It's not bad, but not exceptionally good in terms of returns. I have had my account for 5yrs, and haven't added any more money in the last two.
- The default rate is higher than I expected. In the early years, the A credit rating was reported as nearly 0 defaults, and B had few. But now that is not the case. 5-6% of my loans have defaulted. Most are A/B rated Some not even making a single payment.
- The credit standards seem to move a lot
- The quality of borrower is worse than it used to be. When I started I used to scrutinize every loan, I'd be impressed to see how much detail the borrowers would share. I liked to read their stories and learn to trust that they would repay me. Now you don't see much. It's all button mashing. There are enough lenders to fund all the loans, nobody puts the effort in. I don't even bother doing the manual search anymore either.
- The dashboard says my net annualized returns are around 5%. I guess that is about right. But it's not liquid. If I liquidated all the notes today, I'd probably lose all of the gains. If I stopped reinvesting, I'd probably see a bunch more defaults bring my returns down before i got all the principal back
Besides what others have mentioned, it's worth noting that at this point is almost impossible to hand pick most of your loans. They get dumped onto the market at set times, and most of the "good" looking low grade loans are snapped up almost immediately, so it can be difficult to build a portfolio with exposure to those grades.
What I ultimately ended up doing, and maybe this was their goal, is just to sign-up with their auto-invest system. They lowered the minimum down to something small like $5000, and you can twiddle a few pretty coarse knobs to say what kind of risk exposure you want. At that point it's completely hands-off for me, and I just track the progress - every time I accrue $25 worth of cash from the existing investments, they buy another note on my behalf.
I'd definitely be careful how much cash you throw at this, I thought it'd be an interesting experiment and my portfolio has done fine, but it's hard to quantify the risks. If the economy tanks, how much will the default rate increase? Also as others have mentioned, the secondary market for these notes is really poor - you'd take a huge loss to liquidate your position.
I haven't had a bad experience, per se, but after running through almost all of my initial loans and not opting to reinvest in more, it seems like a relatively decent but not great way of investing your money. I think if I were willing to carefully vet the loans, or focus on a particular vertical, I could have done better.
So, in my case, I did three portfolios - a fully manual hand-picked small portfolio, a blended approach with a higher risk, and then a portfolio of all high-interest, high-risk loans.
The hand-picked ones did extremely well, netting me 8.5%. The very high-risk ones got around 5-6%, and the blended around 4%.
It wasn't bad returns, but the interest income (iirc) is taxed as income, and that wasn't ideal for me.
EDIT: because I opted not to reinvest, all the numbers above are what my return is as my portfolios all wind down. At the beginning the returns were much better, 13-15%, but a significant percentage of people get about 75% of the way through paying off their loans and then get behind and default.
The tax issue can be worked around to some extent by using an IRA. Lending Club will also open trust accounts so it should be possible to open one in the name of a solo 401(k) (only an option if you're self-employed). I'm going to try this in a bit.
I opened my LendingClub account in a roth IRA for the same reason. Its not a very tax efficient investment, and I don't want to deal with it at tax time.
Be forewarned, though, that you can't buy or sell loans on the 3rd party exchange with a tax advantaged account.
It gives you a model for 3-30 month returns, adjusted for losses. I have an experimental amount invested in LendingClub, about 85% loaned out at the moment, and have been in for only a quarter year so far. I've been hand picking loans in small increments, but it's too early to say anything about the quality of my pick criteria because so far there hasn't been so much as a late payment yet.
I spent a lot of time handpicking my 200 investments and I'm sitting on a 12.23% (adjusted) return right now. I think by most measures, this would qualify as a good experience. For me though, it's not. When someone defaults on me (I've had 1 officially and 2 more that will likely get charged off soon) I feel bad about it. Yes, it's expected and yes, LC makes a reasonable amount of effort to collect but it doesn't help how I feel. Especially when the people filling out the loan application write things like, "I'm a hard worker. I always pay my loans back, etc, etc" As someone, that would never short change someone on money owed I feel very let down when it happens to me and I take it a little too personally. It also doesn't sit right with me that LC takes a cut of every payment but doesn't share the pain of losses in any way. What it boils down to, I suppose, is that LC is just not the right investment vehicle for me.
I started in January of this year. It does seem high for sure. I'd like to think I spent a lot of time finding people that had the most to lose when making a decision (mortgage, relatively high income, stable job, etc) to lower my risk. But who knows.
edit: so i just checked for real. looks like it's been over a year (time flies). for the record, it shows 199 (instead of my stated 200) because i put $50 into one investment instead of the standard $25. http://i.imgur.com/o2DdDLU.png
> i put $50 into one investment instead of the standard $25
It's funny you mention that. I went through a phase where I started doing $50 and $100, becuase I couldn't find enough high quality borrowers. I figured that since I trusted these people with $25, why not a little more. It just hurts more when they default. When I see a high value note charged-off, I just feel more betrayed than usual.
I think that's one of the mistakes people make when investing in LC. The safety of the investment comes from having a small amount invested in a large number of notes. Until you are invested in 800+ notes you shouldn't be investing more than the minimum in any one note. If you look at LC's statistics on investor returns 800 notes seems to be the magic number to amortize the default risk.
It was hard sticking to $25 but other than that one investment I was able to remain patient even though it took me almost 6 weeks to invest my full amount. There was just one person I really felt like I could take the extra risk. Incidentally that person paid off the entire loan in the first payment.
I went with mostly B/C since they seemed to yield the best return for the risk. Here's the actual breakdown: http://i.imgur.com/egbkFfh.png My charged off one is B and I have an A and a C that are 31-120 days late now.
edit: updated with actual chart and data (i guessed the first time)
As with any higher-risk higher-reward investment, there are almost certainly people who dove into it far too enthusiastically and lost more than they could afford to lose.
Most such reports probably won't end up in the comments here.
- The default rate is higher than I expected. In the early years, the A credit rating was reported as nearly 0 defaults, and B had few. But now that is not the case. 5-6% of my loans have defaulted. Most are A/B rated Some not even making a single payment.
- The credit standards seem to move a lot
- The quality of borrower is worse than it used to be. When I started I used to scrutinize every loan, I'd be impressed to see how much detail the borrowers would share. I liked to read their stories and learn to trust that they would repay me. Now you don't see much. It's all button mashing. There are enough lenders to fund all the loans, nobody puts the effort in. I don't even bother doing the manual search anymore either.
- The dashboard says my net annualized returns are around 5%. I guess that is about right. But it's not liquid. If I liquidated all the notes today, I'd probably lose all of the gains. If I stopped reinvesting, I'd probably see a bunch more defaults bring my returns down before i got all the principal back