In 2015 I wrote about how I was investing in peer-to-peer loans through LendingClub as a way to juice returns on my cash.
Unfortunately, it hasn’t worked out so well. My returns to date are below 2%.
This isn’t because I invested in riskier loans. LendingClub predicted that, based on the automated investing approach I had, I’d see returns of 5.5%-8.3%.
Of course, I started investing before news came out the LendingClub was up to shenanigans. But here are a couple of other things I learned along the way:
1. The house always wins. I originally looked at LendingClub from an investor’s point of view only. I didn’t bother to look at how it works for borrowers. I should have paid more attention to this. It turns out that borrowers pay an origination fee when they get a loan. For a while this was 5% off the top on all but the best loans; now it is 1.00%-6.00% depending on the borrower.
So if the origination fee on a loan is 5% and the person borrowers $10,000, they end up only getting $9,500 and LendingClub gets $500 before a single loan payment is made. See the conflict of interest here? It’s in LC’s best interest to originate as many loans as it can, even if they won’t be repaid. They win even if investors lose on any given loan.
2. There’s a lot of fraud. I know that LendingClub and its peers have taken steps to address this lately. But when someone takes out a loan and doesn’t make more than one payment, something is fishy. It turns out lots of people were taking out loans on multiple platforms at the same time. I also question how much work goes into verifying borrowers’ data.
Another thing to keep in mind is that you’re making loans with 3-5 year maturities. If marketplace lending like LendingClub starts to tank and delinquencies go up, you’re kind of stuck. There’s a marketplace for selling loans but it’s not as liquid as you might hope.
I’ve shifted my money that would go to LendingClub to PeerStreet. I feel more comfortable investing in loans that have something as collateral, and PeerStreet delivers that. You can also invest in shorter-term loans there.