One of the newest approaches to earning passive income in the digital age is with peer-to-peer lending. LendingClub is the largest P2P lending platform where you get to be a banker to everyday people looking to borrow money for a lower interest rate than the banks will charge. In return, you have the potential to earn a higher rate of return than a traditional bond or money market investment. In this LendingClub review, we will discuss if this is an excellent investment opportunity or an unworthy alternative?
Lending Club Review
You will need $1,000 to open a LendingClub account. This minimum helps ensure your LendingClub portfolio is well diversified as you have the option to invest in most micro-loan requests with $25 increments.
LendingClub supports the following account types:
- Taxable, non-retirement accounts
- Traditional IRA and Roth IRA retirement accounts
- 401(k) Rollover
Regardless of what type of account you open, the service fee on all returns is 1%. For example, if your note charges an interest rate of 5.99%, you will receive 4.99% interest when each on-time payment is made.
Membership to Lending Club is available for most states. While state laws can always change, investors qualify if they live in 45 states plus the District of Columbia.
There are also income requirements that must be met to qualify as well.
Non-California residents must meet one of the following criteria:
- Have an annual gross income of at least $70,000 and a net worth of at least $70,000 or
- Net worth of $250,000
California residents must meet one of the requirements:
- Have an annual gross income of at least 85,000 and a net worth of at least $85,000 or
- Net worth of at least $200,000 or
- Investments no more than $2,500 in notes if they don’t meet either of the two above requirements
Due to these income requirements, Lending Club will only be a viable option to households with an above-average annual income or are asset-rich.
Lending Club Features
|Account Minimums||The minimum deposit is $1,000, but you never need to maintain a minimum balance.|
|Accounts Supported||Traditional IRA, Roth IRA, Rollover 401(k) and Individual|
|Account Management Fees||There’s an annual account fee of $100 if your account balance is less than $5,000 (first year) or $10,000 (subsequent years)|
|Investment Expense Fees||It’s free to invest in any note, however there is a 1% fee on all returns and there can be up to a 35% collection fee on past due payments deducted from your monthly return once your receive payment|
|Asset Allocation||Notes range in quality from A1 to G5 (30 credit grades) and you can invest in a variety of different loan types|
|Auto Re-balancing||Yes–Automated investing and manual investing are both available|
|Mobile App||Yes – You can download the iOS app here and Android app here.|
|Customer Support||Phone — M-F 7A-5P PT, Email — 24/7|
Lending Club investments are very similar to investing in bonds. All notes range in length from 36 months to 60 months (3 to 5 years). Grade A notes are going to be investors with the highest credit quality. E-grade notes will be the riskiest. While borrowers with a E grade note will be assessed an interest rate as high as 26.30%, the average historical return to investors is only 4.52% once you factor charge-offs, delinquent payments, and the service and collection fees.
You might decide to account a small portion of your Lending Club assets to E-grade notes for the possibility of earning a ~25% return, but, you will most likely be able to earn a higher rate of return with less risk by solely investing in notes within the A-E grade range once you factor in defaults and late fees.
Within each loan grade, there are five different interest rates. Take a look the “A” loan grades. A1 will be the most creditworthy borrowers, and therefore have the lowest interest rate. If they make each payment on time, your net monthly return will be 4.32% after the 1% Lending Club service fee.
LendingClub recommends owning at least 100 notes to help ensure your portfolio is properly diversified.
Like a robo-advisor, LendingClub will automatically invest your account balance across a swath of note classes to ensure your risk exposure is minimized while providing a maximum return.
Automatic investing is a free service open to all investors. It is optional and you can also choose your own investment notes.
If you decide to manually invest in notes, LendingClub offers many advanced filters to quickly spot the least risky (and most risky) notes and borrower profiles.
Some of the different filters to choose from including the following:
- Verified annual income
- Government employee vs. Private sector employee
- Loan type (i.e. Debt refinance, vacation loan, new business loan, etc.)
- Debt to Income Ratio
- Credit score
- Number of delinquencies in the last two years
- Credit profile has been reviewed by Lending Club
|Review||Read Review||Read Review|
|Features||· Automatic Investing
· Invest in 30 different credit grades
· Minimum investment is $25 per note
· Taxable and retirement accounts are supported
|Fees||· 1% account fee on all borrower interest payments
· Up to 35% collection fee on delinquent payments
· $100 annual account fee for balances <$5,000
· $1,000 initial account balance requirement
|1% annually of borrowed principal balance||
|Asset Allocation||Invest in notes rated between A1 and E5||Invest in 7 different credit ratings for multiple loan types||Invest in 7 different credit ratings|
Pros of LendingClub
Here’s why you might enjoy LendingClub:
- Many investment options
- Minimum investment is $25 per note
- Free automated investing
- Average return is at least 4.71% to 6.23% on note grades A through C
Cons of LendingClub
LendingClub isn’t a perfect investment platform and here are a few reasons why you might avoid them:
- Membership restricted to certain states and annual income or net worth requirements
- Service fees on delinquent payments can be up to 35%
- Must maintain at least $5,000 to $10,000 account balance to avoid the annual $100 account fee
- History of recent scandals has reduced investor confidence
Another potential negative is that all peer-to-peer lending returns are considered ordinary income and can be taxed at a higher rate than the traditional capital gains tax assessed to stocks and bonds. This applies to all P2P lending platforms including Lending Club.
Lending Club makes it easy to provide non-bank personal loans to borrowers from all over the country for a variety of reasons. With a well-diversified portfolio, you have the opportunity to earn a higher rate of return than most fixed income streams and bonds. If you choose borrowers that are delinquent, the collection fees can severely impact your overall rate of return. Lending Club has one of the best lending and research platforms that can make peer-to-peer lending achievable for most investors.