The Lending Club Experiment … Four Months Later

lc_buildingAdventurous readers may recall that we are in the middle of a Lending Club Experiment – on September 24th, I posted an article describing my first foray into peer-to-peer lending and promised to keep you updated on the progress of the investment.

At the time I invested $10,000, and distributed it mostly among the higher-yielding (and riskier) notes of grade C and below. I ended up with about 400 $25.00 slices of various loans, and the Lending Club calculation engine was projecting that I would end up with a gross return of about 20%, and a net return after the inevitable defaults of around 13%.

For the past four months I have monitored the account, manually reinvesting the principal and interest payments from borrowers and mentally salivating over the high returns. I continued to study the Lending Club business model and read other blogs which experiment with peer-to-peer lending. Meanwhile, in mid-November I exchanged a few emails with Lending Club representatives. From the conversations, I learned a few things:

  • Lending Club surpassed $1 billion in originated/funded loans in November 2012 (it took them almost six years to get to that point).
  • The company made it into the black, generating its first positive cash flow for the fourth quarter of 2012.
  • As of February 2013, the total originations have cranked up another 30%, to $1.3 billion
  • Here’s an infographic describing their 0-to-1-billion progress: http://www.lendingclub.com/public/zero-to-1b.action
  • I asked if they have trouble balancing supply and demand for notes – the answer is that they actively dial up and down advertising to keep those key factors growing roughly in parallel.

So after a couple of months, I decided to double down and add a second $10k, bringing the total investment to $20,000.

It was quite striking, noticing the difference in interest income between my general-purpose ING direct (now called Capital One 360) bank account, which had about $12,000 in it at the time:


.. that’s 2 bucks a month even with an embarrasingly large balance to have in such low-interest account. In all of 2012, I earned a total of only $17.16 on that general-purpose checking account. Versus the Lending Club investment, which has cranked out the following figure in 4.3 months:


Over five hundred bucks, plus another $195 of accrued interest (since notes generate monthly payments and have random payment dates, on average each one has about 15 days of interest accrued).

Although you are surely muttering,

“Duh! Of course there is a big difference between 0.20% interest and 20% interest”

..Seeing that difference expressed in real dollars still made a visceral impact even on Mr. Money Mustache, the man who claims to use numbers in place of emotions.

“Damn, that is some real money pouring in from that relatively small amount of principal”, I thought. So let’s look into more detail on how the risk factor is playing out. Check out my account statement as of today:


It all looks rosy, but there is a hidden side that shows up when you click “more details”. This is where you see the dreaded default rate – the chief reason many people are afraid of peer-to-peer lending. Skeptics point out that loans don’t usually go bad right away.. they go bad after 1-2 years, after a certain percentage of the borrowers hit unemployment or other life events that cause them to crash financially. Fair enough, and you’ll hear about it here as it happens. But for now, here’s what we have:


AHA! We’ve got two loans ($48.46 of principal) that are 16-30 days late on payment, and 4 more loans ($122.77) that are 31-120 days late.  Meanwhile, 523 notes are current, meaning about 99% of our borrowers have been successfully making payments so far. So are we doomed, or not?

Let’s assume pessimistically that all of our $171.23 of principal on those late loans is irrecoverable. If we subtract that from the roughly $759 of interest earned and accrued so far, we would have lost about a quarter of our gross interest. And let’s suppose that the same pattern repeats every four months: another 6 borrowers run off with our precious money and never return. Since you can see in the figure above that our loan portfolio has a weighted average rate of 18.45%, we’d end up netting only around 13.8%. Which is, interestingly enough, pretty close to what Lending Club itself forecast way back when we were buying these notes back in the first article. Thus, as long as the pattern holds, you’re successfully playing the game of high-interest money lending: lots of bad apples, but high enough average rates to balance it out.

And there’s a bit of a bright side to these late loans. Even though Mustachians would naturally condemn any late payer to an eternal financial hell for such unthinkable irresponsibility as ever missing any payment in one’s life, Lending Club manages to coax many of its late payers back into the fold. Observe this graph from their loan statistics page:


According to the stats, I should expect to get back about 77% of loans that show up in my 16-30 day late category, and 53% of those sitting in the 31-120 day bin. After 120 days, you can see that the picture dims considerably – Default means Default. So our future returns will be determined by the rate of future late accounts, minus the recovery rate.

So although the experiment is still young, so far it is going exactly as I had hoped and expected. Returns at 20% are of course much higher than predicted, but that should fall as defaults are charged off and more loans drift into the riskier middle period. But I’d be surprised if the long-term return doesn’t stabilize around the forecast 12% (if something does change, I’ll publish an immediate update rather than waiting for the end of a quarter).

And this is what makes this type of investment so intriguing. I’ve taken less than 2% of my savings, and set it up to automatically generate the equvalent to about 10% of our annual living expenses*. I wouldn’t feel comfortable having much more than that amount invested at this time. But for now the reward, entertainment , and learning value is quite favorable.

A Note on Risk: Many Lending Club critics consider another great recession or a drastic overstatement of returns to be the biggest risk to an investment like this. I have a different opinion: the high-interest consumer lending business model is a tried and true one – whether you love it or hate it, it exists, and it makes money. Lending Club has simply cut off one of the hoses of this gravy train and built an interface for regular schmoes like ourselves to come take a slurp. It’s a great idea.

Thus, the biggest risk to me is that Lending Club itself might be subject to some Enron-style blowup in the future. Although the company seems relatively solid, honest, and well-managed with some big backers, I wouldn’t bet my life savings on the future of any single company. This is exactly why the concept of index fund investing works – you get slices of hundreds of companies, so the death of any particular one is of little consequence to your portfolio.

Lending Club does have a backup plan that should theoretically preserve your investment if LC itself goes bust, but there would still be risks in such a transition. Thus, I think of this $20,000 I have invested as a fairly solid dividend stock that happens to pay 12% over the long run. Since I wouldn’t hesitate to allocate $20k to a reliable dividend stock or REIT, I feel similarly about Lending Club, and that’s where we’re at today. If I want to allocate still more money to peer-to-peer lending and learn more, I might do the research and get a parallel investment going through the LC competitor Prosper.

Interested in trying out your own little allocation? I’ll provide the same link as before, because it benefits this blog if you end up creating an account by using the badge below.

ING_interest lc_lender

Still on the borrowing side? Don’t use Lending Club to commit financial suicide by buying a car or renovating your house on credit, but if you can consolidate credit card loans to a lower rate and then never run a balance on those cards again, you may use this link:

Best of luck to all fellow investors and let us know your own results (including loan grades used and any filters you used) in the comments.

* This is a fun way to think about the rate of return, although in reality the proceeds from this lending club account are earmarked to go to charitable causes as opposed to buying my groceries, as noted in this post.

  • Bill C February 3, 2013, 10:04 pm

    Would love to hear about tax implications for both the returns and charge offs. Are loans handled separately or in aggregate?

    • Dragline February 4, 2013, 7:12 am

      They are listed separately. Your returns are reported by LC on a 1099-OID, which includes every loan that you have and a total. It can be quite lengthy — mine is 55 pages. If you received any bonuses or special promotions (not many of those anymore), you’ll get a 1099-MISC.

      I also received a 1099-B with the short and long-term capital gains and losses from trading the notes (you can buy and sell them from other participants after they are issued).

      I have not received a separate statement with losses due to charge-offs, but the information is easy enough to pull up. You would also report them as a short or long-term capital loss.

      • Aaron February 4, 2013, 9:35 am

        Do you know if it is any better (i.e. less paperwork for taxes) to invest in LC through a Roth IRA?

        • Peter Renton February 4, 2013, 9:38 am

          Yes Aaron. It is far better to invest in Lending Club through an IRA. Taxes can be a headache to do correctly and with an IRA you can ignore those headaches. Not to mention the tax free growth of your money. That is why I have 80% of my LC money in an IRA.

          • Mike February 11, 2013, 1:13 pm

            I’ve been thinking about setting up a Roth with LC, but I don’t feel comfortable betting that LC stays open for the next 30+ years to receive the full roth benefit.

        • Dragline February 4, 2013, 11:04 am

          Yes, you’d have virtually no paperwork to do with an IRA.

      • Dr. Kenneth Noisewater April 29, 2014, 1:54 pm

        Is their paperwork downloadable in common formats (Turbotax, Quicken, CSV, etc)?

        I’m already plugging my equities broker docs into TT and it works as well for me as it did for TurboTax Timmy Geithner, paperwork wouldn’t be an issue barring a mild case of MEGO while checking the return PDF..

    • Jeremy Clark March 31, 2015, 10:06 am

      To minimize tax implications one might put their gains into an IRA or Wroth IRA Mutual Fund account. There are some good tax credits for doing such.

  • Joe February 3, 2013, 10:37 pm

    I copied the playbook of fellow Mustachian blog “Brave New Life,” for filtering LC notes: http://www.bravenewlife.com/08/lending-club-investment-strategy/

    It’s served me well over the past year. I also have about 2% of my stash in LC, with similar performance to what you’ve seen (i.e. LC’s predictions have been accurate).

    I think the 2nd major caveat you should add on any p2p lending posts is to do your homework before investing, or copy the research done by awesome folks like BNL.

  • Debt Derp February 3, 2013, 10:40 pm

    Sounds pretty successful so far. The key seems to be a large enough starting balance to diversify across many loans with a small exposure to any single debtor. Just curious, how long did it take to get the entire $20,000 invested? Thanks for the experiment, keep us updated!

  • indenturedservants February 3, 2013, 10:44 pm

    I think any conversations about LendingClub ultimately boil down to conversations about risk. But why?

    Some people will immediately shut off because the high rate of return seems “too good to be true” (and so it must be associated with some hidden risk), and others will get dollar signs in their eyes. It’s hard to decipher in a rational way what the relevant risks are here. Aside from another economic apocalypse, or the collapse of the company itself (which appears to be in better financial health than ever), it seems like the strategy of lending a small amount of money to a large number of people provides insulation from having all one’s eggs in a single basket, so to speak. You can even see the effect of different degrees of diversification based on the first billion dollars of loans that LC has cut: https://www.lendingclub.com/public/diversification.action

    Can some nay-sayers help bring me back down to earth? Is there any good reason not to put a good chunk of my assets into an investment like LC (meaning 20-40%)? What kind of commitment are others making to investments with this risk profile, and more importantly how risky do others consider this type of investment and why?

    • Anil @ PeerCube February 4, 2013, 12:32 am

      I am not a naysayer but actually supporter of the Lending Club model. I am a lender on the platform, extensively analyze Lending Club historical data on my blog Random Thoughts and run a web service PeerCube to help lenders select loans and share strategies.

      But I am also a realistic. In my opinion, this model is still very new and to large extent unproven. Compared to large number of outstanding recent loans, only a small number of total loans issued have matured and that also from during economic upheaval period 2007-2009 so it is very difficult to make judgement of their risk and return.

      My interest in LC is not only for potential of “high return” but for allowing me to participate in a new asset class of consumer financing and lending in which typically retail investors like myself don’t get to participate.

      “Is there any good reason not to put a good chunk of my assets into an investment like LC (meaning 20-40%)?”

      Do you currently have 20-40% of your assets in Junk Bonds (JNK, HYG, etc) or other high risk fixed income portfolio? If not then why would you consider putting that much in to Lending Club? If yes, would you willing to double up on those investments? If you can double up without losing sleep, sure putting 20-40% in LC will make sense for you.

      At best, the LC loan profile is no better than junk bonds.

      • Mike June 21, 2013, 7:13 pm

        I’ve had a Lending Club account for just under 6 months now. I put only $4400 into it– frankly, a very small amount in the context of my personal finances, an amount that wouldn’t be devastating to lose.

        Not quite 6 months later, my $4400 has turned into $4380, because of a single charge off of $192 (and also, of course, because of interest paid and fees deducted). I have a total of around 100 notes (some of them very small) and I have 8 notes that are in the 30-120 days late category. Logic suggests that at least some of them will end up charged off (but none of these are bigger than $30). If I were to sell these notes– and it’s no given that anyone would take them– then I would remove the risk from my note portfolio, but it wouldn’t do anything to improve total Lending Club investor return, because if the notes are charged off then *somebody* has to take the hit.

        Around 65% of my notes are in the A category– lower interest and supposedly lower risk– and indeed, the charged off note was an A-rated note paying only about 7.5% interest.

        I will continue to play with Lending Club– I buy 2-5 notes per week with the money I receive in payment– but my experience so far suggests that I am right to continue to keep only play money in my account. My serious money remains in rental real estate and the stock market. My experience with Coca-Cola and McDonalds and Nestle is that the share prices sometimes drop, but it doesn’t matter because I’m never selling, and my shares are never “charged off” but instead generate ever-increasing dividends. Some people may think of 2007-2009 as rough years, but I think of those as years in which dividends increased and were re-invested cheaply.

        • Mr. Money Mustache June 22, 2013, 6:13 am

          Great feedback, Mike. I share your enthusiasm for stock investing, although you will see the equivalent of chargeoffs in that too if you wait long enough – bankruptcies or reverse splits.

          Your LC experience is interesting. It is worth noting that holding bigger percentages of your portfolio in a single note (4% in your case) is bound to increase lumpiness in results. Especially losing an A note – ouch! It’s less painful to lose a D which has been paying you 21% interest (although there should be many more losses).

          Still, your story is worthwhile to remind me that it’s not just an automatic “18% for everyone, risk-free!” machine.

          • brian November 10, 2013, 12:47 pm

            I am finding LC harder and harder to find quality high(er) interest loans with the institutional investors getting first crack and others using “bots” to buy notes. I basically use your same filter strategy along with tweaks from Brave New World blog. Any thoughts/ strategies to deal with this for average investors? Is the energy to hover over the LC site worth the gain? Thank you for your site and response in advance.

            • Mr. Money Mustache November 11, 2013, 12:20 pm

              I’ve found the supply to be rising a little bit these days on average, but it’s a slightly choppy sea. I find between 3 and 8 good notes that match my filters every time I log in (I do so at random times whenever I am goofing off on the laptop), which means you can deploy $75-$200 per day at $25 per note, which is plenty for my $32,000 portfolio.

              LC continues to increase supply, and I feel the potential pool of consumer debt is still effectively infinite relative to LC’s current scale. If they do their job right, they will have much bigger scale, amazing profits, and a happy and satisfied pool of investors – and the only loser will be the credit card companies.

    • Accidental Miser February 4, 2013, 3:24 pm

      From a risk perspective, spreading your individual loans among many, many notes certainly reduces your risk. With any investment, if you invest at the wrong time, you get a haircut. Dump your entire investment portfolio into a “safe” SP500 index fund at the top of the last cycle, you lose half your capital by the time you hit the bottom. What happened in 2008 was something of a “Black Swan” event, but that doesn’t mean there isn’t another around the corner.

      One thing my dad taught me was that the risk of putting your money into a savings account is the worst risk of all. You KNOW you’ll lose money to inflation each year and are guaranteed to come out on the bottom. Diversification is great, but it’s getting more and more difficult to find investments that aren’t highly correlated. LC helps introduce a fresh asset class into your investment strategy.

      I love the idea of LC and would happily put 10-20% of my capital in there AFTER studying all the nuances of selecting the right loans. In fact, I might go bigger if I was younger (now 45) and was planning to work for more than five more years.

      Unfortunately, I can’t invest in my state. :(

      • Mike June 21, 2013, 7:30 pm

        I certainly didn’t “lose” half of my capital in the stock market in 2007-2009. Every company in which I bought shares continued to pay the dividend I was expecting, and most of them proceeded to increase their dividends.

        I think instead of looking at the daily rise and fall of share prices as “losing money” and “making money” a better way to look at it as this: when you buy a share you’ve just lost 100% of your money. It’s gone. You have no more money. But that’s okay: you didn’t want money. You wanted an income producing asset, and now you have one. The only question that matters is whether the asset continues to produce the income. The rest is noise.

        If you buy McDonalds at $95 and it proceeds to drop to $85 then, yes, you can kick yourself because by buying early you missed an opportunity to buy even *more* income-producing shares. But that’s hardly unique to the stock market, investing, and saving. The first time I bought a computer the price of that model dropped 15% in the 2 months after I bought it. It happens. So long as what I buy does what I expected it to do– whether that something is paying dividends or allowing me to surf the Internet– I don’t see any merit in losing any sleep over whether you could have gotten it even cheaper by waiting.

        Another point: if you have a strong reason to believe that a share price is about to go down, then OF COURSE you would wait until after the drop to buy it. But, unless you’re a trader instead of a saver, once you’ve taken the action of buying a share (i.e., given that action, assuming that action), you’re likely better off if the share price proceeds to drop, as long as it’s not for a fundamental reason. Why? Because you’re a saver not a trader. You’re not going to sell, so a rising price woudn’t benefit you; a falling price means that your NEXT purchase is going to be cheaper. And there’s always a next purchase.

        And since I have never owned bank shares, I’m also in a position to say that all of the companies in which I own shares are actually selling for a higher price today than they were in January 2008. I WISH some of them would go down.

      • Christopher June 27, 2013, 2:30 pm

        I live in Oregon and at this time acquiring notes is not permitted. However, if you like the idea of P2P lending try similarly modeled Prosper.

    • Mirwen February 4, 2013, 4:58 pm

      One thing about Lending Club is that you can’t get your money out if you need it. If I were to invest in lending club, I would have to wait for all the payments to come in. There is no way to speed up the process, even with a penalty. So you are locking your money into this investment vehicle with no way to change investment strategies or withdraw funds. I wouldn’t invest unless the amount I was putting into LC was a very small portion of my portfolio. Right now, with only 30k in investments, I find it too risky to sacrifice the flexibility to withdraw my funds or change investment strategy. When I get closer to 100k, Lending Club will probably be a part of my portfolio.

      • Mike February 4, 2013, 5:06 pm

        You can always liquidate notes on the note trading platform if you needed to. Not quick, but doable I think.

        • David February 5, 2013, 9:26 am

          I wanted to mention that I have about $5k invested, and have been invested for 3 years now. During this time, I have sold many loans. Not just loans that have gone late, but perfectly good loans too, for a profit. I’ve played with the pricing, but can’t seem to find any buyers if the loan is priced more than 6% above it’s value. A well performing loan can easily sell for 2% above it’s value, if you need to cash out (FolioN, the trading platform takes a 1% cut but you still come out ahead). I’ve attempted to piggyback off of Marc @ Lending Club Experience’s strategy by trying to immediately sell loans on the secondary market for a quick profit in order to get larger returns (If you can fund and sell your loan for a 4% profit in 1 month, that equates to a 60.1% annualized return). The problem I ran into is that the FolioN trading platform doesn’t have the most user friendly interface and it’s very time consuming to manually post every loan you have for sale and calculate the pricing on each one. Also, although I can sell some notes at 5% above value, this isn’t as common as I would need in order to make it worth my time.

          • Anonymous February 20, 2013, 12:13 am

            That’s a really interesting idea. I wonder how much work it would take to partially automate that process?

        • zweipersona February 5, 2013, 2:04 pm

          I’ve actually found this is surprisingly quick, and not only that, I never lost money. I’d sell the note just under the recommended price (which is principle+theorized interest). Of course, if you’ve never earned interest from the note you WOULD lose money, but mine were a few months old, and had already earned interest. In the end, it just cut into the % returns

      • Dan February 15, 2013, 9:09 pm

        The fact that one “cannot get their money out and that it’s locked in” to me is a good thing. Here’s why: My opinion is that, this “locking in” helps to insure stability and longevity to Lending Club. It prevents a run on the bank so to speak. If you do want your money back, you’d have to trade (buy or sell) them through their other option.which is FOLIO. Info about that is on their website. I’m retiring April 1 and will draw from my LC IRA account on approximately 1800 notes which will help supplement my income. Been with LC for almost 2 years and am impressed with what I’ve seen/heard so far along with my personal dealings with them.

      • Tom H April 15, 2013, 9:46 am

        If this is a problem, then you’re using this investment product the wrong way. I have about 60k in it spread over ~2000 notes (and yes, it takes quite a while to deploy cash without buying fishy notes). About 2000-2500ish in cash transacts per month, between interest payments and early payoffs. I have almost triple the early payoffs as I have late/defaulted loans, after almost a year of using the platform, with a NAR around 13.5.

        I can use this as an income spigot, producing zero to ~2500 a month in cash. Whatever I don’t anticipate needing can be reinvested, although I’m picky on notes and can’t buy enough to offset the income stream, so it tends to pile up a little, but thats nice when I need a quick hunk of cash to pump the bank account back up.

        I’m an oddball though. Retired in my 30’s on a couple of mil and I just need 2-3k a month in supplemental cash flow to live pretty well. No house or car payments or any other debt. Between LC and my regular dividends and interest from my other index fund investments, I get plenty of cash flow.

        But if you’re considering this under circumstances where you might have to yank out large pieces of cash by selling notes on the secondary market? You’ve selected the wrong investment product for that purpose. Buy a junk bond fund instead. I wish junk was paying anything near what I think I’ll end up normalizing to on LC, which is around 11 to 11.5%. That would make LC one of the best investments in my portfolio this year, only run over by a couple of ETF’s that shot the moon this year after doing nothing for the past several.

        The LC income is also pretty consistent and fluid. Doesn’t change from month to month very much, although in the 3-5 year out range it might start to lower if I draw too much from it.

        So its kind of nice to say “next month I have to spend $1000 on this and $500 on that, and tap it out of the LC account, or to say my bank account just dropped under $xxx and I want to pump it up a little. When that isn’t going on, let it ride and reinvest.

        I look at this simply: most people pay 10-20%+ interest on the things they spend money on. I’m taking ~17-24% interest from people and spending it on the same things. Nice swing.

  • Mrs EconoWiser February 3, 2013, 11:33 pm

    I have checked out Dutch versions of LC…but they’re nowhere near as advanced as their American counterpart, unfortunately. Don’t think foreigners can invest with LC?

    • Master February 4, 2013, 10:28 am

      If you live in Holland, try out Isepankur.com

  • Simply Rich Life February 3, 2013, 11:52 pm

    That sounds very promising. It would be great if something like this were available in Canada! (and this is where someone jumps in and says it is… right?)

    • Christine February 4, 2013, 12:24 pm

      We had CommunityLend and IOU Central. It looks like both died from Canada’s tight (unorganized?) regulations! I can’t find anything like The Lending Club in Canada.. and unfortunately you need to be a US citizen to join The Lending Club :(

  • Mortgage Mutilator @ Mutilate The Mortgage February 4, 2013, 12:50 am

    lol $17.16 for having $12,000 in a savings account!

    If you threw that in one of our Aussie ING accounts or something you’d be getting about $400+ per year… still nothing compared to the LC but much better than $17! Ever thought about investing OS? :D

  • mike crosby February 4, 2013, 12:52 am

    At $500K invested with a 15% return, that’s $75K/year. Or using the rule of 72, your money return of 13% is doubling every 6 years.

    I think I’d like to jump in. Is it possible to cash out, or do you have to stay till the loans come to fruition?

    • Dragline February 4, 2013, 7:24 am

      You can sell your notes on a separate trading platform, but it might take awhile to find buyers for them and you might not get full price.

      In practice, the cash flows are quite large anyway, because most of the money being paid to you is actually your principal being returned. For every dollar in interest I receive, I get over 3 in principal. But I’m more conservatively invested than MM — most of my notes are “B” grade and my published return is only 11.75%.

      So in your case, if you had 500K invested at 15%, your interest income would be a little over $6K per month, but the cash flow would probably be around $20K per month, which you would be reinvesting in your hypothetical, but could just take the cash if you wanted to do something else with it.

  • My Financial Independence Journey February 4, 2013, 3:38 am

    I’ve always been intrigued by P2P lending as another way to create income streams. It’s great to see that your returns are coming in as expected, if not a bit above right now.

    AS a general rule, I don’t think I’d be comfortable putting more than 5-10% of my portfolio into P2P lending. Probably closer to 5%. I’m still concerned about what will happen to my loans during the next economic downturn.

    • Kenneth February 4, 2013, 10:55 am

      I’m thinking of going 25 percent of my stash. As with all of us, the words economic downturn strike fear into the hearts of lenders (and that would be us). Based on their results in the 2008 timeframe, I’m thinking the worst case would be a minus 10 percent year. So you don’t take any “distributions” in such a year. Should be made up for in the following year. Also, depending on your mix of 36 and 60 month loans, you have 1.67 to 2.78 percent of your portfolio returned every month as principal to reinvest. Thus, your loan origination dates are constantly changing and eventually your portfolio will have many loans, with dates spread evenly over 36 to 60 months of origination. That means you will be diversified over many loan customers, and over many origination months, eventually. If you want to spread out the origination date risk even more, just invest 1.67 to 2.78 percent of your target stash on a monthly basis, plus the payments received, until you have your target stash invested.

      • Dragline February 5, 2013, 7:39 am

        Yes, there is some advantage to spreading out your investments over time — you effectively create the equivalent of a short-term bond ladder with varying maturities from one month to sixty. Then you can inflate or deflate your level of investment simply by reinvesting or not.

        One other thing that you realize is that it doesn’t hurt very much if an old loan defaults, because its mostly been paid off and the outstanding principal is much smaller.

  • Shandi76 February 4, 2013, 4:11 am

    I’ve got about £6K invested in ZOPA which is a peer-to-peer lending site in the UK. I’ve been a lender since 2008 and average about 5 – 6% returns after fees and bad debts, and have had 5 bad debts written off in that time. ZOPA did away with the riskier loans (presumably not enough people were willing to lend to those?) and it has become quite popular so the rates I am getting on A* to B credit rated loans has come down. It still beats savings accounts though.

    They also have a ‘rapid return’ option where you can sell your loans (but only ones that have never had a late payment) to other borrowers for a 1% fee. So you can get back about 80% of your investment (depending on your borrowers payment record) within a week if you need it.

    I think it is a great model, and the main risk is that as it becomes more popular the rate of return will drop as lenders undercut each other to get more business. I hope you manage to keep your 13% rate of return. I wish we could still make that here.

  • Mike February 4, 2013, 4:12 am

    We are nearly to the $10000 mark with our own Lending Club experiment and our returns are about 18%. I’ve done some reading on borrower psychology and stuck with 36-month loans and I focus purely on loans for the purpose of debt consolidation. I’ve done some posts and videos over at my home in the Internet and I welcome any feedback. I’m planning to do $10000 at LC and then try Prosper as well.

    Have you considered selling the late notes on the trading platform?

    • Rich Schmidt February 5, 2013, 7:54 pm

      Do you have a link to these posts & videos? Kind of tough to give feedback without it. :)

  • Jane Savers @ The Money Puzzle February 4, 2013, 4:53 am

    I have a small amount of money that I am trying to put in to some for of Canadian p2p company. Are there any of the Canadian readers who know of a reputable company to invest in?

    All the websites for the Canadian companies look sketchy and, while I am prepared to take a risk on borrower I am not prepared to take a risk on the company running the show.

  • Sophie February 4, 2013, 5:04 am

    Are there similar options in Australia, does anyone know?

    I’m intrigued by the idea but I would want to keep the amount invested in P2P pretty low as a percentage of my ‘stache – it still seems to me that this could go so wrong! (Does that mean I’m just a ‘fraidy cat?).

    • Peter Renton February 4, 2013, 7:11 am

      Yes, Australia has a p2p lender called SocietyOne. Check them out here: http://societyone.com.au/

      • Taryn October 28, 2016, 12:20 am

        Looks interesting, but not open to “retail” customers (which means you need $2.5M in assets or $250K per annum income in order to start). They say they’re working on that, though.

  • James @ Free in Ten Years February 4, 2013, 5:18 am

    I wish something like this was available in Australia. I’d love to invest a small amount of my portfolio in this type of peer to peer service. For some reason, no matter what the numbers say, I see this type of investment as being incredibly risky, but I know it’s not for the reasons you outline.

  • Stashette February 4, 2013, 5:48 am

    Grrr. I wish I could invest in p2p lending, but my state (Indiana) doesn’t allow it, except on the secondary market Thanks, Indiana, for assuming I stupid and can’t take care of my own money.
    I had previously invested in Prosper in 2007-2008, during the recession, and had <5% loans default, all were after I made made initial investment back.

    • cyclevillian February 4, 2013, 6:05 am

      I wish i could invest too but the rules for Kentucky are incredibly strict. Anyone know why?


      If you reside in Kentucky, you must qualify as an “Accredited Investor” which breaks down as individual income greater than $200k or a net worth of $1 million.

      • Mr 1500 February 4, 2013, 6:40 am

        I believe that Lending Club is working on making the service available everywhere. I’d check in with them every now and then.

      • Peter Renton February 4, 2013, 7:09 am

        Every state has different securities laws with some being more strict than others. Kentucky is one of those states. All I can say is be patient. Lending Club have announced there will likely be an IPO by the end of next year at which time they will become available to investors in all 50 states with no income restrictions.

        • George February 4, 2013, 9:58 am

          Thanks for the update Peter, that would be great, b/c I live in Pennsylvania and have not been able to get into this game for years, otherwise I would have been all over this lending club website.

          According to their website right now it says only Individual investors can invest in Notes if they are a resident of: California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Kentucky, Louisiana, Maine, Minnesota, Missouri, Mississippi, Montana, New Hampshire, Nevada, New York, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin, West Virginia, and Wyoming.

          That is only 28/50 states in the US. Thus, right now a lot of people are shut out from this.

          • scott February 4, 2013, 6:04 pm

            I was planning to open an account but found out that as a resident of Tennessee I would only have access to loans in the secondary market. An LC representative told me that the secondary market is about 10% of the total market and that the interface for the secondary market is much less user friendly and would be much more difficult to manage. Bummer.

      • Anonymous February 20, 2013, 12:21 am

        The theory behind the “Accredited Investor” thing: if you have income or net worth above a certain point, you probably have a decent idea of how to manage money safely, so the government doesn’t treat you like a child that needs protecting from themselves. And that income and net worth also implies that you can afford to take a loss if the investment tanks. These kinds of laws are usually sold to voters or legislatures with mental images of seniors on a fixed income getting scammed by fly-by-night “investment” scams.

        The theory behind “you have enough money that you probably understand how to manage it” has some merit, given the high correlation between Mustachianism and wealth. On the other hand, there’s a sucker born every minute at every level of income and net worth. :)

        This also affects things like crowdfunding platforms, as well; that’s the reason why those platforms explicitly say you can’t promise any kind of financial reward if the project becomes successful, because that would make your initial backing an investment.

  • Ross February 4, 2013, 6:11 am

    I tried to sign up for lending club a while back, but I didn’t meet the income criteria. I read all the Prosper fine print and seemed to meet all the criteria. This might be useful for those of us who don’t make a ton but would like to dip our toes in p2p lending.

  • Johnny Moneyseed February 4, 2013, 6:31 am

    I’ve looked into Lending Club before. The numbers really do look great, and it’s good to see that it’s been working so far for you. Since I am still working towards FI, I feel it to be too risky of an investment right now. I’ll stick to my Vanguard index funds. Thanks for the info!

  • Mr 1500 February 4, 2013, 6:43 am

    I’ve been on Lending Club now for almost 2 years and think its great and highly recommend it.

    It has so much potential. I often tell people about it and no-one has ever heard of it or the concept. Despite that, they are doing 100 million in notes per month.

    Just imagine how big it will be once it goes mainstream. I’m not sure if this will be a good or bad thing, but its fun to watch.

    • Dragline February 4, 2013, 7:29 am

      I like it too, but I’ve been frustrated a bit recently by them not having enough notes with interest rates over 9 % that meet my criteria. (I pick my own.) I’ll be curious to see how well investing in the aggregate like MM is doing will work out long term.

      I’ve been doing this for a few years now and have invested in 1940 loans. 1433 are current, 10 are late, 494 have been paid off and 39 have been charged off. There would be a few more charge-offs, but I usually sell my late loans at a discount to the more adventurous.

      • Kenneth February 4, 2013, 10:59 am

        Thanks for sharing your frontline experience, Dragline..

      • seth April 25, 2013, 3:13 pm

        I thought lc wouldn’t let you sell defaulting loans?

  • totoro February 4, 2013, 7:04 am

    I don’t think this exists in Canada. :(

  • TK February 4, 2013, 8:09 am

    I have been thinking about this for a while and the risk/return trade and available data seem sound. An Enron-esque event is probably the biggest concern followed by the trends of returns such that as more investment capital flows into LC will the laws of supply/demand drive down rates as risk increases. I didn’t see this on their website.

    Separately, the Roth IRA option that they have sounds perfect for this type of investment. Has anyone done this?

    • acidjazz2000 February 4, 2013, 9:35 am

      Yes, I believe the Roth IRA option is ideal. That is what I chose for myself. There is no need to worry about tax forms and without any taxes to lower the growth rate, the predicted return over a few years is pretty phenomenal.

  • Emily A February 4, 2013, 8:39 am

    I was just wondering about how your LC experiment was going while checking out my Mint account the other day! So glad you gave us an update. The results have been pretty compelling so far.

    My husband and I were planning to open a Vanguard index fund in a month or so. Now I am thinking perhaps we’ll take the money and split it with the LC, to compare and contrast the results for a while!

  • Mark February 4, 2013, 8:58 am

    I’ve been waiting for this! I started with LC around Jan 20. I put $1,500 in, so I’m more susceptible to high volatility. It’s also more than 2% of my overall net worth but certainly less than 10%

    My roommate has used it for a few years. He’s told me he got 13% returns in 2011 and 10% in 2012.

  • Johnny February 4, 2013, 9:01 am

    This is probably the fourth or fifth LC experiment I’ve followed from similarly well-trusted finance bloggers. Something is still nagging me that it’s too good to be true, but I’ve spent enough time researching the site that my logic should kick in and override my reluctance. I’m curious what will happen to a single P2P loaning site like LC if/when the competition picks up. It’s only a matter of time before bigger fish jump in the pond. Hopefully it’s a big enough pond.

    Thanks for allowing our prying eyes into your investments, MMM.

    • Mr,1500 February 5, 2013, 2:52 pm

      I don’t think competition is a concern. In my own experience, it seems that P2P lending has yet to enter the US conscious/go mainstream. I think that Lending Club and Prosper have tons of room for growth.

      Worst case scenario would be that rates would face downward pressure if there were too many lenders.

      However, I still think that there are a lot of opportunities for P2P companies such as collateralized loans (cars) and mortgages (aka the holy grail).

      • BadAss CPA February 5, 2013, 3:28 pm

        I doubt we’ll see p2p mortgages any time soon because of the artificially low interest rate environment we’re in. If I choose to take a risk on p2p loans, it’s due to a high return that compensates me for that risk. No way I’m giving out money at 3.5% (or less after the p2p co. takes their cut)

        • Mrs PoP @ Planting Our Pennies February 5, 2013, 3:47 pm

          We borrowed $50K from Mr. PoP’s parents in 2010 to buy an investment property. It was a cash only environment with foreclosures around here at the time and we needed the money before we knew what house we would end up so our offer would be taken into consideration.

          Long story short, they were basically our p2p mortgage holder on that property (though technically it’s an unsecured loan) and they are a tad disappointed that we’ll be paying off that 5% note ahead of schedule. (They think of it as a lovely 5% bond at the moment…)

          From the borrower’s perspective, I think p2p mortgages could be very interesting, especially for properties that aren’t considered mortgage-worthy. Did you know you can’t get a traditional (20% down) mortgage if a house is missing kitchen cabinets? Or a front door? Those are such easy fixes and yet we had banks say they weren’t habitable, so we couldn’t get a mortgage against them.

          • Brian December 12, 2013, 1:19 pm

            You can get financing it’s called a renovation loan. They loan you the amount for purchase and a specified amount for renovation. You have to have a qualified contractor give you quotes and a contract. The bank will do appraisals before and after. They hold the renovation money until their inspector confirms the work is completed. We just did one with Wells Fargo. A pain in the butt to get through the vast amount of trees we cut down. But we have the home we wanted and at a price we are happy with.

  • Joe @ Retire By 40 February 4, 2013, 9:01 am

    I invested 10k at Prosper and I was getting around 12% for most of last year. That dropped to 8% in December after a rash of defaults. In my experience it seems many loans default 6-10 months in. For 2013, I’m looking to add 10k to Lending club so I can have a comparison.
    20% is awesome. I’ll keep checking back to see if it can stay high.

    • Mr 1500 February 4, 2013, 11:59 am

      Unfortunately, I’ve noticed the same thing with my defaults. A borrower (scammer) will make a payment or two and then is never heard from again. 120 days later, default. I’ve never had a loan over a year old default.

      These defaults are frustrating.

  • Awesome possum February 4, 2013, 9:02 am

    Cassandra here. Please folks, understand that the default rate increases significantly as time goes on and defaults take a very large chunk of your profits. You have to be very well diversified (ie, have a lot of money in it) or very lucky to avoid losing a lot of your progress as time passes. It’s not a straight line of 2 loans default each month or whatever.
    Fine for MMM. He’s not betting rent money on this, he will be fine even if it every single borrower goes toes up tomorrow, and it does pay better than a savings account if you can stomach the risk and diversify enough. But the first few months returns are NOT representative. Their default rate is greatly understated because the huge influx of brand new, undefaulted loans are swamping the old stuff that has had enough time to pay off or go bad.

    All right, all right. Party pooper out.

    • Mark February 4, 2013, 9:08 am

      Your post doesn’t even have a logical flow.
      “He’s not betting rent money on this”
      Is anyone? I think most readers interested in investing have their rent money saved up for several years. Oh, and it’s not betting.

      “Their default rate is greatly understated because the huge influx of brand new, undefaulted loans are swamping the old stuff that has had enough time to pay off or go bad. ”
      You have no evidence of this, you’re just spouting emotional scare. This is the same reason people sell at the bottom of markets and buy at the high … and lose their shirts in the process!

      Obviously if you only invest $25, you have a pretty good chance of a -100% return. But for those who invest $20000+, they have a near 100% chance of positive returns, and that is fact!

      • TK February 4, 2013, 9:48 am

        Mark – while cass does not provide the stats, I don’t think she is “spouting emotional scare”

        What she is saying is that your experience early on in your/MMM specific portfolio may not be representative of the overall rate of return over an extended period of time, but that is essentially stated and backed up by the LC stats with them indicating a pool of 18% notes expected to realize a 13% average return – obviously nothing is guaranteed but it takes time for notes to go bad.

        Generally if someone is approved for a loan, which means there is a job/income/credit score that says they can pay, there is a low probability that it will default in just a few months.

        Basically if you were a bank with these stats and were realizing 18% but expecting to realize 13% overall for the investment you should be reserving or reducing principal by the 6% differential because if you get 18% in year one then in year 2, 3 your cash return will be 10.5%.

      • acidjazz2000 February 4, 2013, 9:58 am

        Awesome possum’s basic point seems to be that returns of 20% are unsustainable. I think this is valid. I would go even further by stating that I think medium-term returns of even 15% are unsustainable. Loans will default in greater numbers as time goes on and the freely available data from LC itself supports this. If you choose effective filters and diversify over 400 or more loans, however, you should have a decent chance of getting a 10% return over a 3-5 year period.
        For myself, I will be quite happy with 8% or greater over the coming few years. Of course, if there is another recession soon, all bets are off.

        • Mark February 4, 2013, 10:58 am

          Fair enough, but the possum didn’t use those numbers, and I think MMM’s post made it clear he didn’t expect 20% returns, and he thought it looked to be around 13% as LC predicts. My original post was a bit attacking in nature, and I apologize for that.
          I think everyone should expect to have positive, and rather high, returns. I’m thinking expect in the mathematical/statistical sense which is basically on-average. Of course if you only have 60 notes (like me), you’re risking having a negative return, but I also have equal chances of a 15%+ return.

        • Awesome possum February 4, 2013, 11:20 am

          Last reply for now, promise.

          That’s another thing that I think is giving people an overly rosy impression. The returns they’re quoting are over a 3-5 yr period and most people see those numbers and think Annual Return. An average 15% annual return would rock my socks off. 15% over 3 years would not. You do better, on average, with a run of the mill balanced portfolio, and have less risk.

  • Awesome possum February 4, 2013, 9:45 am

    Actually I do have evidence. I’ve posted my analysis here:https://docs.google.com/file/d/0B-WnffknY173QWIyY1EwLXJGb3c/edit?usp=sharing

    It contains all the data on matured loans to date from the Lending Club plus my calculations so you can double check my work.

    When I say “betting” I am using a common colloquial expression for risking money on a future event. If there’s a better description of investing I’ve yet to hear it. While MMM’s lifestyle will not be threatened regardless, someone who is still building a nest egg needs to think about risk and return.

    And I did say that it offered better returns than a savings account when sufficiently diversified, which requires a large investment. So I stand by my statements. But the returns are not what is advertised, over the long run, and I will let the spreadsheet speak to that. I’m not going to respond further unless someone believes my calculations are significantly wrong.

    • Mr. Money Mustache February 4, 2013, 10:11 am

      Awesome Possum – I’ve got a question about your spreadsheet (I don’t have a way to download and view the whole 63MB .xls file right now and it won’t open as a Google Doc). You mentioned that you did a cash-in/cash-out calculation for each loan, while not accounting for reinvesting principal as it is repaid each month.

      Wouldn’t this result in an average of 50% of your cash being idle over the evaluation period of each loan? And if so, would that not understate returns by at least 50%?

      My apologies if I am missing key details since I have not dug into the spreadsheet yet – and I hope others are able to do so today while I’m out riding around in the sunshine ;-).

      It is critical for us to sort this out, as your own calculations are at odds with those of most other people, and it is hard to believe one person has found the flaw while the rest of the $1.3B of investors are being fooled.

      • Awesome possum February 4, 2013, 10:55 am

        Well, you have to cash out eventually, right? Eventually, every loan has to run its course, no matter how long you keep reinvesting, so the bad news at the end (the higher rate of default as loans age) will arrive regardless.

        Why does it matter if you assume that you put all your money in at once or gradually? Your early high returns will mask the cost of later defaults, but when you stop reinvesting, and begin taking your money out for your own use, your remaining, aging loans are going to have to stand on their own feet. Its the same money-in, money-out formula that you started with, just spread over a longer period.

        I’m not trying to be a know-it-all, but I think the Lending Clubs statistics are misleading due to their extremely rapid growth. If someone with a different analysis wants to chime in (and not call me names) I’m all ears. It’s a huge amount of data in the spreadsheet – their entire loan history – so yeah, you’re going to want to look at it at home. Sheet 1 has my numbers.

        And hey, maybe you can successfully negate the aging effect by selling it all in the secondary market. That’s up to you and your powers of persuasion with your fellow lenders.

        • airumair February 5, 2013, 10:22 am

          Awesome possum,

          Thanks very much for sharing the spreadsheet, I took a look at it and looks like you are calculating returns by comparing the ‘Sum Amount Funded by Investors’ to ‘Sum of Payments Received to Date’ for completed loans. Using the two numbers above you arrive at a 3 year return of 7.5% (for all completed loans in LC) which you then say is equal to a 2.5% annualized rate.

          This method of calculating returns is representative of the return that a very very lazy investor would receive if they open an account on LC, throw in a large sum of money, and go to sleep for 3 years and then log in to see their account value. As payments are received monthly, a large amount of the money would be sitting idle in this scenario earning 0%. This is not representative of an average investor in LC who would log-in and reinvest the received payments on a weekly or monthly basis.

          So I modified the spreadsheet a bit, which is shared here: http://bit.ly/11QqSAD

          Please do look at it and see if my method is okay. I took the ‘Sum of Payments Received to Date’ and divided by 36 to get an average monthly payment over the 3 years (this is an approximation because it averages out the partial payments received from notes that defaulted) and then computed the interest rate of a set of cash flows based on the original investment amount. The annual rate I got was better than the “lazy investor” method I described above by a factor of 2.

          In conclusion… two observations I’d like to make:
          1. The annual rate of return for all completed loans was 4.8%, while for filtered loans restricted to CDEFG grades is 8.2%. While these numbers are higher than the previous conservative estimate, they are still far below the LC quoted 13% expected rate.
          2. The total funded amount of the completed loans is only 60 million! and for filtered loans its only 15 million! I can’t say if this is statistically significant or if these trends would hold considering that the total LC currently funded loans exceed 1.3 billion dollars..

        • Mr. Money Mustache February 5, 2013, 3:50 pm

          I think I agree with Airumair that AP’s logic is a bit out:

          If I lend you $1000 at 10% interest, and you pay me back over 1 year, I’ll get only $50 of interest from you.

          That doesn’t mean the loan performed at only 5%. It was a perfect 10% loan and it worked as planned. In order to keep my money compounding at 10%, I would need to fund additional 10% loans with the principal to keep it working for me.

          Similarly, if you’re draining out a Lending Club account over a 3-year period, you wouldn’t leave the idle cash sitting there until 3 years were up.. you’d siphon it out each month and transfer it into other investments, getting whatever return those yield.

      • TK February 4, 2013, 11:43 am

        I think there are two ways two look at it with both having merit.

        (1) individually such that each time you get principal back you have an opportunity/choice to reinvest or invest back into LC or elsewhere.

        (2) collectively such that it is a perpetual fund as part of your portfolio such that everything is always reinvested.

        Over time #2 is a far easier way to calculate your average annual return as #1 would require signifcant tracking of data and reinvestment points but also a more accruate IRR.

        Personally, if you subsribe to a highly diverse and granular LC portfolio and expect (no guarantees) that it will always be a certain % of your total investments then #2 is the way to go. And if you plan on the opposite and are hand picking a smaller number of loans then #1 is the way to evaluate. Passive vs. active.

    • Mark February 4, 2013, 10:20 am

      Betting Definition returns on google – The act of gambling money on the outcome of a race, game, or other unpredictable event.
      Investing returns – Expend money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property, or…: “getting workers to invest in private pension funds”; “the company is to invest $12 million in its new manufacturing site”

      Obviously you explained your use of the word betting, but we can both agree (probably) that it has a connotation of throwing one’s money away unless an unexpected scenario occurs. Whereas, with LC, the expected scenario is to make 6-12% (or more). Sure, you might make less, but you expect to make that.

      I can’t open your spreadsheet on the computer I’m on. Will look at it later if I remember.

    • Anil @ PeerCube February 4, 2013, 10:58 am


      Awesome analysis! I also use similar analysis to measure the effectiveness of my LC investment and on PeerCube http://www.peercube.com – Total ROI based on matured loans – to assess the historical performance of a loan selection strategy.

      For all matured loans issued between 2006 and 2009, PeerCube shows following statistics:

      Default Rate: 13.45% (based on loan count)

      Total ROI based on matured loan: 6.77% (based on dollar amount over 3-year period term of the loan)

      ROI for loans that defaulted/charged off: -47.39%

      ROI for loans that were fully paid: 15.18%

      I think most people confuse difference between “portfolio” performance versus “loan” performance. The performance of portfolio composed of amortized loans is a debate topic in academics and different measures have been proposed to accurately asses the performance without any consensus on which measure better reflects the performance. Everyone uses whatever looks good to them.

      • Kenneth February 4, 2013, 11:13 am

        Thank you for the peercube site. I’ve book marked it and will check it out. This is all important stuff. Credit card companies seem to make a living lending out balances at 13 percent +. I don’t see much difference here. Yes we are going to have defaults, but the ones that pay should more than offset the ones that default.

        • Anil @ PeerCube February 4, 2013, 1:18 pm

          Kenneth, agree, credit card companies have been making a killing doing this. Peer to peer lending offers the same opportunity now to individual investors.

          I am very excited to be able to include a new asset class in consumer lending to my portfolio. But I also like to temper my enthusiasm and get concern when I see overly rosy picture. The impact of defaults is not to be taken lightly.

          Visualize this back of the napkin calculation:

          “For every defaulted loan promising 10% return, 10 loans promising 10% return need to be fully paying on schedule for your portfolio to break even.”


          The historical data shows, on average, a loan default will lose almost 50% of principal invested in that loan.

          • Mark February 4, 2013, 1:41 pm

            Those are slightly contradicting mathematical statements. The first assumes a default is always a total loss. The second says that you only get over 50% of the principal back on a defaulted loan.

            Applying the new 2nd statement to the first, you only need
            5 fully paying loans to pay you back.

            Point still taken as valid, but unless I’m missing something, I think the math is a little off.

  • Joe February 4, 2013, 10:54 am

    I did a small scale experiment on Prosper a few years back. I invested $400 in seven notes I hand picked, five at $50 and two at $75. One was rated E and all the others were AA, A, or B. Surprisingly, I did not have any defaults and had a 9.77% annualized return.

    I never jumped back in but maybe I’ll take a second look.

  • Jamesqf February 4, 2013, 11:02 am

    One question here: how much actual work/time is involved in all this? I get the impression that those of you who invest with LC or similar spend a good deal of time monitoring your loans, checking results, dealing with 55 pages of IRS forms, etc. Seems much like being an active stock trader, as opposed to occasionally putting my excess money in a good mutual fund, and leaving it to grow.

    • TK February 4, 2013, 11:21 am

      James – good question. I will start a thread in the Continue the Blog section for Lending Club topics.

    • Dragline February 4, 2013, 11:21 am

      I would say that there is definitely a learning curve, although I am speaking as someone who does not accept loans in aggregate, which LC allows and MMM has done. But I’ve enjoyed fiddling with it and tweaking my criteria. Its definitely more involved than investing in ETFs or mutual funds, but not as much as investing in individual stocks or real estate.

      But once you have set up your criteria, it only takes a few minutes to run a scan and see if there is anything you want to invest in, which you could probably just do once a week. There’s nothing really to do after that unless you want to sell your loan or buy from a seller. The forms are not that bad if you don’t print them often.

    • Mike February 4, 2013, 12:42 pm

      I spend about 3-5 minutes a day on Lending Club, mainly to capture the loans that didn’t make it through funding and apply the money to new loans. I have a streamlined process that makes it really easy and quick to manage.

  • Ms. Must-stash February 4, 2013, 11:20 am

    Great update – and solid strategies for benefiting from this business model while mitigating risk. I’ve been considering putting a small percentage of my ‘stash into P2P funds for a while now. The thought of cutting out the middleman in order to benefit both parties is very appealing to me – and it’s another great example of how the internet enables such phenomenal increases in transparency / communication that this new model is possible.

  • UK Money Motivator February 4, 2013, 12:05 pm

    The MMM rates of return are very high when compared to us poor Brits. I am expecting a 9% gross from Funding Circle (business loans) and 6% on Zopa (peer-to-peer).

    The UK government are getting on board though, and have pledged £20m to Funding Circle (http://alturl.com/w66s4). This does add a certain level of respectability to the process, but also dilutes the returns of personal investors. All loans will receive 20% of their money from the £20m pot, but we don’t yet know what rate they will be offering.

    • Shandi76 February 6, 2013, 4:49 am

      The rates you are getting on ZOPA are similar to my returns.

      I’ve never invested in Funding Circle. The returns sound more promising. Have you noticed a higher default rate? Would you recommend it?

  • James L February 4, 2013, 12:45 pm

    This sounds like a great opportunity. I’m surprised at the low percentage of people’s total portfolio that is going into this. I’d be tempted to invest 25%-50% of my money in this. My only hesitation right now is that I’m saving for a house and I can’t afford to not have most of money for up to 3 years. However, once that expense is purchased I plan on setting aside an account to fund this p2p investment, very aggressively. This appears to be essentially 2x more profitable than mutual funds and sounds no more risky.

  • wannabfrugal February 4, 2013, 1:45 pm

    There is mention of REIT’s in the main article and I’m curious why you wouldn’t put the 20k in something like nly (http://www.google.com/finance?q=nly&ei=tBsQUeDUA8PTqQGRcQ) that pays a 12% dividend and, maybe this is the heart of the question, seems to have far less risk with assets backing the investment?

    Don’t get me wrong, I’m not intending to criticize, just looking for help evaluating if I should shift some of my investments into something like Lending Tree from a REIT (I guess it does provide diversity from R/E) or stick with high dividend paying REITs (which are also taxed more favorably I believe due to dividends vs interest tax rates). Thoughts?

  • Jeff February 4, 2013, 1:48 pm

    With Peer to Peer lending in Britain, we have to pay tax on ALL the interest received, without being firstly able to deduct money for defaults.

    So if we had your 20% interest and 13% after defaults, we would still be paying tax on the full 20%.

  • BillC February 4, 2013, 1:53 pm

    As someone mentioned above – what does everyone think about LC vs junk bonds or high yielding mREIT (like NLY – currently 12.17% div yield)?

    Obviously if you have a larger stash you might have investments in each. And each have different risks and scenarios in which they’d perform well/poorly.

    My biggest worry with LC (apart from Enron style collapse) would be keeping the money productively invested. Clearly the borrower pool is growing, but are there enough notes to buy that meet the appropriate filters? How long does money sit as “cash” before you can buy more notes?

    • BadAss CPA February 5, 2013, 12:17 pm

      I’m a former investor in NLY and other mREIT’s, but recently I decided to take that allocation and put it to VGSLX instead ($10k min).

      From what I have researched, these mREIT’s are very highly leveraged and are taking advantage of the current low-rate interest environment. That is the main reason they have done so well over the last five years. But looking forward the next five years, I doubt interest rates will stay this low for long. At that point, they would have to rapidly de-leverage and stay ahead of the curve.

      Share prices would drop and I feel more comfortable getting out ahead of time with my gains locked in, especially after the recent FOMC minutes were released. It seems there is starting to be some dissension regarding how long to keep rates this low.

      Currently have 2 Roth IRA’s with Vanguard for wife and I. Considering closing one and contributing to LC instead, unsure of how that would work, anyone with experience transferring a Roth?

      • Peter Renton February 5, 2013, 12:35 pm

        I transferred my wife’s Roth IRA to Lending Club back in 2010. It is not as simple as rolling over an IRA to say Vanguard or Fidelity because Lending Club uses a third party custodian called SDIRA Services. I believe it is a smoother process today than in 2010 when I did it because back then you had to open an account with both LC and the third party custodian separately.

    • mmmfan February 5, 2013, 12:38 pm

      A few have mentioned REITs, specifically NLY, which pays a ~12% dividend. But please be aware that NLY is levered 5-6 times. That means they use massive leverage to achieve these returns. As a rough approximation, their net interest margin (NIM) is 2.2%. Multiply that by their leverage factor and there is your dividend yield.

      I mention this for a few reasons:
      (1) not all REITs are created equal…some that MMM have recommended use mild leverage (40%-70%) and own physical assets. Contrast that with some mortgage finance REITs like NLY which use 500% or greater leverage and own zero physcial real estate (only securities). This is a drastic difference in risk profile.

      (2) the leverage works on the way down too….so if interest rates increase (from what are now historically low levels) then the NIM (and thus your dividend) will go down. Plus the value of the underlying portfolio will be decreasing — a slight 2% decrease in the portfolio levered 5 to 1 will result in a 12% loss to your investment — thats a year of carry!

      (3) The dividends on REITs are non-qualified and thus taxed at ordinary income rates + 3.8% for Obamacare. This may change the appeal drastically when comparing ‘after-tax’ yields across various investment alternatives.

      To be sure, I am NOT saying “dont invest they are too dangerous”. I simply want to highlight the risk for those that may not realize. There is a place in a portfolio for yield enhancement.

      But to drive the point home, if you had $10,000, would you feel comfortable borrowing another $50,000 then buying $60,000 of a 2.2% yielding bond/stock? This is essentially the mortgage finance REIT business model.

      • Mr. Money Mustache February 5, 2013, 3:28 pm

        Great explanation, thanks Fan! You need to do serious research whenever you see a stock/REIT with a too-good-to-be-true dividend like that. You can never just assume the 12% yield is a sustainable thing, because if it were investors would flood in and the price would rapidly double, bringing it down to 4-6% like the other REITs..

        • Clint February 5, 2013, 7:26 pm

          On the other hand, NLY has been my one stock gold mine for the past 12 years , with yields in the double digits most of that time, though dropping to about 5% or so in 2008. The company makes its money on the spread between two- and ten-year treasuries, so it’s a little more complicated than simply saying when interest rates go up, the yield goes down. That hasn’t always been the case, just as when interest rates were going down during the recession, so was Annaly’s yield.

    • Shandi76 February 6, 2013, 4:47 am

      Yes, that part hurts when you can’t offset your bad debts against the interest received on your tax return. I thought they were going to look into changing the law on that?

      ETA: This was meant to be a reply to Jeff’s comment above, but I seem to have replied in the wrong thread. Sorry.

  • Tony@YouOnlyDoThisOnce February 4, 2013, 2:27 pm

    Very cool! I think it may be time to check out the Club. Interesting to see that Lending Club is spot on as far as the people who are probably going to default. Amazing how that works out. I am glad you threw the whole “financial suicide” piece in there about borrowing. I need to pour a new foundation on a property I own ($15k) and I simply don’t have the money. I considered lending club for this. Thanks for talking me down so quick!!

  • Rickard February 4, 2013, 3:41 pm

    I have some money in a Swedish P2P lending system called Trustbuddy. They say that you should expect a return of 12% per year, but it is not guaranteed in any way, but rather depends quite heavily on the behavior of the borrowers in the system. Lenders are compensated in a very strange way (12% per loan, regardless of duration), something that makes longer-term loans much less profitable than short-term loans. In contrast, the Trustbuddy company earns setup fees and monthly extension fees from the borrowers in a way that seems more sensible and normal. There is a maximum loan period of 6 months, though, which gives a lower bound of the lender’s return that is nevertheless quite good.

    But there are other factors reducing the expected return as well. One is that they market 14-day loans provided free of charge for promotion purposes, loans that are financed entirely by the P2P lenders for free. The lenders also have to provide what amounts to free factoring to the Trustbuddy company, covering borrower fees accrued until those are actually paid to Trustbuddy. The whole system is set up so that all the risk is assumed by the lenders and almost none by the Trustbuddy company itself. While this could be seen as greedy and unfair, it has the advantage that it should help the company to remain financially healthy and less likely to fail (which would otherwise be a major risk for the lenders).

    After 3 months, I see a net return of 28% on a yearly basis. As longer loans are less profitable than short ones and the compensation is a bit “front loaded”, I expect the return to drop with time. After 6 months, I should have a better idea of the outcome, but the 12% annual return they advertise seems quite conservative given how the system works. Capital lost to defaults seems almost impossibly low at this time (less than 0.004%) and this will realistically also increase with time. (They have a system that is supposed to distribute losses in proportion to the lender’s capital and time in the system, regardless of whether “your” loans were involved or not, so it really shouldn’t be a matter of me being lucky, or being relatively new to the system. But another way that problematic loans could affect the return would be that it could just take a very long time until they are paid back (longer than the maximum 6 months), and I wouldn’t see this after just 3 months.)

    The major drawback is a moral one, I think. The business model towards the borrowers is essentially that of payday loans, with associated high rates and fees. People willing to take such expensive loans would be the people who are least able to afford it, and those people are the ones paying for the nice returns and good profits of the Trustbuddy company.

  • CALL 911 February 4, 2013, 3:44 pm

    MMM, I hate to be a skeptic, and I really want to believe! My concern is your analysis of default. You seem to be including the recent “doubling down” event you did with the initial investment. My concern is that half of the money is 4 months old (with all of the late payments/risk of default) diluted by the other half of the money being new (and not yet subject to late/default, since it’s new). Basically, you have 6/572 being late. But you also have 6/286 (rough estimate – half the loans) being late, as the other half haven’t had the chance to be late. Am I missing something?

  • Chucks February 4, 2013, 3:45 pm

    “Skeptics point out that loans don’t usually go bad right away.. they go bad after 1-2 years.”

    From my experience with Prosper, most of the loans which go bad do in fact go bad after about 3-4 months. It takes a little while after payments stop for it to be officially default, but if someone’s made a year or two of payments, they’re actually less likely to default in the next year than someone who’s fresh. I’ve actually seen a good deal of people buying and selling somewhat mature loans at a premium as they’re a better bet than the interest rate would suggest and assume people are making out alright.

    While an individual loan is very volatile, I feel a diversified micro-lending portfolio is going to be less volatile in terms of returns than the general stock market. Returns might be lower, but volatility will definitely be less.The market can go up or down 20-30% in a few months, but short of a conspiracy, millions of individuals aren’t all going to decide to default at the same time. While economic factors will affect microloans, the effect will be far less direct than say, index funds.

  • Grayson @ Debt Roundup February 4, 2013, 3:57 pm

    Thanks for the follow-up. I wanted to invest, but I can only trade notes due to state restrictions. I am not sure if it would be easier. I think I might try to add LC to my Roth IRA portfolio.

  • Luke February 4, 2013, 4:18 pm

    MMM, why keep so much money in your CapitalOne/ING checking acct? Their savings account rates are like 3x higher

  • Sam February 4, 2013, 5:53 pm

    I think MMM could get even better returns if he invested his money more slowly and with more dilligence on which notes are invested in. Allocating 10k randomly is not a good strategy.

    I’m a huge fan of investing in notes from military and government employees. You know, nice, stable jobs with which to pay back the loans.

  • reader from the rockies February 4, 2013, 9:55 pm

    Hate to be a spoiler. I asked several of my trusted financial advisors about LC after reading the MMM blog on it. They were not specifically commenting on LC but on the concept. The called it the perfect setup for a Ponzi scheme. They jokingly commented maybe Bernie (Madoff) is running it from his jail cell. I should point out that the advisors I mentioned are not paid for investments they provide. They have no financial incentive to steer me away from a good new investment opportunity.

    A Ponzi scheme certainly could explain higher than usual returns for an apparently reasonable amount of risk. Just food for thought.

    • Peter Renton February 5, 2013, 2:33 am

      Those of us who have been around p2p lending long enough hear the Ponzi scheme argument regularly. I did a post a while back specifically rebuking the idea:

      It would actually be far more difficult for Lending Club to be a Ponzi scheme than for Bernie Madoff for two reasons. They are transparent in all their business. They have to publicly file financials and they make their complete data history publicly available.Also, many (several hundred) people, myself included, have participated as both a borrower and a lender. If it truly was a Ponzi scheme that would not be possible.

      • reader from the rockies February 5, 2013, 6:23 am

        I like the idea that you borrowed money from LC to see the other side of it. That is encouraging. You are correct that Madoff kept his stuff very secret. Doubts were raised about Madoff as far back as 2000, but he went on with his scheme for another 8 years before being caught.

        As for publicly filed SEC documents, that is positive. Then again, Enron was filing documents also. LC may be perfectly legitimate. I am just pointing out that the concept lends itself well to a Ponzi type of fraud. Investors beware when returns are higher. There is always a relationship between risk and return.

  • Redagain February 5, 2013, 3:34 am

    This looked like fun, and I was ready to play with a few bucks. But, alas, Texas is messing with my money. I have a ridiculous margin brokerage with all the qualified investor bells and whistles, but Texas thinks I can’t handle a couple grand in p2p. Guess that solves that.

  • Ian February 5, 2013, 2:33 pm

    Nice, I was waiting for this post. I have started doing manual investments with Prosper, still need to give lending club a try. My mustache is puny in comparison and I still like to personally review my investments. My main criteria is to look at past loans. Prosper has been around a few years so some of the borrowers have a history of loans. If they have had previous loans that have been paid off in a timely manner then I really start to get interested in them. I guess it just kinda shows me they have been responsible borrowers. Also I will not invest in loans for new boats, vacations, etc. Seems like that would up the chances of a financial catastrophe where I would end up on the short end of the stick. I like the debt consolidation loans. I know I am making money off of their debt but they are still probably getting a better rate than the CC companies would give them and they are also heading in the right direction. Good luck!

  • Justin@TheFrugalPath February 5, 2013, 6:05 pm

    I wish that Michiganders were able to invest in P2P lending. I know there are risks, but I wish the state would allow me to decide what types of risks I’m willing to take with my money.

    • Peter Renton February 5, 2013, 6:54 pm

      Lending Club will probably not be available in Michigan until the end of next year but Prosper has just recently come on board. So you can open an account with Lending Club’s competitor if you so choose.

  • goldgoldgold666 February 5, 2013, 8:15 pm

    I would imagine the default rate of these loans would tend to be highly correlated to other economic indicators such as the unemployment rate. That is they will probably tend to do well until the next crisis, at which time the default rate will surge.

    But I am just an annoying pessimist, probably. We’ll see what happens in the next crisis.

    • Mark's Money Mustache February 6, 2013, 9:09 am

      Supposedly the default rate barely rose during the last recession. It’s hard to tell if that was due to the increased number of borrowers, high quality borrowers, etc. But it’s something I’ve heard and might be worth looking in to.

    • Aaron February 6, 2013, 12:28 pm

      That may be true for loans that already exist, but not for loans made during that crisis.

      My father owns a payday loan company. I made a similar comment to him regarding his customers. His response was that his customers became “higher quality” during an economic crunch. The reason behind this is that there is an upper and lower limit to who fits into the typical “payday loan customer window”. When there is an economic crisis, the people who were already at the low end no longer qualify. There are also people at the high end who were in a position before that they wouldn’t have needed the loan before, but now they do. These people are the ones that are more concerned about their credit scores, and not defaulting on loans. Whereas the people who were already at the low end care less about ruining credit that is most likely already bad.

  • Steve February 5, 2013, 9:27 pm

    Aside from the risk, is there anything to stop you from getting a loan off of Lending Club at a 6.03% interest rate and then reinvesting it back into Lending Club at a higher rate? Seems like a loophole to get free money…

    • Mr. Money Mustache February 6, 2013, 9:01 am

      True, although a bit of a stressful loophole. You could also borrow money on your home equity line of credit at 3.25% and invest THAT in Lending club notes too – with the benefit that most HELOCs are interest-only so you would have more flexibility as to when to pay back the principal.

      There is lots of money to be made in exchange for risk. I don’t do any of it right now, but given a need for higher earnings, I’d definitely do a bit. Even carrying a mortgage on your house while you simultaneously invest in stocks is a form of this.

  • The Bearded Bank Builder February 6, 2013, 2:38 pm

    Sweet, thanks for the update! Just started my Lending Club portfolio today

  • Vanessa February 8, 2013, 8:46 am

    Dear Mr. M

    Thank you so much for sharing the LC idea and the process along with all the statistical analysis with us. Husband (Wall Street Guy) did extensive research for past 3 days and we have decided to go follow in your footsteps. Thank you for your hard work and inspiration.

    You should receive the appropriate credit since we clicked on the link from your site. Thanks!

  • Simple Economist February 8, 2013, 1:26 pm

    At what point would a risk like this be worth it? What stage of the investment game? Also, is there a specific amount that needs to be invested to be diversified within LC? Is it worth it with $500, $5000? What % of investments? Maybe 5% ? Higher? Lower? It seems like it would be quite similar to single stock investing with a similar risk/reward profile.

    • BadAss CPA February 8, 2013, 4:58 pm

      According to LC’s site no one investing at least $20k has every lost money. Personally I am comfortable starting with a minimum of $10k as long as it’s diversified with no more than $25 per loan.

      As far as percent of investments, that’s a tough question that I was thinking about myself earlier today. Here’s my current plan, would love to hear what people think about these.

      40% Cash Flow (20% LC, 20% REITs)
      40% Stocks (30% US, 10% International)
      20% Fixed Income (10% Bonds, 10% Annuities)

      • Simple Economist February 11, 2013, 9:28 am

        Thanks for the reply, I’ll have to look at their site a little more and see what all it says about minimum investments. I’ve always been 100% in equities spread over four categories (ala DR) but we are thinking of taking the plunge into a paid for rental house in the next year or so (we like the cash flow aspect of it). I’ll be interested to follow LC for the next few years as it develops a long term track record through different types of economic conditions. You categories look pretty interesting, not sure what exactly the risk profile would be in those (guess it depends on what exactly you are invested in throughout the categories).


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