Investing with Lending Club as an investor? Read this Lending Club review before you make a mistake!
In this Lending Club review, I’ll explain Lending Club’s bad credits, shady history for lenders and borrows, and high default rate.
You’ll see my complete returns history with Lending Club, and my analysis on other lending complain investor complaints.
What is Lending Club?
Lending Club is a peer-to-peer lending, where people who need money (borrowers) borrow from people who lend money (investors).
Many people become Lending Club investors to diversify their income. After all, you don’t want all of your money in the stock market.
The concept is brilliant: cut out the banks so that borrowers get what they want and investors make more money. In reality, however, Lending Club has a dark and dishonest history.
As a result, borrowers often get hit with high rates and investors often lose money because of high default rates.
Plus, peer-to-peer lending operates online and is very unregulated. So all kinds of shading things have happened and nobody has been held responsible.
Why Become an Lending Club Investor?
Most people look into becoming an investor at Lending Club to diversify their investments.
Because the interest rates are so low, there are few places to put your money except the stock market. And people are worried that the stock market will crash because it’s been growing for too long.
Many personal finance blogs rave that they’re getting 7% returns from Lending Club and this got a lot of people excited, myself included.
Lending Club is the biggest peer-to-peer lender, even bigger than Prosper, so many investors decided to start with Lending Club.
In early 2017, I invested $2,500 into Lending Club as a lender / investor.
Lending Club Loans Review
A Lending Club loan charges 6% to 26% in interest rate, depending on the borrower’s credit score, income, and borrowing amount.
It makes money by charging 1.1% to 5% to borrowers and a 1% fee to lenders /investors.
1% fee is pretty high for investors. And even worse:
- Lending Club loans are unsecured. If a person fails to pay back, there is nothing you could do.
- Peer-to-peer lending is not universally legal. Five states limit or outlaw investment activity in Lending Club.
- A 1% service fee for lenders is high. This is really high, most index funds have expense ratios between 0.04% to 0.25%.
Suspicious Lending Club Events
While Lending Club IPO’d in great fanfare, things started to go south in 2016. Here is a summary of the many suspicious events since then:
- Jan 2016 – Lending Club has trouble attracting investors. So it increased interest rates three different times in one month.
- Apr 2016 – Employees at Lending Club report a $3M loan fraud, kicking off an internal audit. The audit then found another $22M loan that did not meet the bank’s strict criteria.
- May 2016 – The board fires the Lending Club CEO. The Wall Street Journal reported he failed to disclose a lot of things.
- Apr 2018 – FTC charges Lending Club with “deceiving borrowers” with false advertising on “no hidden fees.”
Curiously, none of the Lending Club reviews mention these events. Wondering why? I’ll tell you why in a minute…
Lending Club Returns Review
No matter how shady the company sounds, the only thing that matters to you is returns. So let’s look at Lending Club returns in three parts:
- Lending Club’s expected returns advertised on its website
- My actual returns from Lending Club following its recommended path
- More reasons why I don’t like Lending Club
Advertised Returns from Lending Club
Lending Club’s website says its historical returns have ranged between 3.77% to 8.06%.
As a side note: Lending Club recommends investing at least 100 loans at $25 each (or $2,500 in total) to achieve a return in the 3% to 8% range.
A 5% return assumes you are investing across a variety of loans with a 14% average interest rate. 8% of that
Lending Club’s own loan performance statistics chart shows that at the 100-199 notes mark, the yield ranges from 2.36% to 7.35%. If you invest $2500 to $5000, expect to get a return above 2.36%.
2.36% is above inflation and higher than most CDs, and an average return of 4.86% is not bad either. So far, marketing talk is reasonable.
My Lending Club Returns Review
I invested $2,500 in Lending Club in mid-2017. Over the past year, this investment came out to 145 notes of $25 each across a variety of loans.
Here are my Lending Club results. As you can see, my Lending Club return is only 1.72%, well below the range advertised by Lending Club!
When I compared my accounts with similar Lending Club accounts (100+ notes and 14% interest rate), my performance (the blue dot) appears on the lower end of others (red dots).
Even worse, it appears from the graph that the longer you invest with Lending Club, the worse your returns will get.
Lending Club Review on Default Rate
I analyzed my charged-off notes, or loans that defaulted), and was shocked to find out that out of my 145 notes, 6 have already defaulted.
Six out of 145 is a 4.14% default rate on my investment with Lending Club. That’s super high and super bad.
Why is a 4% default rate bad? To give you some perspective, credit cards have a notoriously high default rate, and that’s 3.61% in 2018. (According to the Federal Reserve.)
Other consumer loans have a charge-off rate of just 0.84%. And the charge-off rate of all investments in the credit industry in 2017? Only 0.48%
Borrower Categorized as Medium in Risks are Defaulted Left and Right
When I reviewed my defaulted notes, I found that these charged-off loans range from Grade B to D, which means they are categorized as only moderately risky borrowers by Lending Club. It turns out:
My risk level at Lending Club is medium. But my borrowers are high risk.
Below is one of my charged-off notes, a B-grade loan that defaulted. It looked like this guy took out a $35K loan to refinance his credit card, but never paid back a single penny and just “vanished.”
UPDATE: since I’ve published this blog post, I’ve stopped reinvesting my money with Lending Club and my returns number have continued to fall, something MANY other investors say is the case.
My Lending Club return rate is now a 0.87%. Lower than what I would’ve gotten at my local credit union!
Can You Trust Other Lending Club Review?
If Lending Club sucks so badly, why do most of the Lending Club reviews on the internet sound so positive? I have two hypothesis: affiliate marketing and lousy growth.
Bloggers Get Paid When You Sign Up for Lending Club
Most of the glowing Lending Club reviews come from those who are trying to make money off of affiliate marketing with Lending Club.
What’s Affiliate Marketing? If you read a positive Lending Club review and clicked on the reviewer’s link and sign up, the author gets paid $40 from Lending Club. This is pretty high. If a review attracts thousands of signups, then that’s tens of thousands of revenue for the blogger.
Look, I’m not accusing anyone of writing a fake Lending Club review to make money. But when there is a lot of money at stake, some people can be overly generous with their praises.
Lending Club Changed After 2016
It may also be that those early reviewers who praised Lending Club got started before
When lending Club raised interest rates and significantly expanded its loan base since 2016, it’s clear that the quality of loans went down.
While most industries benefit from scale and growth, the peer-to-peer lending industry seems to get hurt by it. When growth means more bad loans, it means growth will make investors lose more money.
My Honest Lending Club Review
In this unregulated industry where a company has exhibited a history of shady lies, careless mistakes, and growth at all cost, my low returns is a cautionary tale for you to avoid Lending Club in 2019 and beyond.
I recommend that you stay away from investing your money with Lending Club or any of the other peer-to-peer lenders.
If you are over the age of 50 or just starting out, focus on investing your money in an index fund or the savings account.
What about Lending Club as Diversification?
We already know that there is zero evidence your money with Lending Club will beat the stock market.
But some still wonder if it’s worth investing in Lending Club to diversify your portfolio in the event of a recession.
Lending Club claims to diversify your investment as a fixed-income asset, or an alternative to bonds. Here is why this claim is wrong:
Loans from Lending Club are Too Risky
Lending Club loans are riskier than traditional loans. The U.S. government guarantees your treasury loans. Company assets guarantee your corporate loans. Nothing is securing your investments on a random person.
Loans from Lending Club Move with the Stock Market
Lending Club returns may be more correlated with the stock market than bonds, which means it is NOT good for diversification.
Bond prices usually go up when stocks collapse during a recession. However, when a recession hits this country, more people will default on their loans.
Income from Lending Club is Taxed Higher
Many people do not know this. But here’s a tax tip:
Your income from Lending Club is taxed as ordinary income tax, not capital gains tax.
Long-term capital gains from stocks have only a 15% tax, but for most Americans, income tax is a lot higher, from 20% to 35%.
So for every $ you make, you pay more taxes with Lending Club than you will in the stock market.
You’ll Have to Wait a Long Time to Collect Your Money
With stocks, you can buy and sell them instantaneously.
Your money with Lending Club is illiquid because their loans have a 1 to 3 year payback periods.
So I have decided to exit Lending Club, but it’ll be another 3 years before my money is fully out.
Take My Review to Heart, Avoid Lending Club at All Cost
With the stock market in its 10th year of growth, we all want to find alternative ways to grow and diversify our money.
Despite Lending Club reviews glowing about its benefits, Lending Club has struggled to deliver its promised returns.
It has also committed fraud, destroyed trust in an unregulated market.
Still wondering whether you should invest in Lending Club? Just remember:
Lending Club doesn’t outperform stocks, doesn’t beat the bond market, and won’t diversify your investments. You also pay more taxes on it and must wait 3 years to exit.
Tell me your experience about Lending Club below! Or if you have any questions, comment below and discuss!
Decided to put your investment into index funds? Check out Betterment vs. Wealthfront: the Ultimate Review.
Scared for your stock investments and wondering when you should pull out? Read Will the Stock Market Crash? Complete Analysis
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