In order to be both a borrower and a lender at Lending Club, you have to open two accounts. With two accounts, can your lender account fund your borrower account’s loan?
One of the things that I occasionally do to find new ideas to write about is to go through the referral logs and look at the search queries that have clicked through to the site. One such query was “Lending Club can you fund your own loan”.
I want to be upfront with you. I haven’t asked Lending Club for an official policy on this. If I had to guess (which I’m doing now) I’d say that they don’t allow it. At first, I couldn’t figure out why someone would even want to fund their own loan. The only thing that I can come up with is to perform some sort of arbitration. Saving some money on interest rates while paying yourself a bit of interest as well.
While that might sound like a good idea, it probably isn’t. First, if you’re using the loan to pay off higher interest rate debts, you’d be better off just using the cash you’re planning on using to fund your loan to pay down the debt you already have. Instant savings equal to the interest rate of the debt. No need to worry about breaking rules, just instant savings.
The more compelling reason you probably don’t want to fund your own loan on a P2P lending site like Lending Club is all the fees and taxes you’ll end up having to pay. First, you’ll pay an origination fee on the loan. This could be anywhere from 1% – 5.5% of the loan depending on the credit “grade” of your loan. Next, you’ll pay fees on every payment that you pay yourself, further eating into any advantage. Finally, when tax time comes around, you’ll pay taxes on the interest income on the lending account.
The combination of the fees you’ll incur through Lending Club, and your effective tax rate will, in most cases, completely erase any benefit you might see from paying the interest to yourself. It just doesn’t make sense.
So, can you fund your own Lending Club loan? I can’t think of a good reason why you’d want to.
Want to know how I suggest you use Lending Club investing? Check out my 2Q12 Lending Club results.
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I don’t know Lending Club’s official policy on it but because your borrower account has to be separate from your investor account there is no mechanism in place to stop this kid of thing. The only reason to do it as far as I can tell would be to make sure your loan gets funded by helping it over the top. Either way, you are losing money to the service and origination fees so it is not a sound investment.
At Prosper, on the other hand, everything is in one account and there they do not allow you to invest in your own loan. If you have two accounts, though, say an IRA or another account in your wife’s name, then again there is no mechanism in place to stop it.
I do know of investors with great credit scores who are borrowing money on LC/Prosper, then using it to fund higher interest loans for others.
I can think of a very simple reason. Fund the Lending account with your IRA, use it to essentially take out a loan on yourself from the Borrower account. If there is a need to consolidate loans this may be a great solution. You don’t get penalized for withdrawal and in fact you make interest albeit from yourself. A nifty way to maybe put away more than the 15k allowed by law?
Maybe the use of an IRA lender account and personal borrower account is a way around not being able to get a loan against the IRA? It might end up being cheaper than tax+penalty on taking a distribution against the IRA. If so, wish I would have thought of that a year or so ago. I had to take a distribution and about fainted when I got my tax bill.
Please note I’m not a tax attorney, accountant, or IRS emloyee.
Just throwing this out there.
@Pat and @George That’s an interesting take, actually. If so, it’s likely a loophole that won’t last long as I can see that being an issue as far as the IRS is concerned.
I know the IRS has rules against self-dealing with IRA investments. Not sure if this counts or not. Might have to talk to my accountant about this. Like I said, if legal, it would have saved me several thousand in tax/penalties last year.
Thanks for the post. Gave me something to think about. I hope to start doing some p2p stuff, I’ll definitely look through your posts on the subject.
This would in theory be similar to a 401k loan. You pay yourself back the interest. Not as great a deal as it sounds, since you also pay the 1% service fee (lender) and the loan origination fee (borrower). But if you temporarily need money, and you have a an IRA at LC, seems like it would work. I could probably borrow money cheaper if i went fully secured from another source though.
Sounds like too much trouble but I suppose someone would find the value in it if it were possible.
Larry………..I know a guy with a great credit score who borrowed the max $35k at 5.5% at LC & then lent it all out. At the end of the day, origination fees/ interest & defaults took almost $3k off of the first year’s interest & almost $2k off of the 2nd. Counting idle cash time that it took to deploy the money & despite his above average ROI number of 11.5%………….he ended up making a profit of around $2.5k total for the first 2 years. Assuming his numbers stabilize & maintain for the 3rd year, I’m estimating his 3 year cumulative net profit before taxes to be in the $3.5k range.
So no one’s getting rich with that approach
I wonder if you can get a signup bonus and use it toward a loan payment?
You might want to open an IRA account at Lending Club, open a borrower account, fund your borrower account with your IRA money. And pay lendingclub fees for the priviledge. It’s a way to borrow your own IRA money from yourself.
Well, the reason I thought of the question is that I have plenty of assets but virtually no credit. I recently realized the value of a high credit score, and about 10% of credit score comes from having a “mix” of revolving (credit cards) and installment loans. So, how to get myself an installment loan? For various reasons, I don’t think I’ll be applying for a mortgage any time soon. And I don’t want to borrow money for a car; I already own cars. I sort of hate to pay the interest for “personal loans,” so it occurred to me that it might be cheaper to fund my own loan with Lending Club.