What’s up with Lending Club? A review.
Here is the first post since joining Project 52.
I recently signed up at the web site Lending Club after considering doing so for a while. A friend of mine had signed up for it and it looked intriguing. It’s nothing new for sure, a quick search into their crunchbase profile tells us they got started in May 2007 as a Facebook application to promote peer-to-peer lending. In a nutshell, it means if you need $100 and I have $100 to loan out, they put us together. You don’t need to go to a bank for a loan, and I can get more interest on my money than a savings account would give me.
It sounds like a win-win situation. But it hasn’t been all sunshine and rainbows for the company. Back in 2008 the company had to cease some operations until it completed some filings with the SEC. People feared the worse and the internet was buzzing that the company was dead. Then over the past year or so, Lending Club got their SEC filings in order and the amount of loans originated by the site increased.
So right now the site is in the good graces of all the necessary government agencies, and the internet seems to think things are on the up and up. So what do I think? Well the first bummer for me, is that I missed out on my signup bonus of $62 by 2 days. I check my gmail account very infrequently, and that is where the signup link came in. So all that aside, I got started by investing in a “portfolio” of notes. The idea of notes, is that you make loans in increments of $25 to multiple borrowers so that you spread out your risk via diversification.
The risk of the loans is measured with a letter grade with A being the best (lowest interest rate, risk of default) all the way down to G (over 20% interest rate, high risk). When I got started I took my $100 and split it into four notes of grades B,B,C, and E. What I didn’t realize at this time was that I could have looked into the details of each note. But it was too late, we’ll have to see if it comes back to haunt me. When I linked my checking account with Lending Club, I got a $40 bonus. Which has enabled me to offer up another note, and this is where I have decided to have more fun with the process.
Like I mentioned above, borrowers can provide many details with their loan application, and while they are “in funding” (The time between their application and when enough loaners come forward with money to loan them) there is a question and answer feature on the site. Standard questions are usually about employment, or how the person came to be in so much debt. But a lot of details can be extracted from this process. For example, I read one loan of a gentleman in the army who needed a loan to pay down credit card debt. There were a few potential loaners being critical of this guy, when another loaner came in and explained the importance of a good credit score for those in the military, and the effects of a default can have on their career. Security clearance can be taken away, and their promotions can be blocked. Well, immediately loaners were on board for this guy, and he had his full amount in no time. So I am going to be on the lookout for loans to military personnel in the future to try and help out the guys and gals in uniform.
But after all this, is this site a good idea? Well, some people think so, but in the loan business you need to be able to handle defaults. This can make the early stages challenging when you haven’t established much of a bank roll. With my initial $100 investment, it would be crushing if one of the $25 notes was defaulted on. I’d be immediately down to $75 of principal and have an uphill battle in front of me to make that money back. Alternatively, these notes can be bought and sold on the FolioFN platform that Lending Club provides. This is a useful option since the time frame of all Lending Club loans is 3 years. If I needed back the $100 that I loaned out, I can sell my notes. The notes are traded similarly to stocks on the market, where there is an asking price and a bid price. I might not be able to get my full $100 back, or I may be able to profit and get more than my $100. That’s the nature of arbitrage.
So what’s the conclusion? Right now I am suggesting that people take a small amount of money, sign up and proceed with caution, but to proceed none the less. With the company giving out $40 just for linking up a checking account, thats a 40% return out of the gate. It will give you some default protection if you were to lose one of your initial notes. I will likely be monitoring these loans fairly regularly, and making a formal evaluation after 6 months of using the site. So go ahead and sign up. Just keep a close eye on it.
UPDATE: So in the 24 hours since this was posted, two items came up that I wanted to add to this article. First, Lending Club announced that they were moving their offices from Sunnyvale to Redwood City. Secondly, I was reminded of the fact, that on Lending Club’s SEC filing page, their are multiple broken links. The 10-Q, 8-K, Sales Report, and prospectus are all broken. The only link that works is the 10-K from the year ending in March, 2009.
DOUBLE UPDATE: A couple of days later Lending Club contact me to let me know that the links to the filings had been fixed. The broken links were a result of a change of their publishing system. All current filings are now up on the site.