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.
I found similar inadequacies… have had loans for a month on LC I am now finding a lack of account statement information… I remain committed to getting $1250 ($25 would = 2% of portfolio) into LC, but I am going to wait for the next release before going beyond my initial $350…
I have over $11K in Prosper. And I still consider it an experiment.
Thank you for sharing your experience as a lender and providing feedback and ideas for enhancements. Our team is hard at work solving the 4 issues you have identified. We have also significantly increased our marketing to borrowers in the last couple of weeks and reached 80 active listings this morning (up from 50 early last week), which will help offer more choice to lenders. The average net return of all lenders on the Lending Club marketplace has been 12.2% after fees and losses so far (6 months of data). Please keep in mind that even the riskiest loans on Lending Club still are above 640 Fico and less than 30% DTI. We’re considering changing our A-G scale to make it more easily comparable to other markeplaces, what do you think?
Best, Renaud
Renaud Laplanche
CEO, Lending Club
Renaud, Thanks for stopping by and commenting. In fact, one of the reasons that I posted my feedback is because I actually do believe that Lending Club will listen and take action.
I agree that your A-G scale is difficult to compare to other (ie Prosper) risk scales. However, I think it is because I became familiarized with Prosper’s scales first. I realize that your C is a much better risk than a Prosper C, but I think I was still keeping the Prosper default rates for a C loan in the back of my head. Could you display the person’s FICO score or is that not allowed?
I went back tonight and added a new portfolio with more risk using the $100 that I had left. I took on one C, two Ds, and one E. This portfolio has an average return of over 12% and brings my weighted portfolio average up to nearly 10%.
By the way, another issue that I noticed is that if I ask a borrower a question, they can ignore the question. There are a couple of loans with terribly high numbers of recent inquiries which is an indicator of issues, but several of the people that I ask about this are simply ignoring the question. It would be nice to know the number of unanswered questions.
You are correct that we cannot display a borrower’s FICO score directly. However, we are already discussing enhancements where we can make the “credit score” element more accessible to our lenders.
Also, thank you for the suggestion on displaying the number of unanswered questions. We will review and see how we could implement something like this.
Sidney Chen
Director of Product Strategy
Lending Club
Thanks Sidney. I thought you might not be able to display the FICO score or else you would have done so. Good luck coming up with a new alternative and thanks for listening to my suggestion on the unanswered questions.
I agree that there are not enough loans to chose from.
I do not like that every time you bid you have to create a new portfolio. I would like to be able to add to a portfolio. Yes, I can rename a portfolio to something meaningful, but I’d like to be able to group all my bids vs all my LC chose bids. If my full $500 doesn’t end up in funded loans, I have to either bid another $500 or hand pick the loans to reach the investment that I want. My plan was to do my lending club investment just by the numbers (with an occassional exception) and I can’t do this!
I do like that a borrower can accept partial funding. 14 days is a long time to tie up money and then not have a loan fund.
Glad to find some commenters with serious investments! Most of what I’ve found are people still testing the water like me.
$11,000 in prosper sounds like a substantial investment to me, how’s that treating you??
The interest rates look delicious, and are way better than my CD which is actually one of the best rates around for those types of investments right now.
I’m thinking about adding some P2P loans to my long term investment portfolio a long with my stocks, CDs, high yield, and cash.
LMAO @
“…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.”
Is that December fourth of THIS YEAR!? You think the stock market is going to beat 9%? Less of a credit risk? What does that even mean? There is no ‘credit’ in the stock market.
Savvy,
A flaw to this WordPress theme is that it does not have the year listed with the date on the post. However, if you notice all the previous comments, they started back in 2007, so deduction says the post was created in December 2007.
We know that that hindsight is 20/20. The 9% return refers to the historical average stock market return before the latest meltdown. No one saw this kind of melt down in the stock market more than a year ago. I won’t accept that anyone saw it coming back in 2007 unless they show me their trades proving it, and then that has a good chance of being dumb luck.
You are right that I was not clear about the credit risk point. There is no credit risk in the stock market. However, it is a correct statement that stocks have less credit risk than a P2P loan. Additionally, my portfolio (outside of P2P lending) does carry credit risk in the form of bonds.
Can you say for certain what the stock market will be at the end of this year? It might be up more than 10% from where it is now. Due to the tax treatment of P2P loan interest, the stock market does not need to return 10% to beat my P2P lending portfolio.
This meltdown has made me even more certain that the stock market is a better investment right now than P2P lending. Forget what has happened in the last few months – we only have the money we have today and invest today going forward.
There are many individuals in real trouble and those in trouble are more likely to be seeking a loan. With the beat down the stock market has taken, it won’t take much of a comeback to trounce a P2P lending portfolio after taxes after the next few years. I will keep some money in Lending Club but will continue to buy stocks on sale as well.
Can you say today that my stock market portfolio from today forward will perform better or worse than my P2P lending portfolio? Of course you can’t. Well, you can try, but I bet you would have the exact same chance of being right back in December 2008 — 50/50.
Thanks for commenting.
Penny,
Sorry that I missed your comment earlier. Thank you for stopping by and commenting. I have only loaned about $2,000 total in P2P loans. Most of the people who invested heavily in Prosper loans are regretting it, so I agree with your test the water approach.
Actually, I would be putting a little more my portfolio in Lending Club loans if it were available in my area right now. (I still think stocks overall are a better buy right now, but I try not to put all eggs in one basket to reduce risk and volatility.) But unfortunately, Lending Club is not currently available in my state on the primary market and most of the loans on the secondary market are selling at a premium. That is the main reason that I have not blogged much on the topic lately.
I’ve been a Lending Club lender for three months, now, and have been pleased overall with the process. They will be rolling out an IRA investment option through EntrustCAMA in the very near future. I was invited to invest in that program as an early adopter, and am in the process of lending out my SIMPLE IRA contribution for this year ($13,500). I have close to 20k invested with them, and so far, so good, although I know my loans are brand new. Time will tell what the default rate with my loans will be. I’ve tried to keep about 65% in grades A and B combined, with another 20% in C, leaving the balance split between D, E and F levels. I hope to clear 10% after fees and defaults are figured in, before taxes.
Thank you for stopping by to comment. I have not heard of the EntrustCAMA option — that is very intriguing because I have always had concerns around the tax treatment of the interest. Do you have a link to more information?
If you can clear even 9% after fees year after year (and can deffer taxes), you will knock the socks off the stock market over time due the geometric average having much less volatility.
Care to write a guest post on your experience with the EntrustCAMA option? I’d love it if you did.
I don’t have a link yet because the program has not been offered ‘officially’ yet. I’m sure when it is there will be information on Lending Club’s home page. Entrust’s web site doesn’t mention anything on the program yet either. As far as the interest is concerned, it would have to be tax deferred being in an IRA, but I will confirm that with the person in charge of the program at Lending Club and let you know if that is incorrect. I’d be happy to write a guest post after I see how the loans are performing. As far as the process of applying to the program, that was very straightforward and took maybe 10 minutes. I chose to mail a check in rather than wire funds, so it took about 10 days for my funds to become available at Lending Club. As you said, I’d be very happy with 9% too, minus all the volatility implicit in the stock market.
I finally made a new post about the Lending Club IRA.
I think it is an exciting development in P2P lending. I hope to hear back from you with a guest post on your experience. You can send a note to me via the contact form.
I know a common complaint about Lending Club is the relatively limited pool of loans to choose from. I don’t know if this is a trend or just a blip, but I’ve noticed the inventory of loans the over the last week or so has ballooned from 100 or so to over 200.
Thanks for sharing your review and experiences with Lending Club. Do you have any updates to share, now that you’re 2+ years into the initial loans? How is your rate of return now?
As an investment, I consider LC a 3 year CD and knowing the current CD rates, it is a great deal. The day I stop investing, the funds will be returned over the 3 year period. I also just learned that the interest reported to the IRS does not include any one loan earning less than $10.00 per year. Since this applies to most loans less than $75, my earned interets was a fraction of my actual gain.
This post was a long time ago but you should definitely check back with Lending Club. They have made a lot of the changes you recommended and the site is getting better all the time.
I am not so sure about the relative risks of stock market investments vice P2P. I am very happy with the performance I am receiving with Lending Club, and have pulled a lot of funds out of the market. I didn’t do this out of panic. I did this out of a loss of confidence in the leaders that are involved. Wall Street banks? Yeah, right. Check out the bailouts and outright thievery that went on with the subprime disaster.
Bottom line, I believe MORE in the average American with a 660 or greater credit score than I do in those that manipulate the stock market for personal gain. I’m not talking about investors or day traders. I’m talking about greedy investment bankers and Fortune 500 companies that would rather ship jobs oversees.
What is the name, business address of the president/CEO etc, of Lending Club ?
Dina, you can find the CEO on the about us page on Lending Club’s site http://www.lendingclub.com/public/about-us.action As for the address, it is probably around that page somewhere. If you really need it, I am sure you can find it.
Thanks Joe — I imagine that they have made some updates, but I have moved to Texas, which sadly does not allow P2P investments, so I can’t update.
David, In my opinion, Lending Club is a good deal as long as you can invest in enough loans that you can spread your risks to reduce default risk on any individual loan.