Investing in Lending Club: What You Need to Know

Lending Club is no longer taking personal investors, unfortunately. See some of the alternatives here.

We’re leaving this article up for a while so that you can see what Lending Club did and so you can find the alternative peer investing platforms.

There’s an excellent reason why Lending Club was the largest peer-to-peer lending network, responsible for over $13 billion in loans at one point.

Borrowers enjoyed better rates than they could find at a bank, and lenders received returns that could be difficult to replicate with more traditional investments.

Specifically, lenders earned an average return of 9.65% during their prime years.

Whether you’re a newbie investor or a seasoned investing pro, Lending Club can be a good addition to your portfolio. Here is what you need to know becoming a Lending Club investor:

Meeting the Requirements

Not everyone can qualify to become an investor with Lending Club. The laws of Maryland and Ohio prohibit any investing with Lending Club, and Alaska, Massachusetts, New Mexico, North Carolina, and North Dakota only allow citizens to trade notes rather than invest directly. (More on Lending Club’s Note Trading Platform below).

In addition, investors must meet their state’s income level requirements. In most states, that requirement is a gross annual income of at least $70,000 and a net worth of $70,000 or more, although those with a net worth greater than $250,000 have the income requirement waived.

California is the only state with a different requirement—the gross annual income minimum is $85,000 and investors must also have a net worth of $85,000 or more, or else a net worth greater than $200,000. Alternatively, Californians who do not meet the income or net worth requirement may invest $2,500 or less in Lending Club Notes.

All investors are also prohibited from depositing more than 10% of their net worth in Lending Club Notes.

How Investing with Lending Club Works

Once you have opened an investor account with Lending Club, you can begin investing with as little as $25. You have two options for determining which Notes you select to build your portfolio:

  • Manual investing—You browse and choose specific loans.
  • Automated investing—You set your investment criteria and Lending Club will automatically place your orders as Notes matching your criteria are found.

As with all investing, it’s smart to diversify your Lending Club portfolio to protect yourself from the risk of a borrower defaulting. As the company stresses on all of their promotional material, defaulting is an inevitable aspect of lending. Lending Club is not a bank, and as such, your money is not FDIC insured, so it pays to make sure the money you invest is well diversified.

To help you diversify, Lending Club ranks loans with a letter from “A” to “G” to approximate the borrower’s risk of default. While A loans offer a lower risk of default, they also have much lower rates of return for investors. According to Lending Club’s own historical data, Grade A loans average 5.2% returns, while Grade E loans average 9.54%, and Grades F and G loans together average 9.01%.

Loan terms for Notes are set at either 36 months or 60 months. Lending Club receives monthly payments of principal plus interest from borrowers during the term of the loan. These payments are disbursed to investors as they are received. Once the monthly disbursement has been received, investors may withdraw or reinvest the money at any time.

Invest in Lending Club

The Note Trading Platform

One potential downside to becoming a Lending Club investor is the fact that your money is tied up for the full length of the loan term. However, Folio Investing, a registered broker-dealer, provides a Note Trading Platform for Lending Club Notes. On this platform, investors may buy and sell current Notes to and from each other, offering investors the chance to realize some liquidity of their investments.

The Note Trading Platform also makes it possible for would-be investors in Alaska, Massachusetts, New Mexico, North Carolina, and North Dakota to put money in Lending Club, as trades are allowed in those states, but investing is not.

Purchasing Notes on the trading platform is fee-free for buyers, and it gives them the option of buying Notes below value or with a nearer maturity date. The seller does have to pay a transaction fee equal to 1% of the purchase price in order to sell a Note on the trading platform.

Related: Investing in Fine Art With Masterworks (Our Review)

Fees and Taxes

Lending Club makes its money by collecting fees from both borrowers and investors. Specifically, investors pay a 1% service fee on each payment received. You do not pay a fee if your borrower misses a payment, which means the company’s revenue is directly tied to investors’ cash flow—which explains Lending Club’s somewhat exacting requirements for borrowers.

In addition to fees, you will also need to be prepared for the fact that interest and other payments in your Lending Club account will generally be taxable as regular income. The good news about the taxable nature of Lending Club accounts is the fact that you may be able to claim losses on your tax return if any of your Notes are charged off for delinquent payment

Lending Club’s No-Fee, Self-Directed IRAs

In addition to the general investing, Lending Club has also launched no-fee retirement accounts—which means you can enjoy tax-advantaged investing with the peer-to-peer model.

The Lending Club self-directed IRAs are administered by EntrustCAMA, and they allow you to invest in things like real estate, precious metals, land, businesses, and debt (e.g. Lending Club Notes). The self-directed accounts offer you the opportunity to diversify by investing in non-traditional investments. Lending Club’s self-directed IRAs come in many different varieties, including a Traditional IRA, Roth IRA, SEP IRA, or Simple IRA. You can also do a Rollover IRA.

While these products are fee-free, you do need to meet some minimums to maintain the no-fee status. You must open the account with $5,000 and maintain that balance for a year. In the second year, you need to reach a balance of $10,000 before the end of the year, and maintain that balance every year thereafter to keep the fees at bay. If you do not reach and maintain these minimums, you’ll face an annual fee of $100.

If you do decide to invest in a Lending Club IRA, do not forget that your contributions across all of your IRAs are limited to $6,000 annually.

The Google Seal of Approval

For any would-be investors still a little nervous about peer-to-peer lending, the partnership between Google and Lending Club may help allay fears.

You may remember when Google, the search engine (and everything else) we all know and love, purchased a minority share (less than 7%) of LendingClub Corp in 2013. They made the purchase for a total price of $125 million. The purchase was made at a $1.55 billion dollar valuation, which was much higher than previous valuations.

Since that time, Google and Lending Club have partnered to fund loans up to $600,000 to resellers, service providers, and consultants tied to Google. This sort of captive financing is similar to the way GM extends credit to car dealers—it’s a mutually beneficial investment that can improve the bottom lines of all three players since Google already knows the borrowers, Lending Club handles the underwriting, and some of Google’s enormous cash reserves can be put to good use.

Ultimately, the partnership between Google and Lending Club is a great sign of confidence in the peer-to-peer lending model offered by Lending Club.

Whether you’re a newbie investor or a seasoned investing pro, Lending Club can be a good addition to your portfolio. That’s all you need to know about investing in Lending Club.

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One Comment

  1. Avatar Thias @It Pays Dividends says:

    I’ve been interested in trying out investing in Lending Club but have been hesitant because it seems like the tax reporting would be a burden. Any experience in the process? Does Lending Club do anything to help make it easier (ex. with items like charge offs)?

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