Lending Club Review – My 2 year Investing experience

Having been using Lending Club as an investing platform, here is my experience….
I had been reading a lot on generating passive income. Few of the blogs mentioned peer-to-peer lending as a way to diversify investment portfolio. Lending Club and Prosper were the two popular vehicles. Not having tried this platform, I decided to start small.

Today I wanted to bring up my experience after two years of investing on Lending Club.

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What is peer-to-peer lending?

Peer-to-peer lending is a form of lending wherein regular people can directly lend or take loans as an alternative to banks. As a borrower, the loan amount could vary from a $1,000 to few hundreds of thousands of dollars. The interest rate, as it normally would, depends on your credit score.
As an investor, your money invested is split into notes of $25 each and spread to various borrowers. For example, a thousand dollar investment would be split into forty notes. Each note would be a portion a larger loan issued to a borrower. The advantage being that if one of them default, you would be losing only the $25 investment on that loan.
Peer-to-peer lending became popular among borrowers during the financial crisis when banks stopped lending to sub prime market.

My investment

In 2017, I started with a $1,678.66 which came from my income working as a freelancer. As of today (in 2019) it has grown, fortunately, to $1,898.88 net worth. Lending Club adjusts the account value based on current late payments and it gets adjusted again as it is paid or goes into default state.
The Adjusted Net Annualized return on my investment is 5.95% which is good considering the bank CD rates, however, not more than my index funds investments. Regardless, it is positive growth considering the risk levels associated with the investment.
Lending Club provides both automated and manual investing options. Automated investment works based on your risk tolerance level which is setup during your initial enrollment.  In the manual investment mode, you get to pick and choose the loans that you would fund based on  borrower’s credit worthiness and reason for loan is provided to make a decision.
I was not sure how to evaluate the credit worthiness of loan applicants so I opted for automated investing.  I had it broke down as following based on my risk tolerance level.

After two years I wanted to see how I was performing compared to other investors on Lending Club. As you can see in the graph below, I was somewhere in the middle. Investor performance varies widely. Invest with Lending Club, and you could earn more than 15 percent return, or you could lose money.

To be successful, you need to put in effort. I took the easy route of automated investing. Smart investors, however, create their own portfolios based on much more conservative criteria than Lending Club uses to approve loan listings in the first place.

Final notes

I believe it was a very good experiment. Looking back I am not sure if I will invest further because of the risks involved. The big problem is people defaulting on the payments. It is next to impossible to predict if a borrower will default even if you have the full credit history. In the two years of my investing I’ve had six borrowers default and it irks me to see it.
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Happy lending!

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