Lending Club Investing: A Comprehensive Guide

Lending Club investing is a unique way to earn returns on your money by lending to individuals and small businesses. This platform allows you to diversify your portfolio and potentially earn higher returns than traditional savings accounts.

The minimum investment required to get started with Lending Club is $1,000. This is a relatively low barrier to entry, making it accessible to a wide range of investors.

By lending through Lending Club, you can earn an average annual return of 5-7%. This return is based on the performance of the loans in your portfolio.

Lending Club has a robust credit grading system that assesses the creditworthiness of borrowers. This system is based on a combination of factors, including credit score, income, and debt-to-income ratio.

I've found that Lending Club investing is all about being selective with your borrowers.

You should avoid lending to people with a history of more than two delinquent payments.

I've set this rule for myself as a guiding principle, and it helps me feel more confident in my investments.

Credit card companies are charging absurdly high interest rates, often 10X the risk-free rate.

This is why I primarily lend money to people who are using P2P to consolidate their loans.

Consolidating debt to a lower interest rate is a wise decision, and it feels good to help borrowers save money.

The average credit card debt per household is around $15,000, according to the Federal Reserve.

This highlights the need for people to take control of their debt and seek lower interest rates.

To get started with Lending Club investing, you'll first need to check if you're eligible. You must be at least 18 years old and have a valid social security number, and you'll also need to have a checking or savings account.

Some states have different requirements, so be sure to check the list of eligible states. Currently, you can invest in California, Colorado, Connecticut, and 16 other states.

You'll also need to meet certain financial suitability requirements, which may include having a minimum annual gross income of $70,000 and a net worth of at least $70,000 (excluding home, home furnishings, and cars).

To make investing easier, you can set up recurring transfers to fund your account. This way, you can automate your investments and take advantage of the monthly payments that borrowers make on their loans.

Here are the basic requirements to get started:

Note: The eligibility rules may change over time, so be sure to check Lending Club's website for the latest information.

Lending Club investing is a straightforward process. It begins with the borrower applying for a loan and meeting certain criteria, such as a minimum 660 FICO score.

Loans are then added to Lending Club's online platform, where investors can browse and build a portfolio of loans. The minimum investment is just $25 per loan, and each portion of a loan is called a note.

Investors can fund portions of the loans as the verification process happens, and if the borrower passes verification, the loan is approved for investors and will be issued to the borrower if fully funded. If the borrower fails verification, the loan will not be issued and all money will be returned to the investors.

Lending Club's peer-to-peer lending process is surprisingly simple. It starts with the borrower applying for a loan, and if they meet certain criteria, such as a minimum 660 FICO score, their loan is added to Lending Club's online platform.

Investors can browse the loans on the platform and build a portfolio of loans, with a minimum investment of just $25 per loan. Each portion of a loan is called a note, and smart investors build a portfolio of notes to spread their risk among many borrowers.

Lending Club performs some level of verification on every borrower, and investors can fund portions of the loans while this process is happening. If the borrower passes verification, the loan is approved for investors and will be issued to the borrower if fully funded.

A loan can stay on the platform for up to 14 days, but most loans are funded much quicker than that. Once funded, the loan will be deleted from the platform, and approved borrowers will receive their money in just a couple of business days.

Approved borrowers will then begin making payments within 30 days, which will be for principal plus interest on a standard amortization schedule. This schedule is the same one used by traditional financial institutions.

Lending Club's peer-to-peer lending model allows borrowers to obtain funds at a lower cost, and investors can gain higher returns. However, there is a higher risk of default in the industry due to unsecured loans and borrowers who can't access traditional funding sources.

LendingClub expanded into car loans in 2015, a significant move to diversify their product offerings. This expansion allowed borrowers to access financing for their vehicles through the platform.

In 2015, LendingClub also announced a partnership with Google to extend credit to smaller companies that use Google's business services. This partnership aimed to provide financing options to businesses that were underserved by traditional lenders.

The company signed partnerships with various organizations, including BancAlliance, a group of 200 banks, to connect borrowers with community finance institutions. This collaboration enabled LendingClub to offer car loans through a network of community banks.

Lending Club investing comes with its fair share of risks and challenges. The company faces stiff competition and tighter regulation, leading to higher operating expenses and a decrease in profits.

One of the biggest risks associated with Lending Club is credit risk, which is determined by the nature of peer-to-peer loans. Defaults on loans can have a domino effect in the market, affecting liquidity and causing a ripple effect.

Peer-to-peer lending, like Lending Club, comes with its own set of risks that investors should be aware of. The annual default rate across all grades at Lending Club is around 6 or 7%, with higher risk borrowers having a higher default rate.

Borrower defaults are a major concern, as the loans are unsecured, leaving investors with little recourse if the borrower decides not to pay. This risk is even more pronounced for investors who don't diversify their portfolio.

Lending Club bankruptcy is a smaller risk, but it's still a possibility, especially if the company faces financial difficulties. In the event of a bankruptcy, there's a backup loan servicer that will take over servicing the loans, but investors could still lose some principal.

Interest rate risk is another factor to consider, as loan terms are typically three or five years, leaving investors vulnerable to changes in interest rates. If interest rates rise significantly, an investment in Lending Club may not be as attractive as it seems.

To mitigate these risks, it's essential to diversify your portfolio by investing in multiple loans. The $25 minimum investment on Lending Club allows you to spread your risk across a larger number of loans.

Here are the top risks to consider when investing in peer-to-peer lending:

Market Challenges are a major hurdle for companies like Lending Club.

Rising interest rates have made people more willing to put their money in banks rather than peer-to-peer loans.

The gap in interest rates is small, but bank deposits are almost risk-free, making them a more attractive option.

Lending Club has less money to lend because of this, and the amount of money loaned needs to be reduced to maintain a balance between money input and output.

This decrease in loans has a direct negative effect on profits, which are already suffering from other challenges.

Fiercer competition and tighter regulation are also taking a toll on Lending Club's profits.

Higher operating expenses are a result of these circumstances, causing a further decrease in profits.

To profit, Lending Club needs to obtain more funding, but relying too much on institutional lenders can cause problems.

Institutional lenders are more willing to take risks than individual lenders, but this can lead to latent problems, as Todd Baker pointed out.

LendingClub was initially launched on Facebook as one of Facebook's first applications, and after receiving $10.26 million in funding, it was developed into a full-scale peer-to-peer lending company.

In August 2008, LendingClub filed an amendment to its Form S-1 outlining new interest rate formulas and a resale trading system. This was a significant step in its growth and development as a company.

The company raised $12 million in a Series B funding round led by Morgenthaler Ventures in March 2009, which further fueled its growth.

LendingClub was initially launched on Facebook as one of Facebook's first applications.

It was a bold move, but it laid the foundation for what would become a full-scale peer-to-peer lending company.

After receiving $10.26 million in a Series A funding round in August 2007, LendingClub was able to develop its concept further.

In April 2008, LendingClub temporarily suspended new lender registration, canceled its affiliate program, and entered a "quiet period" while it awaited approval to issue promissory notes to lenders.

This was a crucial step in LendingClub's growth, as it paved the way for the company to issue securities rather than direct obligations of the ultimate borrower.

On June 20, 2008, LendingClub filed an S-1 statement with the U.S. Securities and Exchange Commission (SEC) seeking the registration of $600 million in "Member Payment Dependent Notes" to be issued on its website.

LendingClub resumed new lender registration on October 14, 2008, after completing the SEC registration process and posting the filed prospectus on its website.

In March 2009, LendingClub raised $12 million in a Series B funding round led by Morgenthaler Ventures, further solidifying its position in the peer-to-peer lending market.

LendingClub's pre-IPO growth was a remarkable period of expansion and innovation.

The company raised $24.5 million in a Series C funding in April 2010, led by Foundation Capital, which helped fuel its growth.

In August 2011, LendingClub secured an additional $25 million in venture capital from Union Square Ventures and Thomvest, owned by the Thomson family of Thomson-Reuters. This injection of capital led to a $275 million post-money valuation.

The company's valuation increased by $80 million from the preceding year, a testament to its rapid growth. This growth was also reflected in its daily loan originations, which averaged $1.5 million.

By 2012, LendingClub had employed about 80 people, with Renaud Laplanche continuing as CEO and chairman of the Board of Directors. The company had also surpassed $600 million in total loan originations since its founding.

In April 2012, LendingClub's SEC registration was renewed for $1 billion USD in Member Payment Dependent Notes. This registration became effective on April 10, 2012.

The company received $15 million in new funding from Kleiner Perkins Caufield & Byers in June 2012, which led to a $570 million valuation. Kleiner Perkins partner Mary Meeker joined John J. Mack on LendingClub's board of directors.

LendingClub surpassed $1 billion in loans issued since inception in November 2012, and announced that they were now cash flow positive. This marked a significant milestone for the company.

In May 2013, Google Capital purchased a stake in LendingClub, providing further validation of the company's growth potential.

The industry and market for Lending Club is facing significant challenges. One major issue is the rise in interest rates, which has made bank deposits more attractive and reduced the flow of funds into Lending Club.

This has a direct impact on the company's revenue, as it relies on origination fees and service fees from loans. The decrease in loans has a negative effect on profits.

Fiercer competition and tighter regulation are also affecting Lending Club's operations. The company needs to spend more on sales, marketing, and compliance, which increases operating expenses and further decreases profits.

To maintain profitability, Lending Club needs to secure more funding. However, relying too heavily on institutional lenders can be a problem, as it increases the risk of latent issues.

Lending Club has introduced a mobile app for iOS, which allows users to check their account value, returns, and portfolio of notes, as well as manage their Automated Investing strategy or manually invest in Notes.

The app is currently available for iOS, with an Android version in development.

Lending Club has also implemented a $1,000 account minimum for new investor accounts, starting from May 18. This move aims to encourage investors to start with a more diversified portfolio, as it's recommended to invest at least $2,500 to minimize the effect of any singular loan defaults on potential returns.

According to Lending Club's data, only 2% of investors with more than 100 notes had a negative adjusted net annualized return, whereas 16% of investors with less than 100 notes saw a negative return.

Here's a rough breakdown of the long tail returns of investors with up to 1,000 notes, based on Lending Club's data:

As you can see, the returns vary significantly depending on the investor group, highlighting the importance of diversification in P2P lending.

LendingClub has experienced significant scandals and controversies in its history. In 2016, the firm faced increasing difficulty attracting investors, leading to a large drop in its share price.

The interest rates LendingClub charged borrowers were increased three times in the first months of 2016, causing further financial strain. This was partly due to concerns over the slowing US economy.

A LendingClub employee reported that $US 3 million in loans had altered dates in April 2016. An investigation found additional problems with loans, including $US 22 million in loans that didn't meet investment criteria.

LendingClub's CEO, Laplanche, was found to have not disclosed his ownership of an investment fund being considered by the firm. He also didn't fully disclose what he knew about problematic loans.

Laplanche was fired by the board on May 9, 2016, after losing their confidence. Three other managers had also left the firm by that time.

The Securities and Exchange Commission investigated LendingClub's disclosures to investors following the scandal. LendingClub's stock price fell by a further 34% after Laplanche's departure, reaching 70% of its initial public offering price.

The firm struggled to recover from the scandal, with the Financial Times reporting in December 2017 that LendingClub had battled to keep big investors buying loans.