Why shouldn't I invest more money in lending club?

New York, NY · Member since 2012 · 183 posts · 7 votes

I started investing money in Oct 2010 in lending club. My current annualized returns are 11.28% (I think my projected long term return will be around 9.5%). The only reason I can find not to continue to invest on the platform (besides the fact the loans are unsecured), is that there is/was a mention in the company prospectus that if they go bankrupt, I could lose my money. The company is not profitable, at least as of an article I read that was written in 2010.

Anyone have a reason why I should not put more money into this investment? It seems to be working for me, but I want to make sure I am not missing a large risk.

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Pat L.

Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes

13y

Originally posted by Joe A:

in the company prospectus .... if they go bankrupt, I could lose my money. The company is not profitable....

It seems to be ...a large risk.

Using your own words ...
Get out ASAP,,,,

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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
13y
What amounts of money are you putting at risk annually with lending club??

Is it a small amount of your overall portfolio or a lot??

Example if you put 50,000 with them each year for a 10% return but have 1 million cash that hit isn't going to take you under versus 75,000 is all the cash you have and you lose 50,000.
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Pat L.
Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
13y
Originally posted by Joe A:
in the company prospectus .... if they go bankrupt, I could lose my money. The company is not profitable....
It seems to be ...a large risk.

Using your own words ...
Get out ASAP,,,,
2 Reply
Arjun K.
Real Estate Investor · New York, NY · Member since 2012 · 210 posts · 15 votes
13y
Out of pure curiousity, why are you lending on unsecured basis versus a secured basis? It seems you take all the downside, really not a lot of upside when everything else is concerned.
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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
13y
The only thing I can think of is really small amounts of money versus lending larger sums on flips.

If you want 10% or more returns just buy tax liens and make sure the property is in a good area. You do not get depreciation like when you own a property but it's better than unsecured lending.
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13y
Hard money lender should also give similar returns, and you're secured by a chunk of real estate.
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Ali Boone
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
13y
I don't know much about investment clubs like this, but you ask why you shouldn't keep investing there, but just above that you say that if the company goes bankrupt you lose everything. Just going to go out on a limb here and say... maybe that's why you should consider other options? If I were investing in unsecured things, I'd want a lot higher return than 11%! Sounds risky. But again, I know nothing about it.

Rental properties can easily get you 11%+. Plus then you get the tax benefits on top of it. And security. And potential equity. Sounds safer.
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Will BarnardPro Member
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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
13y
First off, you should not be investing any amount of money in unsecured notes. All of your expressed benefits can be achieved WITH security, so why invest unsecured!
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Dawn AnastasiPro Member
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
13y
I have to say I'm biased in support of Lending Club due to having taken out two loans from them to buy two different SFHs. I really like it because they are short term loans and much less expensive than "hard money". It's very difficult to get the 5-10 mortgages. The only reason why I'm paying a lower rate is because I have a high credit score. Others with lower ratings do pay higher rates.
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Will BarnardPro Member
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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
13y
Originally posted by Dawn A.:
I have to say I'm biased in support of Lending Club due to having taken out two loans from them to buy two different SFHs. I really like it because they are short term loans and much less expensive than "hard money". It's very difficult to get the 5-10 mortgages. The only reason why I'm paying a lower rate is because I have a high credit score. Others with lower ratings do pay higher rates.
Maybe so, but you are coming from the borrower's perspective. In this case, it is the lender who needs to have security and i would not ever loan on RE without the security of a deed of trust for any substantial amount of money.
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Dawn AnastasiPro Member
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
13y
Yes, I am coming from a borrower's perspective which is why I said I am biased. I have been a lender on Lending Club too, but I only invested in very highly-rated notes so I got a low interest rate (under 6%).

Where I am coming from is that it is difficult to get money at a low interest rate to invest in real estate once you hit that "bank overlay limit" of 4 mortgages. I found peer-to-peer lending sites like Lending Club to be great, but even that has its limits.

I have not found any private lender who is willing to lend money at an interest rate below 10% even if it was secured by real estate. I would guess that they are either not out there or that I'm not educated enough to know where to look. If it's the latter then it's my own fault for not spending enough time to do the research.

I just would hate to see anyone told point-blank NOT to invest there as it is an option for someone who has money to invest and they don't want to invest in real estate themselves. Rather, they would be giving the means for someone else who has the desire, to do so, and yet still making a profit for themselves (which is their right).
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Leo C.
Real Estate Professional · Baltimore, MD · Member since 2012 · 30 posts · 4 votes
13y
Latest development is that lending club is now cash-flowing positive. No harm in diversifying investments. Credit cards at 20%, banks generally not lending on unsecured consumer sector, a decent space exists for companies that broker online loans in that space.

This lending platform just needs to work on develpoing credibility and stability. Larry summers just join their board, the loan originations are doubling year to year. If it succeeds, it could become a banking sector with very little overhead, less expenses, lower unsecured rates, better return to investors. 10% is great when CDs are going at 1%.

Eliminate or moderate the bankruptcy risk with increased stability, then it will have better returns on average than all the major stock indexes and mutual funds. Most people don't want to work on investing. Real estate investors can get better 20% returns on their cash usually through inordinate number of hours that went into developing and overseeing the investment.

Anyways, if i were a flipper i'd take lendingclub or prosper loans anyday over hard money loans.
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Ben Yoon
Real Estate Investor · Brooklyn, NY · Member since 2013 · 26 posts · 2 votes
13y
"Investing" in unsecured notes sounds very risky.
Extending a loan without some form of lien or collateral in case of a default doesn't sound like a true investment by its literal definition.

You could always minimize the risk (as much as you could) by checking income and credit report, but still...income could always stop for most W-2's.

too risky for me, but everyone is different.

as always, wish you luck!
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Will BarnardPro Member
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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
13y
Dawn, I understand where you are coming from and did note your mention of bias. My post warning about the site is not a blanket no against the program, just a warning and my opinion that making any investment with anybody or company without collateral is risky in my opinion and would not want to see anyone here take a loss without being warned.

If this program could offer the investor collateral rather than all funds remaining unsecured, I would say it is a great thing.
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Leo C.
Real Estate Professional · Baltimore, MD · Member since 2012 · 30 posts · 4 votes
13y
Credit card companies are in the business of unsecured lending, by charging higher interest rates to offset losses, and using credit history to determine limits. They calculate their default risks into the return.

Its the same concept, invest $25 each in 100 diffferent people, expect 10% default, collect from the rest.
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Will BarnardPro Member
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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
13y
Originally posted by Leo Cao:
Credit card companies are in the business of unsecured lending, by charging higher interest rates to offset losses, and using credit history to determine limits. They calculate their default risks into the return.
Its the same concept, invest $25 each in 100 diffferent people, expect 10% default, collect from the rest.
Thats true, but in that case, the credit card company is in control. In this example, the investments are in RE and handled by a third party and not the investor so if the third party folds up shop, investor could lose 100% and there lies the risk in my opinion.
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Andrew Baisley
Singapore, Singapore · Member since 2013 · 19 posts · 1 vote
13y
Originally posted by Will Barnard:
Thats true, but in that case, the credit card company is in control. In this example, the investments are in RE and handled by a third party and not the investor so if the third party folds up shop, investor could lose 100% and there lies the risk in my opinion.

Most of the loans on Lending Club are not for real estate (some are). Most are for credit consolidation. I've been investing with Lending Club for about a year and I'm mostly happy with it. You can set your risk level (they grade the loans) and have a generally high standard.

The interest rates are relatively high, which offsets the default risk. I've had several loans default, but because I've only got $25 into each loan, it's not a very big deal.

The comment that you lose your money if Lending Club goes out of business isn't exactly true. They have an arrangement with a firm that will manage the loans to maturity if Lending Club were to shut down. I'd expect that default rates would go up (lenders might think they don't need to pay this new company), but I wouldn't expect 100% loss.

As always, this should be a small part, if any, of your overall portfolio.
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Will BarnardPro Member
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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
13y
Originally posted by Joe A:
THanks everyone. Will- Perhaps I was not clear. These loans have nothing to do with RE. They are unsecured consumer loans. I mainly invest in people looking to consolidate debt.
I see, and how are you protected from state usury violations?
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Will BarnardPro Member
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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
13y
Again, how do you protect against usury violations? Also, I have no interest at all in making loans for $25. It would waste more of my time than the profits are worth, even if i had 1,000 loans at that level. I just don't see the benefit in this vs. the risk of unsecured loans, regardless of size or diversification between quantity. Thus far, nobody has posted any good solid reason for me to be vaguely interested.
I am certainly happy for any of you who are finding a benefit in it, I have just yet to be convinced of said benefits.
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Jesse Tsai
Investor · Las Vegas, NV · Member since 2011 · 188 posts · 116 votes
13y
I saw this thread last week, but ignored it. But it looks like you're quite interested in the subject, so I'll offer my two cents.

I have my IRA invested on Prosper.com. Its similar to LendingClub, and they are competitors.

I realize that the returns are lower than what I can get elsewhere, yet I still invest there. Why would I do that?

I'm only 23, and just made my first contribution. I originally planned to flip houses with the IRA by "borrowing" funds from a friend (to get around the low contribution limits), but realized that it would be a headache avoiding prohibited transactions. Coupled with the custodian fees, the returns I could generate wouldn't be worth the headache.

Prosper offers to pay all custodian fees if I invest it there, and because it takes little work, along with the ability to get descent returns, I decided to invest there.

See here for lender return distribution:
http://www.ericscc.com/stats/lender-return-distribution

As far as getting around usury laws, I'm not qualified to really have an opinion, but you can read about it here:
http://www.prosper.com/legal/compliance/

I completely agree that I can get less risky investments in real estate or even doing hard money, however, with the low amount of money that is in my IRA, its simply not worth my while to spend too much time or effort trying to deploy $5K.

In a few years, after some more contributions, I may have a different attitude about it though.

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Ben Reese
Real Estate Investor · Driggs, ID · Member since 2008 · 60 posts · 21 votes
13y
Joe,

It's a good question to ask and one I attempted to answer first hand a while back.

Just before the recession I invested a few dollars in Prosper as a test in order to see how well it worked. I picked borrowers with good credit and took a slightly lower rate to get them. It worked well for a while but one-by-one all my loans defaulted when the economy turned.

On the other hand, my private lending portfolio was, and continues to be profitable, and I have earned a steady 10% or better throughout. As Will and others have mentioned, security is the key. It allows you to sleep well knowing that - no matter what - there is something of value backing your loan. And borrowers are not so quick to walk away when they know they could loose a valuable asset.

The problem with credit lending, vs. asset lending is that a credit score is backward looking; a borrower's credit can change overnight. Someone with an 800 score can loose their job, get sick, etc, and default without warning, leaving you with nothing. Toss in a bad economy, and the losses will become significant. I've learned that with asset lending I give almost no consideration to the quality of my borrower's credit. In fact, I generally require that my borrower's have been rejected at the bank, because they are then a lot happier about a 10% interest loan!

Granted, private lending is tough to do with small amounts of money, but if your portfolio is small, or if you don't have the time or desire to manage loans, I suggest you look for private lenders who run funds. With a fund, you pool your money with other investors and the fund manager makes secured loans to rehabbers. The returns I've seen are in the 10-12% range.

Good luck!

Ben
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Dawn AnastasiPro Member
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
13y
On Lending Club, each loan is not only funded by $25 per person, each person can throw as much money into each one as they want. On my last loan from Lending Club, one person put in $9000 of the total amount. I would be more than happy to put up some collateral but I have not found that. The unsecured loan gets me a lower rate than "hard money".
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Sam Phillips
Rehabber · Jacksonville Florida · Member since 2013 · 24 posts · 1 vote
13y
I'm an investor at Lender Club. My whole reasoning for finding that site was to get away from the low interest rates offered by CD's...etc. I only buy notes due to the limitation of the State I live in.

So far I have about 15 notes I've paid $100-$350 each for. Only one so far have defaulted and I have an average interest rate of about 14% (on paper anyways). The way I see it the money I'm losing from the one defaulted note is money I would have never had in the first place if I'd invested in CD's.

That's how I make the arguement for investing in it even though it's unsecure. However, I'm only in at about $5K. I never had any expectations of putting more than that a year in this type of investment. It's simply a way to not have all eggs in one basket.

I personally would put more attention in hard metals... silver, gold, etc.

Ben Reese I also do some trading on Prosper. Lost is built into their formula which worries me so I tread carefully.

@Jesse I wouldn't touch Prosper's "quick invest" tools with a rocket Launcher. For fun I tried it out just to see what kind of loans they would generate. Many of them seem way too risky.

Even my hand picked ones have a high level of late/defaults. I only have about $3k invested in this site and my returns are still positive so I'm not ready to run away yet. Tread carefully.
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Huy N.
Houston, TX · Member since 2013 · 483 posts · 189 votes
12y
Wow this is a very good thread on lending club. I was looking for a short-medium term to park my cash while waiting for this little real estate bubble in my area to bust a bit. would it be a good idea to invest in grade A-B note with a large amount of $? how long is the term of the loan usually for? Sorry i'm a noob when it come to note investing
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Matt Rodak
Lender · New York, NY · Member since 2014 · 76 posts · 49 votes
12y
Great thread for sure. The peer-to-peer lending option has made a movement into the real estate world offering more secure investment options. Just Google "Real Estate Crowfunding" and you'll find several reputable options for investing in real estate with smallish ($5,000) entry points. (must be accredited.)
Further, there are some great posts here on the BP community for RE crowdfunding giving analysis of most of the options. http://www.biggerpockets.com/forums/520-crowdfunding-real-estate
I myself am getting a RE crowdfunding platform started specifically for residential fix-and- flip properties and would be happy to discuss further the ins and outs of this relatively new space - in addition to what's already been posted on BP.
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Randy Krock
Investor · Hampton, VA · Member since 2014 · 17 posts · 9 votes
12y
@huy Nguyen I am also a investor on lending club have been for a year now. I am very pleased with the returns I have received. I invest in the lower grade notes c-g. The notes on lending club and prosper another peer to peer lending company have loans that have 3or 5 year durations but both companies have a secondary market to sell your loans on if you need to liquidate sooner than 3-5 years. If you want to learn more information there are two blogs that write exclusively about peer to peer lending. One is www.lendaccademy.com and the other is www.lendingmemo.com both are a wealth of information if anyone is looking into putting some of their portfolio in this asset class.hope this helps.
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