small increments. For every risky loan you make, you can hedge your bet by making two, three or even more conservative loans.

Furthermore, if you have a legitimate need for money, Lending Club might provide you with a way to get a hand up. I don’t want to borrow any more money in the future, but the house I own in another state is listed as a short-sale right now. I am currently keeping up with the payments, but if I sell the home and still owe money, Lending Club might provide me with a way to meet that temporary need.

In our current economic conditions, P2P lending could very well be the wave of the future. The pitfalls of large institutional lending have been well documented over the past year or so. Lending Club offers all of us a chance to lend money in small increments to customers with whom you can develop a relationship – an online relationship, but one that might be closer than the relationship that you currently have with your credit card company.

I am glad that I risked some money with Lending Club and I plan to invest more over the next year. If you want to try your hand at “being the bank”, I would be grateful if you used my affiliate link.

  1. 7 Responses to “Lending Club beat my expectations”

  2. By DebtKid on Feb 16, 2009 | Reply

    Glad to see you’ve had such a great experience.

    We are very stringent with our borrower applications to ensure that all lenders have a positive experience.


    Product Ambassador

  3. By jon on Feb 16, 2009 | Reply

    Hi, I just played with the 25 dollar lending club sign-up bonus, made a 9.63 interest loan, and after three years (if the loan isn’t pre-paid), I will have 28.88 from the 36 payments. So I will have made 3.88 over three years, an Annual percentage yield of 4.93 percent on my 25 dollar investment.

    It’s disappointing that they don’t return interest on your cash in your account as that would increase your yield (as you wait to reinvest).

    I’d love to see a real world account return on Lending Club, or maybe the math behind a complete set of assumptions behind the process of lending, to see an estimate of real lender returns.

  4. By Lara on Feb 16, 2009 | Reply

    I’m a lender too and my results are very close to you. I went risky though (interest rates of 15%) and got a few loans go on default. Thankfully, I had enough loans to absorb that and I’m still making 9% returns after almost a year.

    @Jon: The trick is to reinvest the money, which you won’t be able to do with just a $25 investment.

  5. By rocketc on Feb 16, 2009 | Reply

    Lara, I am not going to put my whole life savings in LC, but if things continue like this, I have to invest more.

  6. By jon on Feb 16, 2009 | Reply

    Lara, thanks for the info – yes of course you can increase your return by hustling to re-invest your received payments. I was just surprised that 9.63 translated to 4.93 effective yield on that initial investment.

    I see they have their javelin report but that seems to make the assumption that you money is always fully invested.

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