Everything You Need to Know About Peer-to-Peer Investing With Lending Club

By Julie Rains on 6 March 2015 1 comment

Lending Club is a peer-to-peer lending firm, which matches private lenders with individual borrowers. You join, set up an account, search for matches based on your criteria, get more information if needed, and make a selection to invest your money or time. The process is relatively fast and convenient. There are risks, but also possibly great rewards. Here's what you need to know to get started investing with Lending Club. (See also: How to Make Money with Peer-to-Peer Lending with Prosper)

1. Lenders Are Really Investors

Peer-to-peer lending firms provide a platform to match lenders with borrowers. The loans presented by Lending Club are funded by an outside bank and as a lender/investor, you purchase an investment associated with specific loans.

So, as a "lender" you are not lending directly to borrowers; instead you are investing in Lending Club notes tied to specific loans, which you have chosen. Your earnings (or losses) are based on interest rates, loan terms, repayment, etc. relating to the loans in your portfolio.

2. The Minimum Amount for Investing Is $25

You can get started by investing $25 in one loan.

Lending Club recommends that you invest in 100 loans for the purpose of creating a diversified loan portfolio. By investing $25 in 100 loans (for a total of $2,500), your investment risk is spread over multiple loans with various risk criteria. If borrowers default on some of your loans, you can still make money on the remaining loans.

3. You Can Open a Regular Account or an IRA

Your money with Lending Club can be held in a taxable investment account or a tax-advantaged retirement account. According to its website, you may be eligible to open and maintain a Traditional IRA, Roth IRA, Simple IRA, and/or SEP-IRA.

There is a $100 annual account fee for an IRA. This charge is waived if your initial investment is $5,000 or more in Lending Club notes and you hold the investment for 12 months in your first year; or you maintain a minimum of $10,000 in Lending Club notes throughout the year.

Other account types, such as trust, custodial/minors, and corporate, are also available.

3. There Are Two Ways to Choose Loans

Once you've set up an account and added funds, you are ready to choose loans. There are two main ways to select loans and create an investment portfolio.

Let Lending Club Choose Loans for You

Get Lending Club to select loans on your behalf. Go to the "Invest" section, where various options are presented. You may see "Option 1" with an interest rate of 8%; "Option 2," 12%; and "Option 3," 15%. These are the average interest rates associated with loans in the pre-designed portfolio. Note that your actual returns will vary because of defaults and fees.

Choose among options based on your desired level of return and risk. Continue with the prompts to invest your money.

Select Loans Yourself to Build a Portfolio

Use tools provided by Lending Club to build a customized portfolio. Go to the "Browse Notes" tab. Apply filters to specify your criteria. For example, choose notes based on loan grades and sub-grades (ranging from A1 to G5), borrowers' credit scores, verified income levels, loan purposes, delinquencies, and more.

Lending Club will provide results and allow you to get additional information for risk analysis. You may be able to learn about the borrower's employment and current debt-to-income ratio for example. Select and then invest in notes to add them to your portfolio.

4. Earn Money When and if Loans Are Repaid by Borrowers

As an investor, you'll receive monthly cash payments comprised of loan principal repayments and interest. You can then reinvest cash in another loan note, hold cash within your account, or transfer cash to your bank account for other purposes.

Note that fees will be deducted from these monthly payouts, reducing overall returns.

To tap cash quickly, trade your notes through a separate platform as long as these investments are held in a regular, taxable account. The value of these notes may vary, just as stock and bond prices fluctuate.

5. Fees Are 1% of Monthly Loan Payments Collected and Up

You'll pay fees on all money collected from borrowers. If the borrower pays on time (or within 15 days of the payment due date), 1% of the loan payment amount assigned to you will be deducted from your cash receipts. This fee is called a "service charge."

However, if the borrower is late and Lending Club must expend effort to collect payment, then you'll incur much higher fees. Investors pay a prorated portion relating to "18% of the amount recovered if the loan is 16 or more days late and no litigation is involved," or "30% of hourly attorneys' fees, plus costs, if litigation is involved," but no more than the original investment.

6. Lending Club Is Available in Several States

Currently, you can become a lender/investor at Lending Club only if you reside in one of these states: California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Kentucky, Louisiana, Maine, Minnesota, Mississippi, Montana, New Hampshire, Nevada, New York, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington, Wisconsin, West Virginia, and Wyoming.

Further, there are age, citizenship, income, and net worth requirements. You must be 18 years of age and have a valid social security number, and, generally, have an annual income and net worth of $70,000 or more or have a net worth of $250,000 (not counting your primary residence and vehicles). Rules and restrictions vary by state.

You may be able to purchase notes on the secondary market through FOLIOfn Investments, Inc. Note Trading Platform if your state does not allow you to invest directly in Lending Club Notes. However, there are additional costs and risks associated with this method.

7. Returns Are Not Guaranteed

Lending Club operates as an intermediary between lenders and borrowers. But just because the firm behaves in a bank-like manner doesn't mean the money you deposit is guaranteed to be safely returned to you with interest. Your investments are subject to risk as borrowers may default on loans, leaving you with nothing to show for your lending/investing efforts.

To become an active member and lend to your peers in hopes of earning money, join Lending Club, fund your account, choose notes for your portfolio, and click to invest.

According to its website, Lending Club has funded over $5 billion in consumer loans and paid over $494 million in interest since its inception in 2007. Historical returns for borrowers graded from A to C are 5% to 8.67%; however, historical performance does not predict future performance. Invest at your own risk.

Have you invested in Lending Club Notes? Did you make or lose money?

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Guest's picture
RAnn

I started with Lending Club in August, after reading about it on some blog. It seemed almost too good to be true, but I remembered what my car salesman brother said "I can make money lending money to any group of people; I just need to price it right". Still, I was wary, and only invested $1,000, splitting my money between new notes and those offered for resale, and for the resale notes, I looked for those with perfect payment records, uptrending FICO and at least a year of payments made.