Lending Club Review: Income Investing By Making Personal Loans

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1. Lending Club is a platform that lets you make loans at interest to individuals. It thus is like bonds, and can serve as a part of an income investing strategy.

2. One of the big differentiators between bonds and personal loans made through Lending Club is the increment size. Lending club allows lenders to make loans in amounts as small as USD. Borrowers can then pool these small loans to create a larger amount of borrowed capital. At the outset of their initiative to raise debt, borrowers define how much they wish to raise and in what time period.

3. Lending Club is a company based in the USA. It is regulated by the SEC.

4. As with all credit related investments, borrowers do take on default risk — the possibility that the borrower will not be able to pay back the loan. Lending Club provides a variety of metrics, including the borrower’s credit score, to help lenders evaluate the risk in making a loan. Lending Club also sets the interest rate on loans, and bases the rate on the creditworthiness of the borrower: more risky borrowers have higher interest rates.

5. To make things easy for borrowers, Lending Club provides its own credit score to lenders, in addition to providing the FICO score that is widely used in other industries. Lending Club’s score is alphanumeric; it ranges from A1 — the best possible score suggesting low risk, low yield loans — to G6, the most risky/highest yielding loans.

6. Lending Club allows borrowers to invest in two term lengths: 36 months or 6 months (3 years or 5 years).

7. Personally, I invest only in 36 month notes. Approximately 45% of my loans are have an A rating, 30% have a B rating, 15% have a C rating, and 10% have a D rating.

8. Lending Club says investors with a diversified portfolio of notes should expect 6% returns, after Lending Club fees and after defaults. This would be the taxable income an investor can earn. Personally, I’ve been using LendingClub for over a year; since I joined, I’m earning a bit over 9% after fees and defaults. I have not experienced any defaults yet.