I extended my first $400 worth of loans with Lending Club on Sunday night. I intended to lend $500 but could not find enough people that I wanted to extend credit at this time. I decided to give a quick report of what worked well and what could have been better about the my first Lending Club experience.
Update: I posted a video of the Lending Club Loan Portfolio Creation Process and many of these suggestions were added in the January 2007 Lending Club update.
The Good about the Lending Club Experience
- The Lending Club website was easy to use and understand — including the pie charts in the portfolio tool.
- The loan portfolio function was an easy way to start with a potential group of loans.
- It was reasonably easy to change the portfolio before purchasing by adding and dropping loans.
The “Could have been Better” List
- Lending Club did not seem to have a very large pool of borrowers. I could not even find enough decent loans to put $500 in a well-diversified portfolio — meaning $25 per loan. I extended a handful of $50 loans and my last $100 was not used. This will leave 20% of the money invested in Lending Club idle for at least another week while I try to find loans.
- To earn a return of anything over about 8%, you must quickly drop in credit grades. If you look at the pie chart for a portfolio with a risk score of 1 of 5, all the loans are class A and B borrowers. With a risk score of only 1.5 out of 5 points on the portfolio rankings, approximately 60% of the loans (estimation based on graphic) are grades D through G and A is not included at all. That is a large difference for a potential difference of 4% in return.
- Not enough information to quickly filter out poor credit risks on the list of loans available. Very few fields appear on main portfolio review page to quickly delete bad potential loans.
- Titles of loans are very similar making it difficult to remember which loan details you were examining when you move back to the main portfolio page.
Ideas for Improving the Lending Club Loan Selection Process:
- The site should allow you to select what additional fields to show on the portfolio review page. For example, credit inquiries and credit utilization would have been very helpful to add to the review without needing to drill into each detail page. I could have eliminated several loans very quickly — one person had 25 recent credit inquiries!
- When searching for loans in the portfolio, the search returns loans already in your portfolio. I think that this should be an option to turn on or off. I imagine most people want to search to add potential loans that have not already been added.
- More descriptive titles of the loans — maybe this is the fault of the borrowers rather than the site, but it almost seemed like the titles were selected from a drop down list. When looking at a long list, they became difficult to distinguish by much more than the dollar amount of the loan.
- Let me add a loan to an existing portfolio. I browsed the site again tonight and found one loan to fund, but it seemed ridiculous to have a portfolio with one loan, so I did not bother funding the loan.
Verdict on First Lending Club Experience
I am not as excited as I expected to be about my first lending experience with Lending Club. The list of the potential loans to fund seemed too small and my estimated return is only slightly above 9%. I need to take on more risk to make more money, but right now I seem to be more afraid of the credit risk than enamored with the potential return.
My current portfolio will not beat the stock market on average. Purchasing $500 of the total stock market index would be a much better investment because it is more diversified, contains less credit risk, and is more tax efficient. Additionally, Lending Club loans are less liquid than an investment in a stock index. At this time, I classify my first loan portfolio as an experiment rather than a rational investment.