In this post, I present a review written by my friend Nick Joosten about a site known as Lending Club. While a normal bank may give you a 2-3% return on your money, Lending Club, which specializes in micro-loans, promises a return of over 9%. In this review, Nick analyzes the pros and cons of the site:
Lending Club Review
After earning .25% APY in a money market account, I realized it was time to look elsewhere to invest. I came across Lending Club, which at the time promised 9.81% returns. I quickly dismissed it, assuming it was a Ponzi Scheme, and kept searching for other places to invest. Not having much luck after several days of research, I decided to at least look into Lending Club. The idea made sense: to have investors micro-lend to borrowers, essentially getting rid of the bank. But after the Madoff Scandal, I was hesitant to invest in organizations that promised such high returns. After more research, I became more confident that Lending Club was a legitimate organization. It was featured in many media outlets such as ABC7, Fox Business, Nasdaq.com, CNN, Forbes, Bloomberg, Chicago Tribune, The New York Times, CBS News, The Wall Street Journal, NPR, Yahoo Finance, TIME, CNBC, USA Today, etc.
After recognizing Lending Club as a legitimate institution, my next biggest concern was risk. I learned that the average default rate on a loan is around 3%. If you invest all your money in one loan, you have a 3% chance of losing all your money. However, if you invest in two loans, you only have a .09% chance of losing all your money (assuming that different people defaulting on their loans are independent events). For 3 loans, you have a .0027% chance of losing all your money, and so on. The percentage becomes infinitesimal when investing in several hundred loans thereby making it a safe investment.
I’ve been investing in Lending Club for over a year now, and here’s my opinion of the pros and cons:
Pros:
• One of the best ways to earn a good return on your money - I currently earn around 13% APY.
• You can read borrower’s profiles to decide whom to lend to.
• Not risky – investing in hundreds of loans makes it essentially impossible to lose all your money.
• Can receive tax advantages by creating a retirement account
Cons:
• Money is not very liquid – if you have your money invested in loans, you have to wait either until the borrowers make payments or sell the loans on the secondary market (you might have to devalue the value of the loans to make a quick sell).
• After receiving payments from borrowers, it might take a while to reinvest your money in other loans. Loans on Lending Club receive funding for up to 13 days. Your money doesn’t earn any interest while it’s waiting to receive funding from other lenders. Also, a little less than half of the borrowers cancel their loan applications, which adds to the inconvenience of choosing loans to invest in.
Overall, Lending Club is a great way to receive a high percentage return at low risk.
-Nick Joosten
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