San Francisco-based Lending Club is the largest peer-to-peer (P2P) online lending platform in the world. It was founded in 2006, and two years later became the first P2P lender to register with the SEC. Lending Club offers investment opportunities for as little as $25. Investors can attempt to resell their Lending Club notes on an unaffiliated secondary market, the Folionfn trading platform. Lending Club provides investors with opportunities to invest in business and personal loans. It also helps arrange loans to medical patients.
How It Works
The Lending Club platform, LendingClub.com, is a marketplace where borrower apply for loans. Lending Club assigns a rating to each loan. Investors, both individuals and institutions, invest in notes, called “member payment dependent notes,” that back the loan. Lending Club does not underwrite, insure or guarantee the notes – all the risk is borne by investors who depend on borrowers meeting their obligations.
Lending Club’s internal rating system evaluates the riskiness of loans. The most solid loans receive a rating of A1, whereas the riskiest ones are assigned a rating of G5. Lending Club loans are made with fixed interest rates ranging from 6.03 percent to 26.06 percent, depending on rating. The lower the rating, the higher the interest rate assigned to the loan by Lending Club. There is a rough correspondence between Lending Club’s internal rating and the rating system used by independent companies like S&P and Moody’s, where Lending Club notes are rated from A to C.
Investors can invest in fractions of loans up to the full loan amount, in $25 increments. The maximum note amount is $40,000. The notes have maturities of three or five years from the date of issuance. Notes from $1,000 to $9,975 are only issued with three-year terms. All notes are interest bearing from the issuance date, are sold at par, are fully amortizing and pay out monthly.
Historically, investors receive between 5 and 7 percent returns on their notes. Virtually all investors who diversify to 100 or more notes of equal size have seen positive returns. Accounting for defaults and Lending Club’s 1.00 percent fee, investors receive back in cash between 104 and 106 percent of their total investments. Payments are deposited into investor accounts where the cash can be reinvested or withdrawn. Lending Club offers both investment and retirement accounts.
All loans are issued by WebBank, an FDIC-insured bank.
You can read the Lending Club prospectus on its website, which is always a good idea before investing your money. The prospectus details all the risks you undertake when investing in Lending Club notes. To invest in Lending Club, you must:
· Live in any state (and the District of Columbia) except Arizona, New Mexico, North Carolina, Ohio and Pennsylvania
· Have a minimum net worth and gross annual income of $70,000, or $85,000 if you live in California. The income requirement is waived if your net worth exceeds $250,000
· Be an accredited investor if you live in Kentucky
· Limit your Lending Club note purchases to no more than 10 percent of your
Lending Club does not perform means tests on investors to verify their financial condition.
To become an investor, you fill out a short application form supplying your state, account type (investment or retirement), email address, your personal information, investable assets, and banking information. You can then fund your account via a cash transfer or by check.
· Higher risk-adjusted returns: Traditional fixed-income investments from banks, money markets, investment-grade corporate bonds and the U.S. Treasuries generally pay smaller returns than what you can expect from Lending Club notes. For example, five-year Treasuries were yielding 1.80 percent on November 18, 2016. On that same date, BBB-rated, five-year U.S. corporate bonds were yielding 3.82 percent. BBB is the lowest investment-grade credit rating. Lending Club notes historically yield 4 to 6 percent after fees.
· Powerful filtering options: You can select notes based on a number of filtering options so that you invest only in notes that meet your criteria for risk and reward.
· Automatic investing: Lending Club offers a free service to automatically invest your money into a portfolio of notes. You can specify filters to limit the notes that Lending Club will purchase for you.
· Reasonable fee: Lending Club attracts borrowers, publishes investment opportunities, issues the notes, services the loans and provides up-to-date information for a 1 percent fee. That is, if you buy a 6 percent note, your after-fee yield will be 5 percent assuming timely payments. Many find this fee reasonable. For some, however, the fee might seem unacceptably high.
· Scandals: Lending Club has suffered embarrassing scandals that may cause you pause before investing. Chief Executive Officer Renaud Laplanche was forced to resign in May 2016 because of alleged ethical problems regarding conflicts of interest and misdated loans. Law suits and investigations by the Department of Justice and the SEC are underway. Bloomberg reported in August a story in which 32 different loans were taken out by just four individuals, which is unusual at best. Obviously, this kind of activity affects loan riskiness.
· Illiquidity: Despite the existence of the Folionfn secondary market, reselling Lending Club notes at anywhere near par value can be a slow process. It’s best to assume that you will have to hold your notes until they mature in three to five years.
· Taxation: Your returns do not qualify for the lower capital gains rates.
· Returns vary over time: Although each note has a fixed rate, the yield on your portfolio of notes will vary over time as some notes mature and are replaced. Defaults will also cause your returns to suffer.
Investing in Lending Club notes can provide fairly decent returns. However, due to the inherent risks and past allegedly shady dealings, you would do well to limit your investment to an amount you can afford to lose.