I finished my BA a couple of years ago better off than some, in terms of student loan debt, but worse off than those lucky people whose parents paid their way. Between those loans and dumb credit card debt I accrued while in school, I pay a fair amount toward debt every month, but I also make sure to save and invest. I take advantage of my company’s matching in a SIMPLE IRA, have my own ROTH IRA, and occasionally throw some spare money at a non-retirement investment account or two. The most interesting? My Lending Club Account.
The referral promo has ended. As of 12 Aug 2010, friends get $25 dollars to invest. That’s the cost of a single loan note.
What is Lending Club?
Jumping on the social trend, Lending Club is a Web-based (but completely legit) social lending/borrowing platform. On the investment side (the lenders), it offers pretty nice returns, and on the borrowing side, it offers relatively low-interest personal loans. They tout their stringent loan approval processes to protect the lenders, but do offer loans to a variety of risk-level borrowers. Their spiel:
Why should banks make all the money? We started by asking this one simple question. Now Lending Club offers investors higher returns and borrowers lower-cost loans through an online financial community that eliminates the high cost and complexity of traditional banks.
How does the investing work?
Investors/Lenders buy notes, $25 chunks of loans being requested by the approved borrowers. From what I understand, all of the notes in a loan must be purchased by investors for it to be considered “fully funded”, otherwise the loan is rejected. The lenders have a few tools to help make intelligent choices about which notes to purchase. To start with, each loan is ranked by a very convoluted point structure that ultimately results in a letter grade and numerical secondary-grade. The higher the grade (A1 at the top, G5 at the bottom), the lower-risk the loan is. Lower-risk loans have lower interest rates for the borrowers, and lower returns for investors, but are, of course, the safest.
Investors can browse through the notes, and view quite a bit of information about the purpose of the loan, amount, monthly payments, etc. They also have the option of asking the borrowers questions to clarify any confusion, or gather more information that might help them make their decision to help fund a specific loan. There’s also the option to set up automatic investments based on certain criteria (such as risk, purpose), if you aren’t willing to micromanage to the point of choosing specific notes.
Like with many other types of investments, there’s a risk of loss, especially if you suck at choosing notes to invest in, but one important thing to note is that uninvested money in your account is FDIC insured (up to the current limit). For investors who are constantly reinvesting their returns, that’s probably not a good deal, but the payments I’ve received from borrowers are currently sitting uninvested until I have enough to buy another note, so it is a good thing for me.
What made me start investing?
To put it bluntly: a $50 sign-up bonus that was being offered a while ago. $50 is enough to purchase two notes, and get a feel for how it works. So far (after 4 months), my two notes are both current, although both are pretty low-risk; I have A- and B-grade notes. My low-funded investments won’t return much, although it is a 9.72% return at the moment. The real goal is to have enough invested so that you are constantly purchasing new notes after receiving monthly payments on the current notes you hold. I’m planning on investing enough of my own money in the future to do just that.
Right or wrong, I love the ability to pick and choose the notes you buy, because it gives me the feeling of helping someone be responsible with debt repayment (I stick mostly to debt consolidation loans). For instance, a recent one I saw was a guy trying to consolidate credit card debt and help pay for his daughter’s wedding. I can quickly see that I have no desire to fund that loan. Why on earth would you go into more debt when you’re already needing to consolidate? I’m sorry, but you definitely shouldn’t go into debt to fund a wedding! But, that’s just my opinion.
Are you intrigued?
Lending Club is offering another sign-up bonus right now to the tune of $64.62. Like I mentioned earlier, that will get you 2 notes without any investment of your own money. And, you’ll be in a better position to reinvest sooner with that extra $14 and change.
The $64.62 deal is a limited time thing, but even if it has passed, they seem to offer $25-$50 on a fairly regular basis. It’s great seed money if you’re a little hesitant to jump right in. As with any investment avenue, make sure to read all the fine print, including the state and net worth limitations. Sadly, they don’t have approval to lend/allow investments from all states right now. It’s also US-only, FYI.
Want to hear what others think? Plenty of Personal Finance bloggers have blogged about their experiences. Head over to a search engine and see what you can find. I know Five Cent Nickel has an ongoing series of posts detailing their experience.
Or, if you’re already using Lending Club, please comment and let us know what you think!