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My $1,000 Lending Club p2p lending portfolio

Since the closing of Pertuity Direct, I made my first move back into the domestic p2p lending market this weekend, opening a Lending Club account with a friend. Our goal is to earn a healthy and stable return of around 10% with minimum monitoring required and full transparency of the status of our investments at all times.

My approach was first to use LendingMatch, their automated tool, to give me a decent, diversified base portfolio. [On a design note, the user interface of LendingMatch is extraordinary; it ranks up there with Etsy as among the most fun and intuitive browsing and selecting tools]

I selected three filters:

  1. $1,000 total investment
  2. Target return (after accounting for expected default and the service fee) of 11%
  3. No delinquencies in previous 2 years

There were certain other filters that I wanted to choose—notes that were both approved by the Lending Club credit team and where the individuals had their income verified—but they too restricted the portfolio, bringing me down to only a handful of notes, so I let them go.

This search gave me 32 notes to compare. I went through them individually to eliminate certain notes that failed in certain less scientific ways:

  1. Inability to spell (especially in the case of the two word loan title, e.g. “Debt Consoalidaton”)
  2. Bad business ideas (e.g., fixing up and flipping houses in a depressed housing market)
  3. Failure to adequately answer questions asked by other lenders

At this point, my portfolio was a bit more aggressive than expected. Lending Club rates their notes from A (less risky) to G (more risky) and I had no A or B loans and an excessive number of F and G loans. I filled in with more A and B loans, filtering for verified income, which obviously brought my expected return down a bit, but I was more comfortable with the final result, summarized here:


The historical default for this blend is about 3.5%, plus the fee of about 0.7%, so my final expected rate of return is between 10 and 11%. My plan is to continue to expand this portfolio to $5,000. I was actually prepared to invest all that at once, but there are simply not enough notes on the site to create my desired portfolio at that scale. Rob at Lending Club indicated to me last month that the company is focusing on attracting additional borrowers. Now I fully understand why a sufficient number of borrowers is so crucial to taking p2p lending mainstream; while it remains hard to invest a significant amount of money, Lending Club’s reach is limited.

The company’s customer service remains stellar. When I experienced a technical issue, I Twitter DMed @RobGarciaSJ, their Senior Product Strategist, who wrote back nearly immediately.  A colleague who is also looking at opening an account shared with me several e-mail exchanges he had with one of their VPs, all answered in great detail within a few hours. Through those emails I learned that Lending Club is allowing accounts to be opened on behalf of dependents. My colleague is looking for a way for his kids’ savings accounts to earn more than 0.5% interest and thinks Lending Club may be a good option.

I’m looking forward to expanding my Lending Club portfolio as the company grows and tracking how it is going here. With expectations of a 10% return, warnings of “if it sounds too good to be true, it is” ring in my ears, but I remain optimistic that p2p lending is simply offering a simpler, better investment opportunity. It’s one I’m willing to bet on.

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Reader Comments (7)

Congrats on beating me to the $1,000 marker (by a couple of days)!;-)

December 8, 2009 | Unregistered CommenterTheLittleVC

Welcome to the Lending Club..Club! I've also been using Lending Club for 6 months now and love it.

December 8, 2009 | Unregistered CommenterInvestor Junkie

Thanks @thelittlevc. I've enjoyed your coverage of your experiences!

Thanks @investorjunkie, I'm expecting to love it, too :)

December 8, 2009 | Registered CommenterMelody

I think the social lending clubs should be a bit more transparent about the rate of return - they advertise about 9% a year, but that is truly ONLY if 100% of the monthly received payments by the lender are re-invested.

Take for example a $1,000 loan. The total interest on the borrower pays at 11% interest over 3 years is: $178, not the $330 that a lender would expect to earn over 3 years. This is because the borrower is paying interest only on the remaining balance of the loan. So if the lendingclub lender does not re-invest earnings, then his/her actual return is 5.63% /year on the original $1000 (starting with an 11% loan!). An example of this amortization can be seen in using an online auto finance calculator. A bond or CD pays a fixed rate of return.

December 10, 2009 | Unregistered Commenterclint

Well think about it. A CD pays a fixed rate of return but you don't have access to any of that money till the CD matures. If you want to compare it to a CD, you need to reinvest so ALL the principal stays in the game, for the whole time.

Since you get some of the principal back over time, you can't really compare. The models are different if you don't reinvest.

It's not different with stocks. If you kept taking a percentage of your stocks out each month (principal return), you wouldn't score the original rate that you expected either. I don't see any duplicity in their advertising.

January 10, 2010 | Unregistered CommenterPatrick

Patrick, I agree. As Lending Club itself advertises, though, the trick to high returns is to continually reinvest. I wish that Lending Club had an auto-reinvest tool according to a lender's pre-determined filters.

January 10, 2010 | Registered CommenterMelody

I started investing with Lending Club about 4 months ago. I don't have a lot of money invested right now but I am considering investing significantly more. I am getting 14.62% right now which comes out to about $0.28 per $25 invested. So, if I up my investments to $2400 that would give me a return of $26.88. That would allow me to buy 1 note every month. A real investment calculator would be great though.

March 17, 2010 | Unregistered CommenterDoug
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