Lending Club is a popular online marketplace that connects borrowers and investors. The platform operates by offering loans for personal use, business purposes, and for credit card refinancing. Investors can then fund these loans, essentially becoming the lenders and earning interest on their investments. Lending Club has been around since 2007 and has facilitated billions of dollars in loans to date. As an investment option, Lending Club offers the potential for high returns, with average returns ranging from 4% to 7%, depending on the investment strategy. However, investing through Lending Club also comes with certain risks, such as the potential for borrowers to default on their loans, which could result in loss of investment. In this article, we will take a closer look at Lending Club as an investment option, the advantages and disadvantages of investing through the platform, and provide some tips for safely investing your money.
How does Lending Club work?
Investing with Lending Club is simple and straightforward. Here are the basic steps:
- Sign up for a free account on Lending Club’s website and provide some basic personal and financial information to create an investor profile.
- Choose an investment strategy based on your goals, financial situation, and risk tolerance. Lending Club offers two investment options: automated investing and self-directed investing.
- Once you have chosen your investment strategy, you can begin selecting the loans you wish to fund. You can browse through a list of available loans and choose the ones that meet your investment criteria.
- Your investments will be spread across multiple loans to reduce the risk of any one borrower defaulting.
- Repayments are made to your account on a monthly basis, including both principal and interest. You can then withdraw these funds or reinvest them in new loans.
It’s important to note that Lending Club charges a fee for its services, which is deducted from the interest earned on your investments. However, these fees are generally lower than those charged by traditional investment firms.
How do investors of LendingClub make money?
Investors of LendingClub make money by funding and investing in loans that are issued to borrowers. When borrowers make payments, investors get a portion of the proceeds as interest payments. LendingClub’s platform charges a service fee for facilitating transactions between borrowers and lenders.
Here are some ways investors can earn returns through LendingClub’s platform:
- Receive monthly payments of principal and interest from borrowers.
- Sell their notes on LendingClub’s secondary market.
- Reinvest their earnings to compound returns over time.
It’s important to note that investing in loans comes with risks, and investors may not receive their projected returns if the borrower defaults on their loans. LendingClub offers tools for investors to diversify their portfolios and mitigate risks.
Additionally, LendingClub’s platform provides detailed information on each borrower’s creditworthiness and loan details, allowing investors to make informed decisions about which loans to fund.
Types of Lending Club Investments
Lending Club offers two main investment options for its investors: automated investing and self-directed investing. Here’s a breakdown of each:
| Investment Type | How it Works | Pros and Cons |
|---|---|---|
Automated Investing |
Uses an algorithm to automatically invest your funds across multiple loans based on your specified criteria. |
|
Self-Directed Investing |
Allows you to select the loans you wish to invest in based on your own criteria and due diligence. |
|
Both automated and self-directed investing options diversify your investments across multiple loans, which helps to mitigate the risk of borrower defaults. However, automated investing may limit your control over which loans your funds are invested in, whereas self-directed investing requires more time and effort to select loans based on your own criteria.
How do investors make their money through LendingClub?
Investors make money through LendingClub by investing in loans issued to borrowers. Here’s how it works:
- Investors sign up through the LendingClub website and create an account.
- They allocate funds to a portfolio of loans based on their investment preferences such as loan grade, term length, and risk tolerance.
- Once the loans are issued and the borrowers start making repayments, the investors receive monthly payments of principal and interest.
- Investors can either reinvest the returns into new loans or withdraw the money to their bank account.
LendingClub charges investors a service fee based on the amount of interest paid by borrowers, and investors may also be subject to taxes on their earnings. Overall, investing in LendingClub loans can provide a steady stream of passive income.
Advantages of Lending Club Investing
There are several advantages to investing in loans through Lending Club:
- High potential for returns, typically ranging from 3-8% annually, depending on the loans invested in and other factors.
- Low minimum investment requirements, with as little as $25 needed to invest in a single loan.
- Diversification of investments across multiple loans, which helps mitigate risk.
- Option to reinvest principal and interest payments into new loans, which can help boost returns over time.
- Historically outperformed traditional investments such as stocks, bonds, and mutual funds, according to Lending Club data.
When compared to other investment options, Lending Club investing offers several unique benefits:
- Higher potential returns than traditional savings accounts, CDs, and bonds.
- Lower fees than many other investment platforms, with a 1% fee for invested assets under $100,000 and 0.70% for invested assets over $100,000.
- Less volatility than the stock market, making it a potentially good option for risk-averse investors.
Overall, Lending Club offers a unique investment opportunity with the potential for high returns and diversification across multiple loans with relatively low minimums and fees.
Can you make money with LendingClub?
Yes, it is possible to make money with LendingClub. LendingClub is a peer-to-peer lending platform where investors can lend money to borrowers and earn interest. Here are some ways you can make money with LendingClub:
- Investing in loans that have a high probability of being repaid
- Choosing loans with higher interest rates to earn more money
- Diversifying your portfolio by investing in different grades and terms of loans
- Reinvesting your earnings to compound your returns over time
However, it’s important to note that there is always a risk involved with any investment. LendingClub provides a detailed breakdown of their historical loan performance, but past performance is not a guarantee of future results. It’s important to thoroughly research and understand the risks before investing.
Disadvantages of Lending Club Investing
As with any investment, there are some potential drawbacks to investing through Lending Club:
- Default risk – Borrowers may default on their loans, causing investors to lose their principal investment as well as any potential returns.
- Illiquidity – Investments are tied up in loans for predetermined periods of time, typically between 3-5 years, making it difficult to access funds if needed.
- Regulatory uncertainty – Lending Club investing is not currently regulated by the SEC, which may leave some investors feeling uneasy.
- Limited investment opportunities – Not all loans are available for investment, as borrowers must meet certain qualifications and requirements set by Lending Club.
- No tax-advantaged accounts – Investments through Lending Club cannot be made through tax-advantaged retirement accounts such as IRAs or 401(k)s.
It’s important to carefully consider these potential drawbacks and assess whether Lending Club investing aligns with your investment goals and risk tolerance. If you want to learn more about Lending Club, you can read our comprehensive Lending Club investing review.
What are the risks of investing in the LendingClub?
| Risks | Details |
|---|---|
| Credit risk | Borrower default risk |
| Market risk | Changes in interest rates or general economic conditions |
| Liquidity risk | Difficulty finding buyers for the loans on the secondary market |
| Platform risk | Operational and management risks associated with LendingClub as a company |
- Investing in LendingClub loans is not guaranteed against losses
- The loans are unsecured, meaning there is no collateral to protect against defaults
- There is no FDIC insurance on LendingClub investments
- Past performance is not indicative of future results
Conclusion
Overall, Lending Club can be a great option for investors looking for higher returns and diversification in their portfolio. However, it’s important to understand the risks involved and assess whether or not Lending Club aligns with your investment goals and risk tolerance.
While there is a potential for borrowers to default on their loans and for investors to lose money, Lending Club has historically delivered solid returns to investors. By carefully selecting loans that align with your risk tolerance and diversifying your portfolio, you can mitigate some of the potential risks involved in investing in Lending Club.
If you’re considering investing through Lending Club, it’s important to take the time to read and understand all the information available to you. This includes reading the prospectus thoroughly and assessing your risk tolerance. By doing so, you can make an informed decision about whether or not Lending Club investing is right for you.
Overall, Lending Club can be a valuable addition to your investment portfolio, but like any investment, it requires careful consideration and research before investing your hard-earned money.
