Bonds & Fixed Income

Sound like I’m nuts??  We’ll I’m not.  Let me introduce you to investing 2.0.  It’s called Lending Club.  Believe me – I was skeptical too.  But with no minimum investment I figured I would give it a shot.  I’ll tell you I was pleasantly surprised.  Below is my review.

LendingClub’s homepage claims a 9.5% annualized return as of 09/05/2010.  They also report a mere 2% default rate on their total number of loans.  How in the world can that happen was my first question… how can make 9% in this economy?  The answer is pretty ingenious.  Makes me wonder why I didn’t think of it first…

After signing up and making my first cash deposit (paypal was offered at signup) you are then able to buy notes.  Below is a sample of what you can search for.  You can filter by interest rate, length of note, or keyword (ie. credit card).

Everything a bank would use to lend money is available for you to see.  Within each loan is a detailed look at the profile of the requester.  Employment history, gross income, number of delinquencies, bankruptcies, etc.  If you see a red flag in the profile – don’t invest!  Very easy.  You are also able to ask the member questions if you decide to.  For instance – if you were on the fence because of his high revolving credit balance you could ask them how they plan on using this loan.  Please note:  much of this info is unverified.  Members who are requesting loans are encouraged to get their income and employment verified.  This at least give lenders a better idea of their financial situation.

So how has my experience gone?  I signed up for LendingClub in April and so far I’ve been very impressed.  One BIG limitation for me is that I was not able to lend directly in new loans.  LendingClub loans are only allowed in 17 states (check the terms for list).  That doesn’t mean you can’t buy the notes from other lenders though.  LendingClub has a trading platform to buy and sell your notes before they reach maturity.  I actually bought most of my notes at a 1-2% discount.  You have to watch out though, there are people on there trying to dump worthless default notes so make sure you only by notes that are current on payment.  As you can see below, you can filter by interest rate, term, etc and also sort the columns.

You are also able to view the original listing thru the trading platform so you’re still able to see all of the original Q&A’s, financial information, and notes from the member.

So now I have my account … How do I make money?

Great question!  Most of the loans are structured as 36 month notes.  60 month notes came out a few months ago but i haven’t really looked at those much.  As you can see, it’s all about risk and reward.  Want to take a chance on a less than steller credit score?  Then you could make up to 20% interest on your investment.  But even the top credit scores will earn you over 8%.  And with credit scores in the 700+ range… your risk of default is next to zero.  In today’s volatile stock market – I’ll take that!

I picked a wide range of notes from the A grade (top credit) to the G grade (bottom).  Below is my portfolio of notes.

So far I’ve only had one note go late (the G grade) but they’re on a payment plan so I am still getting paid.  All of my others have been on time.  As you can see I am making just under 14% with my allocation of notes.  I went a little on the risky side just to see what the collection process was if a note went late.  Lending Club does all of the collections, payment plans, payment reminders, etc.  You sit back and collect the interest and late fees.  Not bad at all.

Overall, I think Lending Club is great for an investment.  If you are looking for a semi-liquid investment I think you’ll find Lending Club is perfect for you.  I believe the only drawback is the amount of time it takes to research your potential loans.