If someone ever begins to explore peer to peer lending, they are almost guaranteed to encounter Lending Club. There is no escape. With five years of solid history, an 85% share of the market, and above 150,000 issued loans totaling over $2 billion, this single company from San Francisco currently dominates the industry and its news cycle.
So does it deserve all this hype? Should you open an account through them? What kind of experience can you expect when investing through Lending Club? In this Lending Club review we will examine the major parts of the platform so you can decide for yourself.
Note: this article is for investors. If you are a borrower, you may want to read Lending Club Review for Borrowers.
Let’s get started!
Trust & Consistency (4.5 stars)
Whenever I meet people who are thinking of getting started with peer to peer lending, they usually ask about its risks. After all, there must be dangers involved with investing in something that did not even exist 10 years ago.
To entrust your money to anybody other than yourself inherently means it is no longer under your control, so any type of investing will always contain some degree of risk. However, peer to peer lending is dramatically more transparent than simply handing your cash to a stock broker. This is because your invested cash generally remains within your control. In this way, Lending Club gets points for reducing its risk to lenders. All of Lending Club’s historical loans can be downloaded off its website in a spreadsheet and analyzed by the average borrower using Excel or other statistical programs. They even include a much larger file of all their applicants (of which 90% were denied).
Lending Club also gets points for their underwriting, that is, for the process they use to approve which borrowers are even allowed onto their website. The company has done an increasingly excellent job at filtering out risky borrowers, and this has reduced the number of borrowers who have not paid their loans back. Each year they get better and better. For example, if you examine the rate that their borrowers defaulted during 2008 (see below), almost 15% defaulted. But if you look at 2009 only 9.2% defaulted. Lending Club receives solid marks for striving to only allow worthy borrowers onto their platform.
Lending Club’s Thundering Success
In January 2013, Lending Club experienced its first month of issuing $100 million in loans, and then crossed $150 million just five months later in June. Stunning. Each year Lending Club has more than doubled their loan volume (currently totaling over $2 billion), and is now cash flow positive. They were recently named by Forbes as one of the most promising companies in America.
All in all, Lending Club is experiencing tremendous success. This decreases the odds they might go bankrupt and increases the overall trust we can place in them.
Some Risks Remain
However, Lending Club does not get perfect marks. First, and this is something they cannot really avoid, the fact remains that they are cutting the path of a brand new industry, and in any new enterprise there are always unknown risks. This is something every new lender has to take into account.
Second, while big investors with lots of money have protection in case Lending Club goes bankrupt (through their LC Advisors program), average retail investors like you and me have no such protection. I am not overly concerned with this problem because Lending Club has plenty of cash in its reserves and is making more of it every month, but it does increase the risk for its average lender.
Read more: The Risks of P2P Lending
How Easy is it to Become a Lender? (4.5 stars)
How easy is it to get started investing at Lending Club? The bottom line: they have done a great job at making the setup quick and painless. A new lender can choose to open a regular taxable account or a retirement account like an IRA (see my writeup on Lending Club IRAs). The application has an applicant hand over the usual information like their address, birthday, and social security number so that Lending Club can verify their identity. They are also asked to report how much money they have available to invest.
If you are looking to just open an account and explore the platform without committing any funds, you will be happy when you discover how easy this is.
However, there is often one hurdle in the way for many would-be lenders. Lending Club does need to work on the number of states that can currently open an account. Only about thirty states allow investing through Lending Club, though many others do still allow trading on the secondary market (Foliofn).
For those who are able to begin actively lending, it is really easy to transfer funds over from a checking account. Once the money is moved over, you are enabled to begin checking out loans and investing in those which meet your inspection. To be nit-picky, the platform giant could get dinged for its lack of an instant-transfer feature. Their competitor Prosper offers lenders the ability to instantly move money from a checking account (once an initial transfer is successful). Lending Club would be wise to imitate them on this feature.
Overall though, Lending Club gets solid marks here.
Lending Club’s Website (3 stars)
Peer to peer lending is still in its infancy. As a result, Lending Club gets points for creating a usable platform out of nothing, so to speak. A lender can usually open an account with ease, searching for new loans while arranging their purchased notes in various portfolios. Payments arrive smoothly, and most of the lender experience is understandable. For something that did not even exist in the nineties, it is amazing that the peer to peer platform has created something so functional.
An Unfortunate Learning Curve
While the website is good, it’s not great. Beginning lenders can often get overwhelmed by all the information that is thrown at them on different pages. The site can feel clunky at times; honestly, to me it feels like it was designed by a law firm. The website would really benefit by getting something like a total overhaul, remade to be friendlier and less official, more responsive and less angular.
In my opinion, this is evidence that Lending Club’s focus has been on its big institutional investors (hedge funds, etc) more than the average American with extra money to lend. Hopefully, now that the platform is cash-flow positive, there will be less attention given to keeping its head above water, and more focus on creating a good experience for its retail users.
The Account Screen
To highlight the design, let’s examine their account screen in the graphic below. This is the main page that every lender looks at when they first log in. Lending Club has emphasized three important numbers: Net Annualized Return (called NAR – 17.92% in example below), Interest Received, and Account Total. Additionally, there are figures of how much cash is tied up in various phases of the lending process, as well as boxes with dropdown reports for how many notes are being paid back on time, how many are late, and how many have defaulted (or charged off).
Yet, like we highlighted with their overall design problem, Lending Club should really improve this screen. For beginners especially, this screen uses a lot of unfamiliar terminology, and I am not sure Lending Club realizes this. It would not be much work for the platform to simply have information boxes that would appear if a user hovered their cursor over the different sections. A term like “Charged Off” is understood by regular lenders like myself — but for beginners, the platform may as well be speaking Dutch. Hover-over definition boxes would go miles on this page (Prosper has these).
NAR = Not Accurate Return
Lending Club’s site loses points for its calculation of the rate a lender is earning, here called the Net Annualized Return (NAR). To be fair, it’s not a bad starting point. For most lenders, NAR at least is somewhat in the ballpark of their actual return. However, active lenders like myself have examined how they calculate this value, and have found it is usually inaccurate.
- NAR does not take into consideration uninvested cash, so if you move $10,000 over from your bank account and invest just $25 in a single loan earning 7%, your account might say you have an NAR around 7%. But this would mean you have $9975 sitting there earning no interest, so you are actually earning a return of around 0.01%.
- NAR does not consider bad loans until they have fully defaulted, so if you have hundreds of late loans that haven’t had a payment in months (and will probably default), your NAR would still be cheerfully be telling you how amazing your account is doing.
- NAR is not accurate for people who trade on the secondary market. For anybody who buys or sells already-issued loans on Foliofn, the NAR figure is near-useless.
During my interview with Scott Sanborn in May, he communicated that Lending Club does have a goal to clarify its NAR figure for its users. While he disagrees that it should take late loans or uninvested cash into account, he spoke about how Lending Club hopes to have a number on the account screen that will show where the NAR is eventually headed (once an account has experienced some defaults and the curve has settled down).
Most active lenders like to calculate a better return using the XIRR function.
Filtering Loans on Lending Club (2.5 stars)
Once your account is set up, you will have the choice to find loans yourself (the Browse Notes link), or let the platform select some loans for you (the Invest link). The best returns (and the fewest defaults) come through filtering loans ourselves, so that is what we will be reviewing Lending Club on today.
To start, Lending Club has done a fairly sufficient job at helping lenders overview the available notes and choose some to invest in. For instance, if you click the Browse Notes link at the top of the Account screen, a long list of available loans will appear on your screen. If you look in the top right corner, you will see the total number of loans that are available on the platform (see the picture below). In this picture, 1162 loans are available to invest in.
For positive marks, Lending Club is quite transparent here, allowing both its available and historical notes to be downloaded off the website for further examination. This helps sites like NickelSteamroller get established as providers of useful filtering tools.
On the actual website, if you look at the left side of the screen, you will see a section labeled Filter Notes. Here are listed a variety of different filters you can apply to slim down the large pool of notes into a smaller higher-quality group. Note: filtering loans is the most complicated part of peer to peer lending, so you may want to read my ebook or my series on filtering if you do not yet understand what this means.
The most basic filters are easy to use on the Lending Club website. For instance, say you wanted to only invest in borrowers who have not had a public record (like a bankruptcy). You would simply go to the option labeled Public Records and check the box for “Exclude Loans with Public Records”. Click Update Results and the list of available loans drops to 1115, meaning almost fifty loans on the platform are from borrowers with a negative mark like bankruptcy.
No Fine Tuning
Overall, Lending Club site does only a passable job at helping us filter their platform. The platform loses points because its filters cannot be very fine tuned. For instance, lenders can dramatically improve their returns by lending to borrowers who have been employed for at least ten years. However, Lending Club only gives you six options: you can filter borrowers with 0 through 4 or 5+ years of employment. Yet active lenders like myself have often benefited from lending to people with, say, six years of employment history rather than five. Lending Club’s loose filters are no help here.
This is not always the case. A few criteria like Inquiries in the past 6 months allow a full spectrum of degree of control.
But overall the problem is deep and widespread. Debt-to-Income Ratio can only be filtered in 5% increments, no fine tuning allowed. Same with the Loan Amount. Same with number of borrower Delinquencies (how many times a borrower has previously made a late payment). The problem is most apparent with the Earliest Credit Line filter. You may choose one of only four options: Any, 1 year or more, 5 years or more, and 10 years or more.
This is really frustrating for lenders like myself. There is a dramatic difference between borrowers who have a credit history that is one year old versus a history that is four years old, but Lending Club does not make any distinction.
If I Was Lending Club… (two big filtering wishes)
Two desired filtering changes for the Lending Club website:
- I would move the Filter Notes section off the sidebar that it is crammed into and put it on its own screen (Prosper does this well). At least then the whole picture could fit in a browser window. Beginning lenders could get a much better handle on filtering if this were the case.
- Secondly, I would allow for full fine tuning of optional filters like Earliest Credit Line. These improvements would not be too complicated to make.
I say all this as somebody who truly delights in peer to peer lending and its San Francisco-based industry leader. More than fixing the NAR calculation, more than redoing their site design to be more user-friendly, more than anything: I wish Lending Club would simply improve their website’s filtering.
Getting Your Loans Funded (4 stars)
Lending Club offers a wide selection of loan grades to invest in: from A-grade to G-grade. A-graded loans are the safest since they are issued to borrowers who have the very best credit, giving lenders about a 6% return. G-grade loans are the most risky, but give lenders above a 20% return. The more risk you take on, the higher the interest rate you earn on your investment. For instance, my Lending Club IRA is currently earning a 14% return because I only invest in lower grade loans.
Lending Club’s Loan Quality
It is important to state that, in my experience, Lending Club’s default rate is quite remarkable, meaning their borrowers are less likely to default on their loans. For this, Lending Club deserves great praise. It is one thing to promise a 20% return on an E-grade loan. It is another thing to consistently approve borrowers who are likely to pay that loan back.
On Lending Club, once you have found a few notes that pass your filter criteria, you have the option to look at them more closely (see the D-grade loan below). Lending Club does a good job at laying out a borrower’s credit history, stated income, and all sorts of other variables to give you a good picture of who you are lending money to. The screen could use a better layout, font, and typography, but overall the information is very complete and layered into a readable style.
Once you choose to invest an amount (in increments of $25), you are brought to a screen where your entire order is laid out. Here you can see if the note you are about to buy is already in a portfolio, a feature that Lending Club does well. If your order is to your liking, you can hit Complete Order and your notes are purchased. You then have the choice to add these notes to a portfolio, either an existing one or a newly created one.
Lending Club’s Portfolios are Awesome
Lending Club has done a good job at helping lenders arrange their notes into these portfolios. From the Portfolios link on the top of their website, you can check the earnings report of each portfolio of notes. The beauty of their system is how portfolios enable you to compare different investment strategies.
For instance, say you wanted to invest to both people who own their homes and people who rent. You could add loans from people with homes into one portfolio and those who rent into a second one, comparing them later in the year to see how each of them performed. In this way, portfolios can help you examine different investment strategies over time.
No Automated Investing Option (for now)
The one strike against Lending Club in regard to purchasing notes and reinvesting returns comes from their lack of an automated investing feature. Prosper, Lending Club’s competitor, has a savvy option called Automated Quick-Invest which automatically searches the platform using any filter you set up. It then invests money into any matching loans for you. The need to regularly log onto their website to manually invest in loans has been a hassle for active Lending Club lenders.
Thankfully, Scott Sanborn indicated that Lending Club is rolling out an automated investment feature sometime in 2013.
How Easy is it to Maintain a Lending Club Account? (3.5 stars)
Lending Club does a good job at helping you maintain your account. They adequately categorize your issued loans by giving them a status of Current, Late (In-Grace Period), Default (Charged Off), or Fully Paid. Furthermore, they do a good job at breaking down the payments each borrower has made, as well as any problems that are happening on a problematic loan. As you can see in the screen below, the platform has outlined the Payment History that a borrower has made, including the payments they have yet to make.
At the same time, you can scroll lower to examine the Collections Log for any problems the platform has encountered. Borrowers who miss a payment are contacted by Lending Club via phone and email, eventually handing the process off to an external collections agency if there is a problem.
Foliofn & Lending Club’s Secondary Market
Lending Club’s greatest strength goes right along with its greatest weakness, specifically its Foliofn service, the secondary market it offers for lenders to sell loans or buy loans that somebody else initially purchased. On the one hand, Lending Club allows you to sell loans that are late, something Prosper does not do. This is a huge advantage for lenders who are able to be more active on the platform. If a lender has a note go just one day late, they often can get somebody to buy the note on Foliofn. Most of these slightly-late loans recover their payments, so there is a good demand for them on the secondary market. For lenders who want to invest a little more time, this can mean they never experience a default, because they simply sell any note that goes late.
Yet Foliofn is also the section where Lending Club’s website is the most dysfunctional. The interface and function of Foliofn has a lot of problems. Lenders regularly communicate to each other in places like the LendAcademy forum that the site frustrates them and discourages them from regularly using it.
This has not stopped many thousands of lenders from using it. Lending Club’s secondary market is thriving. If you want to sell your notes at cost and close out your account, you will find the process quite doable. In this way, the platform has managed to provide an efficient and much needed service to its lenders.
The banks used to be the primary way we lent money to ourselves as a nation, but these middlemen are being superseded by technology. Using the internet, we are connecting those of us with need to those of us with extra cash to invest.
Lending Club: Likes
Lending Club has done a great job at becoming this new intermediary. It seamlessly gets you started as a lender, helping you enter its platform and get connected to available borrowers. It is stellar at being transparent, helping lenders through making nearly its entire history available to us. It skillfully collects profiles of its borrowers and arranges their loans on a platform that we can search for worthy investments of our cash.
There is little debate about this fact: Lending Club has done an excellent job at becoming successful as a company, and should be lauded for their efforts. They are issuing over $100 million in loans per month, and are solidly on track to becoming a public company in the next 18-24 months. Regarding their riskiness as an investment, they are far ahead of their competitor Prosper, a company that has not yet become cash-flow positive. This is perhaps their greatest strength, namely their ability to make a profit and remain afloat as a company, thereby reducing our risk of investing through them.
Overall, the site does a great job at being comprehensive, meaning almost every element of peer to peer lending is well addressed. Most peer to peer lender should have a good experience when lending through them.
Lending Club: Dislikes
While Lending Club does a great job at enabling peer to peer lending, it suffers from a few problems, particularly its website. The coarseness of its text and layout should be solved through a new website design. As the main player in the peer to peer lending game, Lending Club should be known for having an innovative and user-friendly interface.
The site needs to redo how it communicates the return it makes for its lenders. Its Net Annualized Return rate remains an overinflated representation of how much interest a lender is earning. It does not take late loans into consideration, and more importantly does not include uninvested funds in its calculation. Lending Club would do well to imitate its competitor Prosper in a few ways, namely their Auto Quick-Invest feature so that lenders do not have to manually log in every week, as well as their Instant Transfer feature so that lenders do not have to wait to begin investing. Perhaps most importantly, Lending Club’s filtering needs a total overhaul. Its congested Filter Notes interface and imprecise options do a second-rate job at helping lenders filter the platform for good borrowers (this issue is even worse at their Foliofn area).
It seems that the company continues to put its institutional investors (hedge funds, etc.) ahead of average retail investors, which is understandable since deep-pocket investors are how a large company like this is able to exist at all. I want to give them some grace. However, institutional investors can be a fickle bunch. Normal investors, on the other hand, were what started Lending Club, and are how the company will feel consistent support in the years to come. The San Francisco giant would do well to pay their retail investing community a little more attention than they have for the past couple years.
Conclusion: Lending Club is a great way to begin lending.
Lending Club is the primary player in the field of peer to peer lending, and overall is a great recipient of your extra cash should you choose to open an account through them. They are a good investment as a cash-flow positive company, despite peer to peer lending being a new and somewhat-uncharted avenue of investment. You will find their website, while clunky at times, suitable for a complete peer to peer lending experience. Beginning lenders should be able to quickly set up an account, find good loans to fund, and have a positive experience peer to peer lending.
Open a Lending Club investor account here.
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