Sep 24, 2012 185 comments

The Lending Club Experiment

It’s time to dive in and explore some interesting new investment options.

I have some personal cash set aside, and the newly-minted Money Mustache Foundation has $10,000 of seed capital that we’d also like to put to work. On top of this, I have replaced the old $75,000 line of credit on my primary house with a new $200,000 one*, and the current balance is a comfortable Zero Dollars. So there is a sizeable keg of “dry powder” ready to put to work as opportunities come up.

Now, normally a conservative person saving for financial independence would simply be investing all surplus funds in a pre-arranged series of places every month. Assuming you have no emergency credit card or car loans, you might allocate the first chunk to 401(k) deductions, some to extra principal payoff on your mortgage or student loans, and the rest to index funds like Vanguard’s VTSAX.

Update from 2017: please enjoy this article, but I don’t recommend actually investing with Lending Club until you review the latest results here. My experiment ended up going well for a few years, but returns have soured more recently so I would not recommend following in my path unless something changes.

However, with my 401k already filled up, mortgages paid off, and a reasonable amount already allocated to index funds, I’m looking for learning opportunities with higher potential reward in exchange for more effort and risk. Some of the options under recent consideration include:

Buying the junky-but-spacious rental house next door to me from the current owner, renovating it, and re-renting at a much higher rate. Or re-selling it for a quick profit.
Buying an interesting building elsewhere in my own city (possibly on the Main Street) and owning a tiny slice of the town’s commercial district, as a source of rental income
Investing in some REIT funds for an expected annual dividend of 6-7%
Trying an investment in Lending Club, where you indirectly lend money to other US borrowers at expected returns between 5.8 and 13% annually.

I’ve been intrigued by Lending Club ever since I read this post about it on my friend Brave New Life’s fine early retirement blog. However, at the time the strategy seemed complicated, I didn’t understand the risks, and I did not have much liquid cash looking for investments.

But over the past year, the investment picture has changed. Cash has accumulated, the US stock market has roared up to record levels (making lump-sum investing just a bit less appealing due to pricier valuation), and great deals on rental properties in my own area have been hard to come by after a sizzling summer of quick sales.

The final piece of the puzzle clicked in at a recent conference I attended in Denver. I got the chance to talk to some Lending Club employees in person about the company and its operations in detail. In summary, Lending Club is a San Francisco-based company founded in 2007 to function as a new, streamlined connection point for borrowers and lenders, replacing a portion of what banks and credit card companies do. It’s high-tech, it is regulated by the Securities and Exchange commission, and it seems fairly honest and straightforward to me in the way it conducts its marketing. After a year of sniffing around its foundations, I decided it was time to try it out.

So I got an account, scheduled a transfer of $10,000, and then did some reading during the five days I waited for those funds to clear.

Brave New Life’s strategy was a good starting point: he used a website called “lendstats.com” to mine 5 years of Lending Club loan data, in order to design a filter which would find him the best range of loans in which to invest. Copying his ideas, I found that the highest historical return was obtained by selecting the riskier investments (credit grades D and below), and further optimization was possible by doing things like excluding renters, insisting on employment history of at least four years, skipping loans from borrowers in California and Nevada, etc.

So I logged into my new Lending Club and implemented the same filter there. By checking and unchecking various boxes on Lending club investment screen, I was able to include and exclude loan applications (called “Notes”) with various characteristics. Each time I adjusted my filters, an adjusted list of qualifying notes would appear – usually somewhere between 200 and 1200 notes. At that point, I was able to click “select all”, and Lending Club would present me with a summary that looked like this:

A summary of the notes I selected (click for larger)

Hey! That was an unexpected result. I could see that Lending club was automatically calculating the average interest rate of all of my proposed loans, subtracting the expected default rate based on their 5-year history of thousands of other loans with these characteristics, and presenting me with an estimated final rate of return (13.07% annually in this case). In other words, the site was doing its OWN data mining for me, making that third-party lendstats page I mentioned earlier redundant as far as I can tell.

So I was almost ready to invest. The only question was whether to use the manual loan selection method shown above, or the automatic “Build Portfolio” feature provided on your home screen when you first log into Lending Club. Here’s an example of what that looks like:

It looks clean and simple, and when you click any of those nicely-colored “Option 1/2/3” buttons, you’ll get a summary of net investment returns after fees and projected defaults. At 13.03%, Option 3 corresponds very closely with the 13.07% net return projected in my manual portfolio screenshot above, because as you can see it does most of its investing in the lower-grade, higher-yielding loans.

The key difference is that when I requested that my full $10,000 portfolio be invested in Option 3, it ended up allocating the whole ‘stash across only 60 notes. That’s $166 per note, more than six times the minimum $25-per-note investment. With all other things being equal, I would prefer to spread the capital across the greatest number of qualifying loans, because it will reduce the “unique risk” in my portfolio without decreasing returns.

As noted in Lending Club’s own marketing materials, the larger your number of notes, the more your performance will trend towards the projected returns, with fewer surprises. In fact, among investors with 800 notes or more, every single investor has made a positive return from Lending Club, with 93% of them in the 6-18% range depending on their loan grade choices.

To resolve this discrepancy and test my hypothesis, I made two separate investments so we can track them separately:

The first $5200 went to in my manual portfolio of 208 loans of grade D and lower, filtered for borrowers with no delinquencies in the past two years (because that was the only filter I could find that improved the projected results noticeably). 208 was the maximum number of matching loans available at the moment.. projected return after defaults: 13.07% annually.
The remaining $4800 went to the default Lending Club high-yield “Option 3 portfolio” of 29 loans of slightly higher average grade, projected yield 11.81%.

Here’s the lending club default portfolio for “option 3”

I’m guessing that my manual portfolio will be both higher-yielding and less variable from the projection, if I understand the statistics correctly. But we will all get to see over time – I’ll provide regular updates as these loans pay us back principal and interest, AND we use the gains to learn about some charitable giving options.

Update, 16 Months Later: I assigned each of these purchases to a different portfolio and have been keeping an eye on them. It looks like my custom portfolio with 208 notes is so far performing slightly worse than the Lending Club automatic selection! My portfolio has seen more defaults, which more than eats away my interest rate advantage. However, the LC selection has many more late notes at this point, meaning they might fall behind in the next few months. Stay tuned.

MMM Portfolio:
Weighted Average Interest Rate: 20.43%
Defaults and chargeoffs: 4.8%
Late in any stage: 1.7%

LC Portfolio:
Weighted Average Interest Rate: 18.24%
Defaults and Chargeoffs: 0%
Late in any stage: 13%

I am finding this Lending Club research to be a fascinating experiment in the field of applied statistics. When you look around the web to see what other financial bloggers have said about the service, you run into a raft of interesting opinions and techniques, bordering on witchcraft and sorcery. People will say things like “I am excluding borrowers who are consolidating credit card debt, or buying a new vehicle, because those are just recipes for disaster”. Or, “I’m avoiding the D through F grades, investing only in A-grade notes, because those are the safest”.

Points like those are intuitively satisfying, but when it comes to statistics, you have to ignore your intuition and look at the numbers. Lending Club has already run the numbers for you, and they factor the historical default rate as part of the projected return. Unless you are able to predict a drastic change in the pattern that has developed over the past five years (and over $813 million of loans and repayments even through the 2008 financial crisis), the math suggests you’re better off learning from the trend rather than trying to apply intuition. And the trend is that the higher-interest-rate loans tend to provide a higher return, even after accounting for defaults.

That is exactly why credit card companies make ridiculous profits, and if this experiment succeeds, it is also why Mustachians may be able to earn 13% annual returns by replacing the credit card companies in the role of Risky Lender**.

So it is exciting to me, because the reward is potentially much higher than the stock market, and the risk may be higher too (especially if I’ve done my research wrong!). I’ll be watching every dollar that rolls in on these loans, and adding more to the investment over time as blog income permits.

If you’d like to follow along and try your own Lending Club investments at any point, I’m providing the following link to the service (it’s an affiliate link, meaning the blog gets $25 if you do end up creating an account):

If you happen to be on the borrowing end of things, there’s even a link for that:

Either way, do your research and be aware of risk. If you already have a friend who uses Lending Club, you could ask them for a referral link too – some existing members have the ability to generate $100 referral bonuses for a limited number of friends.

Update! This experiment is ongoing. Read more about it with these other articles in the series:

The Lending Club Experiment – Four Months Later

The MMM Lending Club Headquarters – where it stands today

Footnotes:

* I signed up for the new home equity line of credit in June, after interviewing and comparing rates and fees of all the major banks. The winner ended up being a local credit union that was originally founded to help Colorado University faculty, and it has been a pleasure dealing with them.

** I’m sure there will be questions about the ethics of lending money at high interest rates. After all, I feel that credit card companies are often predatory in their own lending practices. The quick answer might be to look at the net economic effect of investing in Lending Club. By increasing the pool of investors, you’ll tend to drive down interest rates for borrowers, and lower the share of loans that go to credit card companies. This might increase the desirability of borrowing to some people (which I’d say is a bad thing), but on the other hand, it decreases the prevalence of extremely high interest rates, flattening the spread to a level that might become more economically efficient (good). Plus, the proceeds go to you. What will YOU use the income for? Will it provide a net societal benefit greater than that which a bank or credit card company could produce with those profits? It’s an interesting question to ponder.

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Want More?

TheDrone November 5, 2012, 6:44 pm

A satisfied Lending Club borrower chiming in here.

Getting $15,000 in 30 days at a 7.9% interest rate would be nigh impossible via traditional channels. In fact, I was declined for the same amount in the traditional channels for at least double the interest rate about a year earlier. My situation didn’t change much between my previous application and the Lending Club application.

I was on a path (finally, after a very long time) to be creidt card debt free since early 2011. The problem was, it was going very, very slow. Sure I’d be credit card debt free by 2016, but it was very very expensive at 20%+.

66 investors (or 67 depending on what screen I look at, lol) took a chance on me and I can’t thank them enough. It changed my life. It took a variety of factors, but the freedom to make more moves to have the remaining debt I do have significatly lower or 0%, I’m well on my way. I’m on the 7-10 year retirement plan (would be 5-7 if I didn’t have the debt to deal with.) 2012 has been an amazing year for me financially. The single biggest factor has been the Lending Club loan. Without it, 90% of what I’ve accomplished this year simply was not possible.

I very much look forward to the chance to invest in similar people, not just notes or interest returns. Sure this might get me into trouble. But if I can help someone else, just one person, and make a good return in the process, that’s just about the biggest win-win I can find.

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Ginger 'Stache December 11, 2012, 1:51 am

I recently began an account with LC, and there are a few quirks that I think are worth mentioning. I’ll begin with the negatives, since I think that it’s more beneficial to be aware of the risks before beginning any new type of investment. Firstly, there are all kinds of delays in the system: it takes about a full business week to verify your bank account, and then another for any money you transfer to post to your account, so you’re looking at about two weeks between signing up and being able to start investing in notes. Notes are given 13 days to fill, and even then are not necessarily issued. Some “high-quality” notes will attract enough investors in just a day or two, some take nearly the full time, and some simply won’t be filled at all. So, realistically, from signup, you’re looking at a little under 3 weeks before you will actually own your first note. However, 2 of these weeks are a once-off, so it’s not really a big problem.
On the back side of this, it takes 4-5 business days for payments to post to your account. So, although I have 8 notes whose payments were due five days ago, I still have no confirmation that they have been paid in a timely manner. This only matters for those who wish to take advantage of the secondary market, which can allow investors to sell notes that they think may be at risk of defaulting. It is much easier to sell a note that is in the grace period than one that shows as late!
The final issue that I have come across is the poor interface, most notably in the secondary market (which, it is worth noting, is run through a second company, and you must set up a separate account in order to use. The accounts are linked, but again it takes a few days to process, so I recommend that you do this immediately as soon as your LC account in activated.) Their is no way to easily filter notes that have been put up for sale: you can order them based on exactly one criteria at a time, but with tens of thousands of notes (and only about 100 visible at a time), this isn’t nearly sufficient to create a viable market. For example, you can list notes in order of the price markup, or yield-to-maturity, but that doesn’t help if you are trying to find quality loans, as it tells you nothing more than how much somebody is asking for the note, or how much time remains before it comes to term. Also, the first several hundred are likely to be outdated sale orders that you must slog through in order to find reasonable ones.
Ok, so enough about the negative issues: now for the positive ideas! I have had excellent success with getting responses from potential borrowers. There is a feature that allows you to ask questions (from a set list) of the borrower before investing in their loan. All investors are then able to see the answer, which can often give more information about the quality of the loan. For instance, you often find people attempting to consolidate credit card debt who have credit cards that are charging a LOWER interest rate than the one offered by LC! So, with a little work, you can get a lot more information about the borrower’s financial viability.
Here’s the greatest aspect of LC: there’s a way to greatly reduce the risk of getting stuck with defaulting loans. As people have noted above, if you look at loans that have been completely paid off, the average return is much smaller than LC reports. This is because any principal and interest remaining in a note whose payment is 119 days late is still counted in the value of your account! It is only after the borrower defaults that they are removed. Since the majority of notes issued on lending club are newer, and thus haven’t had time to default yet, the Net Annualized Return that LC displays on their front page is much higher than the true value. This can be verified as you watch your own account: if you hold onto all of your notes, your NAR will looks great for the first year or two, but during the third year will dip dramatically as loans begin to officially default. There is a way to avoid this, though!
The same phenomenon that skews the LC numbers works to your advantage. The basic idea is, almost everybody borrowing from LC is an honest, hardworking person, who wants to pay back the loan, and almost nobody missed the first few payments. Most of the borrowers that eventually default don’t start missing payments until a year or more into the loan. So, if you invest in notes, keep them for a couple of months, raking in a lot of interest. (remember, you get a LOT more interest at the beginning of a loan than at the end, when the payments are mostly principle!) Then sell them at a slight markup, somewhere over the 1% that LC charges for selling a note, and you get all of your money back to reinvest in more new notes, without having to carry the increasing risk of defaults as time goes on!
Of course, this only works as long as the secondary market is nice and liquid. At the moment it seems to be, probably in large part due to the fact that many states (I think about 17 of them) do not allow people to fund notes, but DO allow them to buy notes that have already been funded. If everybody starts using this tactic, the secondary market will collapse, as supply greatly outstrips demand. It is also extremely time-consuming, again in large part due to the terrible interface in the secondary accounts.
Sorry for the long-winded comment, but it’s my first one on MMM and I get a little excited about this kind of stuff. I’ve been reading the blog for few weeks, trying to work my way up to the current entries. Just a couple more months of articles to go!

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Andrew Rich December 30, 2012, 7:03 am

Hey, so I opened an account and was really stoked about it (since the returns look crazy) but as it turns out, I can’t invest. I work for an investment bank and it seems there are some regulations that prevent me from participating. I work on the tech side so I’m about as far as it gets from the money too.

Do you know of any other similar services where there my not be similar restrictions? Until my stash is big enough, I can’t quite quit yet so unfortunately my restrictions aren’t going anywhere :(

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Dave Van Thuyne January 14, 2013, 5:13 pm

Retired from military last year & no mortgage or debt. Just needed something to do. Started investing in LC in May 2012 and the following is my summary:

Net Annualized Return:16.42%

Interest Received $520.54
Total Payments
(Principal & Interest) $1,405.44

Account Total $13,954.90
Available Cash $3.68

I have over 600 notes w/ 2 chargeoffs, 6 about to default, and 10 paid off early. About 70%. of my investment are skewed to D, E, F, G notes (mix of 36/60 month terms). I frequently employ the trading platform…critical tool to gauge borrower reliability. Lending Club statistical modeling indicates the more mature the note, the less likely it is to default (First 8-10 months is most vulnerable for default). The 2 charge offs i’ve had, the 6 about to default, and the 10 early payoffs happened in the first 6 months of note issue. Unbelievably, a couple borrowers declared chap 13 bankruptcy almost immediately, and another couple decided not to pay after the 1st payment. Lender beware! Divesify, diversify, diversify…do not overexpose yourself in any one note no matter how attractive it appears. Make regular scheduled investments and reinvest your principal/interest payments…leverage the power of compounding interest. Right now its cautious optimism…short term results are solid so far. I want to see how well this shakes out over a longer duration (2-3 yrs).

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- Rob A. January 29, 2013, 10:57 am
  
  Dave Van T. – found your post very informative. Wondering what you mean by
  “I frequently employ the trading platform…critical tool to gauge borrower reliability.” I’m new to LC – just started funding and have about 175 notes heading to a goal of 400 but haven’t even received month #1 payments yet. I’ve looked at the trading platform and frankly it puzzles me. Seems to be a seller’s market there? I’m I missing something and how can I use it to my benefit as you suggest? Thanks, Rob
  
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Martin January 22, 2013, 1:44 am

About 4-5 years ago I signed up with a similar site, Prosper.com, and ended up losing money. Granted, the economy was much worse then and residents of my state were later blocked from using that site (as well as LendingClub). I may have made a profit if I’d been allowed to re-invest some earnings.

Remember, with the higher headline interest rates comes higher risk of default.

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- Martin January 22, 2013, 1:47 am
  
  I should mention I made loans to high rated borrowers with expected returns north of 7%.
  
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Awesome possum January 24, 2013, 8:34 am

I gotta say, I was initially excited about the Lending Club. It seemed to offer very good returns, it had very legitimate backers, coverage from respectable press and well, it looked like fun. I made an account and was considering putting $2500 in. However, after taking a look at the data, I don’t think it’s a good idea for anything except “play money.” I downloaded the statistics from the site and spent a long time slicing and dicing the info. The problem is that it’s a young, rapidly growing service so it doesn’t have a significant track record and the old, established loans are swamped by new stuff. New loans haven’t had a chance to go bad yet, so they are much more likely to have favorable experience.

When I restricted the analysis to just loans that have reached maturity, the returns just aren’t there. What I did was look only at 36 month loans initiated 3 years ago or more (there are no mature 60 month notes). I compared the total amount funded to the total amount paid back and calculated the returns based on that. I ended up with a range of 8% return over a three year period for A loans to -4% for F grade (0% for G). It works out to a 3% annual return for A to a -1% for F. That is before the 1% cut for Lending Club.
I kept working at it, trying to find some combination of factors that got close to the 10% return that I would want for this level of risk. I couldn’t do it and still keep a population large enough to feel comfortable that it wasn’t a fluke. I topped out at a 3.5% annual return, before LC’s cut.

So, in short, I think that the very high returns people are seeing are because loans have not yet had time to go bad. The losses on bad debts come close to wiping out interest payments. I don’t think it’s a good investment for any purpose other than personal entertainment (it still beats Vegas). The level of risk, especially considering the amount you would have to invest to get decent diversification, is way too high for the returns. I hope that perhaps the picture will improve given the recovering economy and job market, but there isn’t enough data to support that. I may check back in a year. If anyone wants to look at the data and tell me that I made a mistake, I’d be very happy to hear your analysis.

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- Mr. Money Mustache January 24, 2013, 11:23 am
  
  I always appreciate a dissenting opinion, Awesome possum – and I hope some readers will take you up on the data analysis challenge.
  
  I have read other reports that came to a completely different conclusion on the completed loans, including running my own analysis on closed loans using lendstats.com. So we can’t rule out that you are missing some decimals in your spreadsheet.
  
  Any other mathematicians with a bit of extra time want to have a go at this? I’d love to be able to incorporate the result into the NEXT Lending club article in the near future.
  
  Remember the fundamentals of this model: LC is doing the same thing that credit cards are doing: lending money to riskier borrowers at high interest rates. It is known to be an insanely profitable business model. It works so well, that the only limitation is a lack of people with which they can saddle with more debt. This is why the card companies mail out so many offers – creation of debt is their only profit bottleneck.
  
  With Lending Club, YOU become the credit card company. I personally lend only to people who are doing consolidation and get-out-of-debt loans rather than buying new trucks with 19% interest.. just because I’m stubborn and don’t want to facilitate such blatant stupidity. But I know I am being naive and others have different feelings about the issue. At issue here is only “will it generate some profits” and I hope we find the answer to be “hell yeah”.
  
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- B. Mason January 24, 2013, 11:47 am
  
  I somewhat agree. Few people understand the import of analyzing only completed loans, where they would come to the conclusion that about one in five loans has charged off some principal over the history. However, you can mitigate this principal loss by being savvy in your loan selection. I do all of my picking via statistical algorithm and have shown to avoid about half of the principal loss vs. a competing strategy. Soon will have a website up to share my picks via newsletter service.
  
  In the end, I think the returns are there to warrant an investment for me. I’ve got $38k in now,
  
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  - Awesome possum January 24, 2013, 2:49 pm
    
    I guess I’ll have to go back to lendstats and see. My analysis ignores the question of interest rates, default rates, timing of principal vs. interest, etc. It is only this: For all loans initiated more than 3 years ago, how much cash was put in, and how much cash came out? I did a rough calc to get the annualized interest rate. It’s not going to be exact, but I think it’s close enough. I applied all the filters I could think of, as well as the popular ones mentioned by others, to see if I could improve matters. I’m coming at this from the perspective of someone who was really excited about it and was all set to make some money, so believe me I tried to make it work. I’d be happy to email you the file.
    Other folks may have a better Ouija board than I do. For me, the returns aren’t very good and the risk is pretty darn high unless you have $20k to spread around.
    
    Reply
    - B. Mason January 24, 2013, 3:04 pm
      
      I also use this metric to analyze my performance (cash in and cash out). I call it a three-year return. Remember that it is unrealistic to consider this rate of return as what you would actualize, because most people are going to reinvest payments and not let cash sit idle. Anyway, feel free to send along your file and thoughts, because I think you should be as excited as I am for the future! Brycemason@p2p-picks.com.
      
      Reply
Samson MacVittie January 27, 2013, 12:17 pm

If a borrower says they are paying off and/or closing credit card accounts, is there mechanism in place to insure that is what the funds were used for or is this all based on good faith and honesty from the borrowers application?

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Alex February 25, 2013, 12:44 pm

I would love to invest this way, but am not allowed to because of their curiously-high suitability requirements. As if people making 70k per year needed more help!

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Jerry March 2, 2013, 7:40 pm

I have been in Lending Club for a couple years. I have 30 loans that have been charged off out of 569. They say I am averaging 7.96%…not exactly 13% but not bad.

I do not owe any money but it occurred to me that one could borrow a bunch of 3-4% home equity money and turn maybe 4% or more in profits.

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- Mr. Money Mustache March 2, 2013, 7:48 pm
  
  Hey Jerry, thanks for the info. What is your loan grade distribution? (what percentage or number of each grade?).
  
  From what I understand, unless you get an unusual number of defaults, the biggest determinant of return is the grades in your portfolio – better grade loans naturally pay out at a lower interest rate in exchange for lower default risk.
  
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AmeliaDarling April 4, 2013, 4:12 pm

Hey MMM

I saw an article today that said LT was limiting the types of questions that can be asked of borrowers and that the LT community had reacted negatively to this. What is your opinion? Do you question individual borrowers or do you focus on the diversity across the board?

Thanks!

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Mark S April 15, 2013, 7:20 am

If I read correctly, I need an income of $70k anually. I don’t make anything close to that and don’t have the suggested ($200k in) assets. I just saved up my first $3k and am ready to put it in. Did I misread it? Gogo VSTAX?

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clementinebean April 19, 2013, 4:39 pm

Just found your blog today. Wondering how this is going. Have you seen good returns so far? What are you bringing in monthly from this? When do you expect to get back your original investment and start making a profit?

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Ying May 4, 2013, 7:18 pm

I’m fascinated by this…this is very similar to the Wenzhounese Chinese method of investing. My family is Wenzhounese and the Wenzhounese community runs their own private lending practice, and you can only get in through connections or referrals. It works pretty much like the Lending Club and I grew up wondering what the hell it was that all my relatives were doing with their envelopes of cash. Once I got my own full-time job, my dad explained it to me. I guess they only explain it to their kids once the kids start making incomes. Anyway, I haven’t joined their private club yet but I’m thinking about it.

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Chris May 16, 2013, 1:05 pm

I have two questions/issues about LC that I am waiting for them to answer before I invest.

1. Why, if there is post-charge off recovery of a loan, aren’t the recovered funds distributed to the investors?

2. Why does a three-year term loan convert to a 5-year if the borrower hasn’t paid it? Why would there be a 36 month default? Is there a balloon?

Both questions raised by prospectus review. Waiting for advisor to call back.

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- Mr. Money Mustache May 16, 2013, 1:35 pm
  
  Hey Chris, Interesting questions and thanks for sharing them. I hope you get a chance to post here again once you get your answers.
  
  (Or, if any readers happen to know the answers already, please chime in if you get a chance.)
  
  There has been a lot of LC discussion on the forum – here’s a starting thread and you can also use the search box in the upper right of that screen to find more: http://www.mrmoneymustache.com/forum/investor-alley/lending-club-vs-stocks-vs-gold/
  
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- Ian Turner June 5, 2013, 5:08 pm
  
  I don’t know the details, but I think the short answer is that they had to structure things this way in order to satisfy regulatory requirements. Keep in mind that, despite what you may read in the press, the financial services industry is a highly regulated one.
  
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David July 24, 2013, 3:55 pm

Geez, I opened up an account at Lending Club and there were only 16 notes left with this criteria. I think I came too late to the party. :( So I stripped away most of the criteria except for working for at least 3 years and I got about 130 notes. I still didn’t feel like this was enough to split up my 10K. Maybe there will be more in a little while or maybe people have caught on and there is not much left for the rest of us.

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Brian July 25, 2013, 1:58 pm

Not everyone has access to notes through Lending Club. Residents of roughly 15 states are not allowed to originate loans, and can only trade notes with other investors after the fact through Lending Club’s “folioFN” platform.
If that describes you, here’s a good place to start: http://www.lendacademy.com/a-guide-to-investing-on-lending-club-with-foliofn/
MMM, if you’re interested in a guest post of experiences from “the other side” let me know.

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Matt August 21, 2013, 11:19 pm

Any updates on this? I’m curious to see how your portfolio is doing now!

Signed up through your link, just waiting on my funds to transfer…

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- Mr. Money Mustache August 22, 2013, 8:42 am
  
  Yes! Regular updates are being made here: http://www.mrmoneymustache.com/the-lending-club-experiment/
  
  (I’ll update the article with this link as well)
  
  Reply
jared February 11, 2014, 3:35 pm

Ok so I noticed you took down your monthly breakdown from the site. Is this because you are now showing a net loss for the most recent month? The period between 01 Dec 13 and 31 Dec 13 was the first month with lending club that my account had no organic growth. The period between 01 Jan 14 and 31 Jan 14 was the first month I had a loss of $500. I like to keep track of my risk as well (although it makes me nauseous sometimes) as my 31-120 days late notes are 1386 and my default notes are 1267. I consider my “risk profile” as a ratio of delinquent notes (not including grace period) divided by my total value (which is 4.5%). I feel like this trend of note write-offs has become very common with lending club which you can even see with the expected default rates posted on their web site. Not too long ago a note in grace period was expected to default approximately 5% of the time but is now 23%. I guess my question is do you, or anyone else for that matter see the same pattern as I am seeing (widening losses / more risk)?

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- Mr. Money Mustache February 15, 2014, 11:31 pm
  
  Hi Jared, I didn’t take anything down – perhaps you are looking for this page with the ongoing results? -> http://www.mrmoneymustache.com/the-lending-club-experiment/
  
  Defaults and interest are still plugging away as expected. There hasn’t been a significant boost in risk that I can perceive.. but there might be in the event of the next recession, whenever that kicks in.
  
  Reply
Tony March 6, 2014, 11:16 am

I found this example of LC tax implications and was wondering if anyone else had this issue.

“I’ll provide an example using my numbers from Prosper in 2012:

My OID (interest) income was ~$26k, and my charge offs were ~$15k. My net income was ~$11k. As I have very large capital losses from 2006 (IRS code only allows deducting a net of $3k per year), I will never be able to take advantage of the ~$15k in charge offs, but I had to pay income taxes on the $26k of interest income, which being in a high tax bracket, high income tax state (CA), and various other tax anomalies, my tax burden on this $11k of net income (because the reported taxable amount is $26k) was around $9.5k. My net, after taxes ending up being $1,500” – CA Lender at Lend Acadmey

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- Nigel August 24, 2014, 2:47 pm
  
  Im surprised with all the responses to this article that there was no explanation of the tax implications of this type of lending. Tony hit the nail on the head in describing how you can erode most of your income because the interest is regarded as regular income on this investments and not long term capital gains as would be the case on a vanguard etf.
  For this reason since I am also in a higher tax bracket I have experimented with LC but in a Roth IRA so I do not have worries on losing most of my gains to the tax man.
  
  Reply
Rachel March 21, 2014, 2:09 pm

I’m new to your blog, so please forgive the late comment. I wanted to invest in this about a year ago and my mother talked me out of it. She’s pretty financially savvy so I heeded her advice. After reading this, I decided I to go ahead and go for it! Imagine my disappointment to discover that because I live in the state of Iowa, I cannot participate!! WHAA? Why Not? Only 26 states are approved to participate. After some very light research, I’ve decided to write a letter to Iowa’s securities regulator. Others who have run into this issue, I ask of you to please do the same. With enough people asking out states to change this policy, hopefully we will succeed!!

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Darren March 24, 2014, 2:39 pm

I signed up for Lending Club in 2013 and am fairly happy with my results so far. I am a conservative investor, who mainly invests in Vanguard Index Funds, so I was initially comfortable with the grade A-B notes.

However, after adjusting for taxes (if you are investing in a non-IRA account), your returns take quite a hit. This is because all income is taxed as “ordinary income” and are not provided a qualified dividend status.

In summary, I now agree that investing in higher yielding notes is the best option after taking taxes into consideration. Thanks for everyone’s insight thus far.

Reply
freedom52 July 5, 2014, 7:38 am

Hail Great MMM! I’ve been lurking on this site for many months and didn’t feel I could contribute until now. At the risk of embarrassing myself or sounding like a smart/dumb ass, I wanted to share my discovery: interest rates on loans are not directly comparable to yields received by dividends. For example to receive the equivalent annual yield of 3.72% that I would receive in dividends from the Vanguard REIT ETF VNQ, a LC loan would need to pay me almost twice that, 7%, clear of all fees. This is without reinvesting the dividends for the comparable 36-month period. While there is risk in both lending and investing, at least in investing your principle can increase, even without reinvesting the dividends. The expense ratio on VNQ is 0.1%. Which is the better investment in your view?

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Nick July 9, 2014, 1:59 pm

Lending Club seems to be expanding very quickly. If there are any weaknesses in the model there is a serious risk of collapse. While the whole business may be above board, the market it serves may find a loophole and exploit it. This can happen when there is a new in-fashion method of money exchanging hands. There is too much excitement surrounding this to make me feel comfortable. The numbers are growing too quickly. Be smart and don’t invest money that you can’t do without.

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BH September 27, 2014, 1:11 am

Very interesting article. I’m one semester away from receiving a master’s in applied statistics, so I think my heart skipped a beat when you said the data is easily accessible. I’ll start some modeling techniques right away, and I’ll be sure to share my results if anything interesting turns up.

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- Mr. Money Mustache September 27, 2014, 7:28 am
  
  Please do! I’d love to get some new insights on Lending Club through their rapidly growing data collection.
  
  Reply
Joe December 16, 2014, 11:58 pm

Hey MMM,

I accidentaly deleted my “MMM” filter on Lending Club a few minutes ago! For some reason, I thought you had an LC article that spelled out the filters you use, but now I can’t find it. Will you please let me know?

Thanks!
Joe

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Dave November 10, 2015, 2:07 pm

I have a question for MMM now that you have a couple years experience with the Lending Club. Thinking about asset allocation and my own aversion to overweighting in any one investment class and the LC policy of limiting the investment to 10% of assets. What percentage would you personally use as a maximum LC account value as a % of ones total portfolio? I am thinking of maybe 3% of total. While the diversification of notes in an LC account provide lower risk we are still looking at a single company; LC. Like any company it could suffer or ultimately fail.

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Matt January 13, 2016, 7:47 pm

Canadians take note! There is s pseudo-version of the lending club in Canada now. (at least one anyway..) It’s called the Lending Loop. A quick interweeb search brings up articles by the Globe and Mail, as well as the financial post.

It is small right now, as it’s just starting up, with only about 12 businesses/lending opportunities the last time I checked. Their lending model appears to be similar to the Lending Club, but their borrowers are small businesses instead of individuals. Interest rates vary from 14.5% for a ‘C’ rated borrower to 8% for an ‘A’, with repayment windows between 6months and 4years represented. 9 of the 12 loans are already fully funded, with borrowing between $10,000 and $50,000CDN (…so that’s about $800US with today’s abysmal CDN to USD exchange rate. lol!) It will be interesting to see how this grows and plays out north of the 49th!

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Plastic Kiwi January 28, 2016, 3:06 am

There’s one p2p here in New Zealand started up in Sept 2014 called Harmoney. Seems to be going well with actual defaults well below projected so far…less than half way through the shortest loans though.

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Chris O March 7, 2016, 3:34 pm

Just found your site through the New Yorker article. Great stuff. I just started opening an account, and literally within 1 or 2 minutes of entering my phone number, I got a call from a Lending Club rep. He just asked if I needed help. It was kind of eerie and I did not think this was a good thing. It makes them seem bloated, like people are just waiting for new accounts to open. It’s like they pounced on me like you would if you needed a hard sale and did not want to let the mark get away.

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- Leslie May 10, 2016, 11:31 am
  
  Yeah, they are desperate for new money as they were under capitalized.
  
  Reply
Roger May 9, 2016, 8:19 pm

http://www.latimes.com/business/la-fi-marketplace-lending-pullback-20160511-snap-story.html

Appears the lending club wasn’t all it’s cracked up to be?

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kindoflost August 19, 2016, 6:52 pm

I put down $3,000 in Prosper back in 2006, also as an experiment. The defaults were much higher than anticipated. Ended up losing about $600 and it took me until 2010 to be finally out. Someone commented above that maybe Prosper was ahead of its time (I am paraphrasing) and maybe things are better now. I know they were not accepting new investments for a long while. Maybe LC is better. I really like the option of having a secondary market where you can sell your notes if you want out.
Good post, I need to revisit this as it can easily double the 4% SWR…

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Cameron Summers October 31, 2016, 12:42 pm

Hi MMM, I’ve been a reader and fan for the past year and just started investing in Lending Club thanks to your introduction. I also work as a researcher in machine learning and spent a bit of time building a model that automatically picks loans for a higher return. I’ve detailed it on github at https://scaubrey.github.io in case you or any other readers are interested in how artificial intelligence can be used here.

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- Mr. Money Mustache October 31, 2016, 4:22 pm
  
  Wow Cameron – fantastic article!
  
  So, you’re suggesting grabbing a selection of loans based on their Lending Club grading. Would it be even better to run the analysis based on all the more detailed internal parameters, like purpose of loan, previous defaults, etc?
  
  (Apologies if you did actually do this and I missed it, I only read through your sentences quickly and did not look at the code).
  
  Reply
  - Cameron Summers October 31, 2016, 5:53 pm
    
    Thanks MMM! The models are indeed based on the detailed parameters of each loan such as the borrower’s debt-to-income ratio, previous defaults, and credit rating. No need to apologize, I know it’s quite a bit to chew on with limited time to read :)
    
    The borrower info is primarily helping the model to understand who is likely to default – very similar to how statisticians at banks and probably even Lending Club assess the initial risk of the borrower – but to increase your portfolio return you have to also take into account the Lending Club grading and interest rates. This was the main focus of the article, strategies on how to optimize these two elements together using machine learning.
    
    Reply
jaysmasher April 14, 2017, 12:24 pm

So I was hoping to actually comment on the Lending Club experiment. I see that you are winding down according to your website. Are you still doing that? Just curious as it has been a few months since you’ve written a post about it.

Reply

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