Save and Conquer

With the recent credit crisis, there has been a lot of talk on the blogs about peer-to-peer lending, and in particular, about Lending Club. I opened an account there a little while ago and have found it to be a good alternative investment if you don’t mind tying up money for up to 3 years.

They are running an incentive program that if you refer someone who opens an account and either lends or borrows money, they will give both the referrer and the new person $25 in their accounts. (If you bypass the referral, neither person gets anything for signing up.)

Their web site says:

When you refer friends to Lending Club and they become borrowers or lenders, we will deposit a bonus into each of your Lending Club accounts. You will each earn:

• $25 when your friend becomes a lender or borrower OR
• $50 when your friend opens a lender account with an initial deposit of $1,000 or more

They rank borrowers from A (best credit scores) to G (not so hot), and they have interest rates for each level. They use borrowers’ FICO score to rate them. Currently, the rates range from 7.37% to 18.61%.

They say the average annual performance is 12.19%. I think that would be if you lend to all levels of borrower. If you loan to just A-thru-C people, you’ll make something more like 9.5% minus the 1% that lendingclub.com charges on payments from buyers for overseeing the process. That is still a lot better than other investments like CDs, bonds, or money markets.

You can either use their LendingMatch service to automatically create a portfolio of loans with your risk criteria (minimum $500), or you can pick out your own specific loans (minimum $25). The loan rates are already set, but you can browse the descriptions to see which ones you “like” for that given rate. All loans are for 3 years with early repayment allowed, so it will tie up whatever you invest for probably a long time. It is kind of like buying a 3-year bond with much better performance.

Lendingclub.com makes its money by charging lenders a monthly 1% processing fee for any money payed by the borrower. and by skimming off an additional percent or two from the borrowers, where the percentage depends on their credit score. Lending Club also has increasing percentage fines that they levy on borrowers for late payments all the way through litigation.

You can get a breakdown of all this by going to their site and clicking on the “Rates & Fees” link. Lending Club is a member in good standing with the Better Business Bureau.

The Dough Roller wrote a Smackdown comparing the P2P lenders, Lending Club and Prosper. His conclusion was that Lending Club is better for lenders. Pinyo at Moolanomy wrote an article about Lending Club and why he likes it better than Prosper. On the con side against tying any money up in a P2P lender, Mike of Quest for Four Pillars wrote a guest post at Blueprint for Financial Prosperity titled, “Why I Don’t Invest in Peer-to-Peer Lending.” His complaint was that the interest earned is taxable at his income tax rate and since he cannot use P2P lending in a tax-sheltered account, it was not for him.

My anwwer to Mike is that this would just be a part of diversification of your portfolio similar to bonds, but with a much higher payback. Even after tax in a taxable account, P2P lending pays better than current bond or money market yields. And since my wife and I always max out our tax-sheltered withholdings, we need to diversify and earn something with money in our taxable accounts.

Note that in addition to the risk of a borrower defaulting on money you’ve loaned, there is some additional risk, in that money held in your Lending Club account is not insured. If Lending Club went bankrupt, you could lose all money that you have not loaned. Also, you do not earn interest on money in your Lending Club account that you have not loaned out. I do not have a large portion of our assets tied up in Lending Club.

Anyway, if you are interested and want to get an extra $25 in your lending account, please use the URL with my name. It will benefit us both.

https://secure.lendingclub.com/refer.action?referrer=brycef

Correction from Mike at Richer by the Day: From the Lending Club FAQ…

Is my money insured?

Your Lending Club account cash balance is covered by FDIC pass-through insurance. Lending Club holds these funds at Wells Fargo Bank. This coverage does not include funds that have been lent out to borrowers.

Stumble it!