Lending Club IRA: Why it is good for your retirement

I am thrilled to hear about the new Lending Club IRA account to allow peer to peer lending in an retirement account. EntrustCAMA, part of the Entrust Group, is the account administrator. I heard of the Lending Club IRA only a few weeks ago through the comments by a beta tester on my initial review of Lending Club post.

Why is this the Lending Club IRA Big News?

  • Tax Deferred status: Interest is normally treated as income which is taxed at a higher rate than capital gains which means that personal loans were handicapped as investment class against stock market investing over the long term. The Lending Club Individual Retirement Account changes that!
  • Reduced Volatility: Stock market investors have learned a recent painful lesson in volatility. Volatility hurts your investment over the long run because investments earn a rate of return from the geometric average and not a simple average due to the volatility. I link to an an example below that explains the difference, but essentially all things equal consistent returns are better than volatile returns in the long run. I strongly believe that overtime Lending Club loan returns will have significantly less volatility than the stock market, with similar average returns, over the long term.

P2P Lending IRA Proposed by me in 2007
I have been hoping for a Prosper or Lending Club IRA since performing an analysis of the tax impact on P2P loans versus stock market investing. In the four scenarios outlined, a tax protected peer to peer lending portfolio beat all the other options including investing in the stock market in a Roth IRA. I published a spreadsheet with all the data examples showing you why the Lending Club IRA can likely make your retirement account grow significantly in the long run. If I have not explained volatility well enough for you — here is a link to the mathematics behind volatility.

Graph of the Results:
P2P Lending Investment vs Stock Investing
The graph and article mention a Prosper retirement account but the same information applies to a Lending Club account.

How do you invest in a Lending Club IRA?
First, you must meet the lender requirements which include being eligible in the state where you live. Secondly there are income and net worth requirements. Both are outlined on the Lending Club website. Sign up and mail Lending Club a check before the April 15th IRA deadline to invest under the 2008 limit. (Unfortunately, I cannot invest for 2008 because I already maxed out my Roth IRA.) Of course, you can always start investing for 2009.

Sign up for Lending Club Now

Will I invest in the Lending Club IRA? YES!
My original plan for 2009 was to load up on stocks at this point in time because I strongly believe that the current market provides a tremendous long-term buying opportunity. However, now I will add a Lending Club retirement account to help reduce volatility in my total portfolio in the long run.

Standard disclaimer: I know about finance but not about your personal situation. Consult your own financial adviser before acting upon this information. Thanks. :)

Your thoughts on the Lending Club IRA?
What do you think? Answer the poll questions and respond in the comments below.

Do you think the Lending Club IRA is a good idea?

  • Yes (76%, 26 Votes)
  • No (24%, 8 Votes)

Total Voters: 34

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Will you invest in a Lending Club IRA?

  • No (38%, 13 Votes)
  • Yes (32%, 11 Votes)
  • Maybe (30%, 10 Votes)

Total Voters: 34

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Sign up:

Try it Now! Join Lending Club.
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Comments

  1. Allen Taylor says:

    Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor
    http://www.investingworldtoday.com

  2. Lending Club lender says:

    It’s nice to see that my ‘gut instincts’ about return and volatility are borne out by your mathematical models. Given the implied lower volatility of this type of investment, what percentage of one’s total retirement portfolio would you suggest for different age groups?

  3. J says:

    So let’s do the math… $5,000 minimum, plus $250 in annual expenses for the FIRST year (you’ll get the bill first thing in 2010, so yes, FIRST year and nobody’s really talking about beyond then how much it will be), PLUS 1% servicing fee on the notes and a huge number of defaults starting to flood the system (why do you think stats are down still, even after protest)?

    You’ve got to be pulling an April Fool’s joke if you think this is a path to financial success. My portfolio finally went under water with LC a couple of weeks ago, it was conservative, and I’m looking for a lifeboat off the ship as nobody at LC seems to want to fix the late loans. Fix collections, lower fees and don’t reward bringing in bad people (referral programs are crap)… I see none of this happening. My personal opinion… It’s Prosper.com Part 2. Advice… GET OUT, not IN. P2P is done, stick a fork in it and get on with your lives.

  4. I do wish that whoever voted “No” would say why. I’d love to hear why people don’t think this is a good idea.

    Thanks for stopping by again. I think that Lending Club’s rules state that your Lending Club investment can be no more than 10% of your total net worth.

    So that is what the rules say, but what would be an optimal percentage? I have not worked on that scenario yet. It would take me several years to get up to 10% so that calculation has not been high on my priority list. I would think though that 100% in Lending Club loans would be a bad idea even if the math tells you that it is the optimal return. I may look into that question later.

  5. J, Thank you for commenting. I had not seen your response in the comment queue before I responded to the first commenter who went through without approval since he had commented here a few times before.

    I intentionally posted it before midnight to show it was not an April Fool’s joke. I have had a loan portfolio with Lending Club for a long time now and it is actually doing quite well — WAY BETTER than my prosper loans.

    I’m sorry to hear that yours loans have gone south. Would you be willing to send me a screen shot of your dashboard I’d like to see what it looks like since mine looks rather good. Contact me through the contact form, and I’ll respond back so you can attach. Let me know if you want me to post it for others to see or not.

    I’ll re-do all the math on my above analysis considering the fees, but overall the reduced volatility should make a large difference after time.

  6. Lending Club lender says:

    Entrust’s fees are definately something I took into account before investing. For my SIMPLE IRA, it works out to 1.85%, plus Lending Club’s 1%. Though significantly higher than index funds like Vanguard ETF’s, they didn’t seem outrageous when compared to some other mutual fund families or ETF’s. Entrust will waive it’s fee for this year if you invest by April 15th. The fee that I don’t really understand is Entrust’s $50 application fee. You fill it out and mail it in to them. Inputting your data into their system shouldn’t take a lot of time, They then wire your funds to Lending Club. In an era of $100 fees for college applications, I guess they see this as another revenue source. I believe this fee will also be waived if you apply before April 15th. No matter what, if a significant percentage (greater than 3-4%) of loans go into default mode, the question of fees becomes a moot point as you write off the balance of those loans. It would be nice if LC provided some additional stats regarding the number of loans that were able to be recovered through collection efforts. It would also be nice to have a forum on the site.

  7. The fees are definitely going to add up at that rate.

    Lending Club had the benefit from Prosper’s experience, so I can assure you that they will never have a forum. See number eight on this list. The forums there became quite inconvenient to Prosper and when they purged the forums of both members and posts, they made an army of angry lenders.

  8. Lending Club lender says:

    Quick follow up. I may have miscalculated the fees involved in my above post. I will owe ENTRUST $250 next January. That will cover this year and next year’s fees. So if my SIMPLE IRA is fully invested both years ($13,500 x 2 = $27,000), then the fee works out to .92% for two years, or .46% each year. After that, assuming about a 10% return, the annual fee should be in the .5% area the third year, and will go down a bit each year as a percentage of the total value of the account, assuming the account increases in value. That puts them in line with many ETF’s, though not as low as Vanguard’s.

    I did confirm the fact that the application fee is waived if you apply before April 15th.

  9. Deepak (2 comments.) says:

    Nice writing. You are on my RSS reader now so I can read more from you down the road.
    Deepak

  10. Deepak (2 comments.) says:

    After that, assuming about a 10% return, the annual fee should be in the .5% area the third year, and will go down a bit each year as a percentage of the total value of the account, assuming the account increases in value.

  11. Lending Club lender says:

    Quick follow up on the subject of ENTRUST’s fees. They charge $25 to wire funds over to LC, and $5 to snail mail a check. These fees are covered through the end of this year by LC, but will be the responsibility of lenders as of January 1, 2010. There’s also a two day delay between the time you make the request and the time the funds get moved out. That delay is in addition to the time your check takes to clear, of course.

  12. LendingClubber(new comment) says:

    I just signed up for Lending Club’s “No Fee” IRA through EntrustCama. While the minimum investment for the no fee status is $15k, that was just a bit more than I had planned to invest. Saving $250 a year is significant and worth the extra investment to me.

  13. A Personal loans guy(new comment) says:

    I have always really liked the idea of social lending and the retirement idea is interesting, does anyone know if prosper does the same thing?

  14. Lending Club lender(new comment) says:

    Lending Club has waived all IRA fees for any account that maintains a balance of 15k or more in 2010. Looks like they’re trying to bring more capital in. Traditional, ROTH, and SIMPLE IRA’s are on their menu, as well as solo 401(k)’s. My SIMPLE has done well this past year, with only 3 notes late out of over 100 notes total and no defaults yet. Return is hovering around 11%.

  15. Lending Club lender(new comment) says:

    I don’t think Prosper offers anything in the way of an IRA product, but even if they did, I’d be very leery given their default rates, now approaching 45% of all loans! See Fred93′s blog for the gory details.

  16. Lending Club lender(new comment) says:

    Not sure if anybody is still following this thread, but Lending Club has reduced the balance requirement for a no fee IRA to 10k.

  17. Ken H(new comment) says:

    It takes lending club a while to register loans as defaulted, and they’ve only been around 4 years. If you look at the statistics page and then performance, you can analyze the return on, say, their first 6 months of loans, which at this point should all be paid back. The “A” loans returned about 5%, the rest averaged almost zero….and that was before they increased their fees. I have a portfolio of $15,000 in loans. About $900 of this was before they opened up the trading platform and is separated as non-tradeable notes . These were invested conservatively and i’ve only got about $50 return in almost 3 years. Pretty sucky. My more recent notes I selected more risky loans, and I’m rapidly seeing defaults and late payments accumulating. I think a lot of people that know they are about to declare bankruptcy, but it doesn’t show yet on their credit score, go to lending club for a quick score before declaring bk.

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  1. [...] March 31st, 2009 — Announcement: Lending Club IRA is now available. This is tremendous news since my example above shows that a P2P Lending account that is tax [...]

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