What Is Lending Club

In general I want nothing less than 16% per year returns on investments. So when I started looking at Lending Club, I saw a potential for 16% return.

The idea behind Lending Club, and other Peer-To-Peer lending companies, is that individuals get together and offer to loan small amounts to people, which together makes one big loan for the borrower. Each borrower is funded by dozens or even hundreds of small loans from individuals.

For investors, this means that the risk of default is higher (exposed to more potential defaulters) but the default amount is limited. it also means higher returns, since Lending club just takes 1% of the monthly payments. For borrowers it means they get a lower interest rate. It's a win-win.

I've looked at another Peer-To-Peer lending company before, Prosper, but by the time I got around to funding an account, Texas regulated them out of the state, at least for funding loans (you can still borrow from them).

I started to look into Lending Club, and opened an account. Turns out, in Texas, you can't fund loans on Lending Club either. However, you can buy notes others have funded. This gives the Funder liquidity, and people in Texas the opportunity to participate.

I'm kind of glad I was introduced to Peer-To-Peer lending through the loan trading platform. By getting in through loan trading, I avoided the unfamiliarity barrier to getting started in trading loans, which is now an integral part of my investment strategy.

Lending Club had done a great job of analyzing loans, defaults, returns, etc. You can also download a giant spreadsheet of all sorts of loan data. The data isn't current, it only goes through the end of last year, but it is a lot of data if you want to analyze it.

Lending Club uses Foliofn for note trading. I this is really where the best returns lie. There are a limited number of people who can "write" (fund) notes (not us in Texas, for example). Those who cannot fund notes can only participate via trading, ie we need to buy notes. There aren't many whose only option is to trade notes, which creates a demand for notes. The raises the premium paid for notes (supply and demand).

Lending Club has set the "ideal" bar at 8,000 notes, which they say you will have a guaranteed positive return. So there is a high demand for notes. Those who can write, or fund, notes may not be comfortable with trading notes. Usually, I think, people get started in Lending Club funding notes, intending to hold them for the duration of the loan (3-5 years). They know they can sell their notes at any time in case they need to liquidate, but don't consider trading notes to be anything more than a liquidation strategy.

I think there are some whose only strategy is to fund loans, and then turn around and sell them. They never receive their first monthly payment. The also don't have to worry about defaults, because they don't hold the loans long enough (you can't default until you miss a payment).

So, in a nutshell, that is my view of Lending Club. It's a win-win-win for lender, borrower and Lending Club.