Lending Club - recent experiences

[Gigemags]

I recently signed up for Lending Club, but I have not funded my account yet. Will any Lending Club investors tell me how they are doing? I've read the WCI experience and it seems to be pretty nice ~12%, The Lending Club's stated range is 5-9%. Does the automated investing truly let you set it and forget it, I don't want to waste time all day looking for new loans to invest in.

Lastly, my office recently began accepting Lending Club (in addition to care credit) for payment of services. I do not believe that I have a significant conflict of interest as I am not intentionally funding cases I hope to complete (its mainly credit card refinance, mortgage, etc.). Usually I have no clue who paid with cash, credit card, was funded by a parent, or which funding service paid. I was told only a handful of patients have used this service. Anyone see this as an issue?

Thanks!

Gigemags

[PenguinMD]

We do both Lending Club and Prosper. Looking at my recent dashboard LC is around 10.16% adjusted and Prosper is 7.14% seasoned. I've always found Prosper to be a bit lower although I have similar auto investing criteria for both accounts. Think it has to do with LC having more volume of loans out there.

The thing to note is that all earnings are taxed as interest income so you get taxed at marginal. So if you're in a high bracket plus state tax then it can eat into your returns.

I do LC through a Roth IRA which eliminates the tax and paperwork. Prosper is a taxed account which gets really annoying as you need to also enter chargeoffs and recovery fees into your schedule and these are listed individually per loan.

We're in the process of winding down Prosper as at 7% and in a high bracket with state tax I'm really getting only 4%. It's the same rate that I get with my state tax exempt munis without all the paperwork and tax headaches.

In short think P2P lending is another good diversification strategy. I think the best approach is through a retirement account to either eliminate the tax or defer it. If you go taxable keep in mind it gets taxed at your marginal tax so just realize what rate you're really getting at the end of the day. Plus you'll have some annoying paperwork with recover and charge offs that need to be entered (it's actually really not bad just kind of annoying to enter such small numbers).

Good luck!

[scott]

PenguinMD,

Did you have to open your IRA through SD-IRA or someone else?  And if so, what type of fees are associated with your retirement account? Thanks!

Scott

[Gigemags]

Penguin MD,

Thank you for your information! Really helpful

 

[PenguinMD]

I went through this link which has all the info to setup the SDIRA for my Roth IRA.
https://www.lendingclub.com/public/individual-retirement-accounts.action

Smart to ask about fees as that's usually where these self-directed custodians make their money. The deal with LC is if you do at least $5k the first year they cover the $100 annual fee. Subsequently, though it goes to $10k min to get the $100 waiver annually. So you really want to do at least $10k to avoid the SDIRA fees.

Now some custodians charge each time you transfer money I didn't notice anything like that. I do remember filling out some paperwork to do the initial Roth rollover from Fidelity to LC.

So in other words it's not really setup as something you would do monthly drips instead you would want to move large deposits each time to minimize the paperwork.

Also the SDIRA account is specific to P2P lending and can't be used for other purposes. I was looking to see if I can use the same account to do some real estate crowdfunding investing. PeerStreet also uses SDIRA (same custodial) however it must be a separate account and the fees associated aren't as generous as the deal with LC. You save with taxes but you get hit with fees so you need to make sure you have significant investing to make it worth it, in other words don't go this route to only invest $1k -- that'd be a waste.

One last thing. A heads up. As with any alternative investment -- caveat emptor!

Both platforms: LC and Prosper have been experiencing larger than expected defaults recently due to the current economy and therefore have raised the interest they charge for riskier borrowers. Overall this is causing returns to dip a little. Remember these are real loans and people can default (remember the whole housing loans default -- watch The Big Short).

Here's a recent WSJ article about.

Net:
P2P is good for diversification as part of your overall portfolio strategy but wouldn't advocate it as a major component.

>>>>

LendingClub Boosts Projected Loan Losses, Raises Rates on Some Loans
Wall Street Journal - 18h ago
LendingClub, the largest player in that business by loan volume, specifically boosted its projected loan losses on all borrower segments for its three-year loans from between 0.22 percentage points and 3.56 percentage points compared with its previous ...
http://goo.gl/55ADeV

[scott]

Thanks Penguin MD - very insightful! Have you done this with Lending Home as well?

 

[VagabondMD]

I have been doing LC for a couple of years, weighting my portfolio toward the safer loans with 80-90% in the A and B range. My current yield as of this minute is 5.63%. I have long joked that I made more money on the LC IPO (members had the opportunity to purchase the IPO at the IPO cost) than I will ever make as a participant lender.

I tend to pick my loans individually, and this is time consuming. I view this more as entertainment than part of my investment strategy. About 0.1% of my net worth is at LC, and truth be told, with this level of participation, it's probably not worth the bother.

I do not see any conflict of interest with you accepting payment. The loan accounts are anonymized in both directions.

[NotMyRealName]

I don't know what the outcome will be with all this news, but thought I would share it, since it may be material to your decision-making.

 

http://www.nbcnews.com/business/business-news/lendingclub-founder-s-surprise-exit-leaves-industry-lurch-n572066

http://www.wsj.com/articles/lendingclubs-ties-to-fund-under-fire-1463011193
Is LC a falling knife, or is it time to hop in?

http://www.cnbc.com/2016/05/11/bullish-options-action-in-lendingclub.html

[PenguinMD]

Yeah saw that news.

Two things:
1) Those articles are from the perspective of buying the stock which is different than being a customer. That being said as a customer you do want to know of forces going on within the company you're dealing with.

2) Again diversification, no one is saying to put over 50% into any P2P platforms. To minimize risks you want to spread out your bets. That being said I've been winding down my Prosper account (mainly cause of the super unfavorable tax (taxed at marginal) and the annoying extra tax work needed to log a 1 recovery or 3 write-off properly. I am keeping my Roth IRA account at LendingClub of course this is a small amount of overall net worth.

Likely there will be a shakeout in the industry and be interesting to see if the economy really slows down and goes south then you may see crazy defaults happening ... It all comes down to the underwriting.

[YYjames]

Returns are not easily calculated for this sort of investment

For example PEnguinMD claiming 10.16%

1. How seasoned are the notes? Most defaults happen starting month 16-20.

2. Return calculation of which kind? IRR? Adjusted NAR ? To be frank, EXPECTED returns on an investment like this that is amortized cannot be easily predicted as the cash flow is irregular (borrower pays, stops, then pays then defaults then recovers).

Overall, returns are more like 7% on seasoned notes with defaults built in.

I wrote a script in R that does some loan survival analysis but too lazy to explain right now. Google is the best friend.

[consultpsych]

Stupid question -- I am enjoying reading about this but not sure how this would work exactly. I am "basic level" with understanding this, so apologies.

I have not started doing backdoor Roths yet but my plan is to start this year and do them yearly, one for me and one for my wife.

Would I have a second Roth with Lending Club that I could then, with no penalty or issue, just roll money into from one of my (let's say Vanguard) Roth IRAs?

Then could I, each year, do the backdoor Roth contributions and then just keep putting part of that into a Lending Club Roth?

[PenguinMD]

Yes, this is what I'm doing now.

Each year contribute to my traditional IRA on Fidelity and then convert to a Roth IRA (backdoor conversion).

I then need to fill out the paperwork to transfer part of the money in the Fidelity Roth to my Roth setup on LendingClub. This is a manual process unfortunately.

It's actually pretty straightforward.

[consultpsych]

Thanks PenguinMD

[ACN]

I have $500 invested for fun at LC when I was in medical school.  I now have it on auto-pilot and just let the software fund $25 notes.

 

Current stats:

10.88% (5-7 years? total) - I believe it was closer to 13-14% about 4 years ago.

12 notes issued / current

1 grace period

14 fully paid

2 charged off

[consultpsych]

ACN -- that's awesome.

I think rather than fund it regularly, I also might put just transfer some Roth money at some point, whatever I need to put in to avoid fees, and then just leave it. (That's definitely my preferred investment style!)