Beating Broke

Personal Finance from the Broke Perspective

Can You Fund Your Own Lending Club Loan?

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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.

 

Lending Club 2Q2012 Update

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Another three months have passed which means it’s time for another update on my Lending Club account.  If you’ve been following my LC updates, you know what this is all about.  If not, you can catch up by starting with the Calculating a Real Rate of Return on Lending Club post, followed by the first Lending Club Return Update and then Lending Club 1Q2012 Update.  If you’re interested in opening your own Lending Club Account, you can do so here.

Now that we’re all on the same page, let’s take a look at what happened this last quarter.

First Lending Club Delinquency

The biggest thing, I think, to note for this update is that I finally had my first (and second) delinquencies on loans.  The first, I sold.  I was lucky enough to be able to sell it for break-even on the remaining principle.  I lose out on the interest that it would have paid through to maturity, but if it went into collections, I likely would have lost more than that.  I should have paid a bit more attention, but I believe the first was a C grade loan.  The second, which just went into late status at the end of June, is a D grade loan.  I’m holding on to this one.  My reasoning behind holding on to it is three-fold.  First, and more importantly, is that the loan is showing as late, but it is also showing that the borrower has entered into a payment plan.  While that isn’t ideal, it does show a desire to pay it in full and avoid the collections process.  I’m giving the borrower the benefit of the doubt that they’ll be able to pay the loan off.  Second, the remaining balance on the loan, including interest, is $6.06.  If I lose that, it won’t break my portfolio, or my rate of return to any significant degree.  Third, and finally, I’m keeping it as a part of the experiment.  I’m curious to see how the process works, and how it will end up.  How it does end up will likely help me make decisions on what to do with any further late loans in the future.

Lending Club Returns Remain Above 13%

After it’s all said and done, the one late loan in the bunch could end up dropping the rate below 13%, but it hasn’t been written off yet.  If, however, it remains in a late, but paid, status, my rate is doing pretty well.  As of 7/4, my account is showing a NAR (Net Annualized Return) of 13.58%.

“My Net Annualized Return is at 13.58% on @lendingclub – @BeatingBroke”  <– Click to Tweet This

I’m still amazed by that rate of return.  Yes, I do realize that I’m likely having some luck so far.  Another factor might include the size of my portfolio.  It’s climbing, but it’s just barely over $500 total.  As the portfolio size grows, the likelihood of a written off loan grows with it.  The flip side of that, of course, is that the larger the portfolio gets, the more diversified I’ll be, and the less one written off loan will affect my rate.  One nice part of the size of the portfolio is that it’s nearing a self-sustainability mark.  Currently, the total monthly payments coming in is $23.67.  With that coming in each month, I could easily stop contributing to the account, and merely use the payments as the renewing funds for investment.  I don’t plan on doing that, but I certainly could.

Lending Club Account Dashboard
Lending Club Account Dashboard

Adjusted Lending Club Risk Ratios

Previously, I spoke about having adjusted the loans I was buying to be almost all C and D grade loans.  While I am not abandoning that idea, I’m adjusting it slightly to try and keep it slightly more balanced.  What I don’t want to happen is to find myself with ALL D grade loans.  The lower grade loans, while paying less in interest, are a lower risk.  I’m now trying to keep the portfolio to a pretty nice bell curve that centers somewhere between C and D.  One thing to keep in mind here is that it’s somewhat hard to find the A and B grade loans that have any return at all when you have to purchase the loans through the FolioFN trading platform, which tends to push the curve towards the D side anyways.

That’s it for this quarter’s update.  With a little luck, and some shrewd investing, I hope that next quarter’s update will be just as good!

Want to open your Lending Club account? Click here.

Do these updates add any value for you?  What would you like to see change in them?  What do you like?  And, what has your experience been like with Lending Club?

 

Lending Club Returns 1Q2012 Update

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If you’ve been following along, you know that I’ve been performing a bit of an experiment.  I’ve been taking 10% of my earnings from this and other online ventures and splitting it evenly between Lending Club and Sharebuilder accounts.  The idea was to see what kind of returns I could get from the two, and to test for stability.  I’ve been running the experiment for a little over 6 months now, and I’m calling it done.  The difference has been so drastic, that I don’t think there’s any point in running it any longer.

In short, Lending Club is kicking Sharebuilder’s butt.  Really, the only thing that the Sharebuilder account has going for it is that the chance of default on any of the investments is extremely low.  So, I suppose that it is possible that in 5 or so years, the gains on the Sharebuilder account could potentially be better.  However, as I’m about to show you, the short term results are strongly in Lending Club’s favor.

My Lending Club Returns

As of today, Lending Club is telling me that I’m seeing a return of 13.15% on my account.  My Sharebuilder account is currently reporting a return of -16.42%.  It doesn’t take a math major to come to the conclusion that Lending Club is performing far better.  To date, with a bit over 2 years of total history, I haven’t had a default in my Lending Club account.  I’m pretty sure that has more to do with just getting lucky, than with any effort of my own. Some other interesting numbers, besides the return: The portfolio has grown enough that it brings in enough in principle + interest payments to reinvest monthly now.  The monthly interest gains, as of the end of March, have now exceeded $4 monthly.  It’s not much, but it’s been fun watching that number grow.

My Lending Club Portfolio

Open a Lending Club AccountWhen I first started out investing in my LC account, I was investing in mostly A, B, and C investments.  I’ve recently shifted that to be mostly C and D investments. Why?  Well, as I mentioned in my post on selecting Lending Club investments, I have to purchase my investments through their trading platform rather than directly invest in the loans.  What that means is that in most cases, I have to absorb a small percentage of profit to the original investor.  So, a loan that has an actual interest rate of 14% might only return 11% to me because I bought it at a higher price than what it was worth in principle at the time.  Because of that, I have to invest in the higher grade loans in order to maintain a higher return rate.  But, I’m OK with that.  Even the worst graded loans that LC has are still well above what a traditional bank or credit union would lend to.  And, at less than $25 per investment, I can afford to take the risk.  I’ve diversified the account so that one or two defaults isn’t going to destroy the account.  Sidenote: If you can buy your LC loans directly, I suggest you check out Peter at SocialLending.net’s post on how he’s investing in 2012. He’s got several filters and some interesting insight into how he’s set up his investing that are worth the read.  They’re somewhat useless to me because of the way I have to invest, but will be useful to someone who can invest directly.

Lending Club, Going Forward

With the end of the “experiment”, I’m now putting the full 10% that I had been splitting into my Lending Club account.  The overall total for the account is still at less than 3% of my overall investment portfolio (including retirement investments), but it is growing.  At some point, I’ll have to decide if I want to continue to add to the account or not, but with the returns that I’m getting, and the luck I’ve had in the default area, I can’t see wanting to stop investing in the account.

Have you given Lending Club a try yet?  How have your returns been?  What’s your default rate?