Lending Club

[tooqk4u22]

In some of the comments on the MMM blog post there were a number of questions that came up that are worth exploring for all interested and those who have experience with LC.

How active vs. passive is it?  Seems like there is a lot of time involved in picking loans and possibly managing taxes at return time?

LC has a Roth IRA account option - seems like LC would be a natural fit for this - has anybody done this?

Relative returns/opportunity cost vs. other investments - seems like a no brainer against bonds but equities have performed well?

What are thoughts on LC or similar becoming overcrowded with investors thus driving down returns and forcing increased risk?

Overall LC seems like a good place for a small piece of ones portfolio provided it is with a very diversified LC portfolio. 

 

[Mike]

It would work better as an IRA/Roth IRA than as a purely taxable account because the income generated is treated as ordinary income by the IRS (not as capital gains), so you pay your marginal rate on it.

As far as active/passive, it's definitely on the active side of the spectrum, particularly if you are the sort that wishes to set all the criteria by which you choose to approve loans in the screening tool for investment.  If you just have the site generate a portfolio for you, that will go a lot faster - but has the downside of many notes not ultimately being funded (some of them will ultimately be declined by LC).  If you pick the criteria, you can have it only display those that have verified income/approval by LC to reduce/eliminate this problem, but it will also significantly reduce the number of notes.

Once you've committed your money, it gets easier; you just log in periodically to reinvest whatever cash accumulates in the account.  How often you need to do this depends on what you've invested.  I have a little over $20k in there, so I log in once every week or two and put the $200 or so that has built up into new loans.  Since you're getting interest+principal, the cash flow can be quite high on larger balances, so you need to be aware of this to keep the idle cash problem to a minimum.

As far as returns go, mine is holding just above 12%, and I've been on the site for approximately 2 years.  Default rate is 2% so far, but if all my 31-120 day late people default, that rate will climb to 3.5%.  All in all, it's not a bad way to invest - it's basically a higher risk version of bond investment.  You just have to keep in mind some percentage of your loans will go bust, and that your ROI will start high and slowly drop as this happens.  I expect mine to stabilize somewhere just under 10% over the next year or two; accounting for my marginal tax rate, my effective return will be somewhere around 7% - not too shabby.

[cats]

I put $1k in almost three years ago, as an experiment (LC was a little newer then, and I was making a lot less $$, so $1k was about as much as I felt comfortable putting in at the time).  It's done okay.  I had a spate of defaults last year which really drove my rate of return down, from 13% to ~5%, which basically highlights that you need to be putting in a lot more money to ensure that you're well diversified.  If you're under $5k, a couple of extra defaults suddenly puts you way over the average default rate and then poof! there goes your great return.  I do think it's unlikely that you will have enough defaults to suffer a net loss overall, but unless you are putting in a significant chunk of cash, be prepared for the possibility that your rate of return may vary a lot.

At the moment I am basically letting the account wind down and siphoning cash off into other investments as it becomes available.  I'll admit the main reason I haven't put more money in is that figuring the defaults into your tax returns sounds like a huge pain in the ass (have to do my returns for this year still, so I guess I'll find out...).  If I can figure out a way of keeping that relatively painless, I might be tempted to jump back in.  Using it as my roth IRA investment of choice might also be an option.

[Acg]

I posted this in a random thread about LC in Investor Alley but nobody has responded and I think I might have better luck here.  Thanks!


Hey - I have a couple simple question that I know could be answered by LC customer service, but I figured I'd ask here since I'm sure someone else has the same questions:

Can you set it up to automatically deposit the interest payments into an external checking account each month or do you have to move it yourself each month?

If so, is there an option to reinvest principal and keep interest?

If someone pays off a loan early or defaults on a loan, does Lending Club send you some kind of notification?  I'm concerned about the loans that are being paid off early because it could be very tedious to constantly need to login to see if there is any capital from the paid off loans that needs to be invested.  Thanks.