I’ve had my little Lending Club experiment running for about a year now, so I figure it’s high time to post an update on how things have gone and my “initial” impressions.
I haven’t added any more funds since getting up to $500, but I’ve regularly reinvested the principal and interest payments that I’ve received. That actually brings me right to my major complaint about Lending Club – the investment process is a PROCESS.
The “notes” that you invest in have a window of time during which they can be funded. If they are not fully funded within that time frame, then they are cancelled. Most of the notes that I find to invest in usually have anywhere from 10-13 days left in their window, which means that once I “purchase” that note, my money sits idle for up to two weeks. During this time a note can also be cancelled if Lending Club’s review of the borrower does not meet their standards.
If the note gets cancelled for any reason, you have to start over. This has meant that on several occasions I’ve had money sitting idle for a month or longer that could have been invested.
Assuming everything goes well and the note is approved and fully funded, you then have just one month where all of your money is working for you. The payments of principal and interest made to your account go back into your general fund, which just sits there until you have enough to invest in another note. So your working money is continually eroded as each monthly payment is made, as opposed to something like a mutual fund where all your payments are immediately reinvested and put to work for you.
Granted, with a minimum note purchase of $25, having that small chunk of money sitting idle isn’t a huge deal, but it still rubs my investment sensibilities the wrong way.
Once you’ve accumulated at least $25 back in your general account balance, you then have to find a new note and go through the process over again. Now, there is a way around this part if you sign up to use Lending Club Prime, which will automatically reinvest your money for you, but you need a minimum balance of $2,500 to join (this is actually down significantly from when I first signed up for Lending Club). The downside of Prime is that you lose some of your ability to filter certain note characteristics, which I use to try to reduce my risk.
Overall, it’s a pretty mild complaint, but still one that has left me feeling a little ambivalent about Lending Club. It feels like a lot of micromanagement while still sitting on my hands and waiting. I don’t think I’ll pull out just yet, but I think I still prefer mutual funds. My biggest qualm is that unless you have a LOT of money in it, you are exposing yourself to a pretty huge diversification risk. Then if you do have a lot of money spread over a large number of notes you would have a rather nightmarish account (and tax) statement with all of those notes listed out.
But how has my investment actually done? Pretty decently. My experience with the borrowers has been all positive – I’ve never had a late payment or default. I have even had two notes get paid back in full early – though this isn’t necessarily a positive since you then miss out on any interest payments.
Like I said in my original post, I started out with some pretty low-yield notes (about 6%) while I was just testing the waters, but I started bumping that up a little bit later. Right now I usually aim for notes in the 9-12% range, which feels like my personal acceptable level of risk. My current Net Annualized Return is 8.7% and I’ve made about $30 in interest net of fees.
I think that Lending Club has been an interesting way to invest and make a little bit of money, but there may be safer and easier options out there that will still yield a similar return.