A lot of people dream of achieving financial freedom, having enough money to cover daily expenses and the cost of living without the need to work.
This is really the ultimate dream, having the freedom to wake up late, not having to commute to work or dealing with the day to day hassles of your business without having to worry about money.
Though this is just a dream for most people, there are actually some who have been able to achieve this dream and are living examples that it is possible.
If you ask them how they did it, most of them will likely say that they were able to achieve financial freedom due to investing.
Now when it comes to investing, one of the most common opportunities you will likely see is investing in the stock market.
But investing in the stock market is just one of the many different investment opportunities you can find. You can also invest in real estate, commodities, and so on.
In this review, we’ll look at an investment opportunity called peer-to-peer lending. It’s basically a way for regular people to loan money to other regular people who need it.
One of the pioneers for this kind of opportunity is LendingClub. It’s a company that provides people an opportunity to invest and borrow money.
As an investor, the amount of money you can earn back will depend greatly on the portfolio that you create with this company. But is this opportunity with LendingClub really legitimate? Or is it just a scam that you should avoid?
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LendingClub is a Legitimate Company that Offers Investment Opportunities
LendingClub is a company that brings investors and borrowers together to provide an alternative way to access credit.
Founded in 2007, the peer-to-peer lending company was one of the pioneers of this type of business and was a big hit during the global financial crisis.
When the recession hit, banks stopped lending money to people, making it almost impossible to access money when they needed it.
Enter peer-to-peer lending companies like LendingClub providing access to cash at low rates to people having difficulties getting a loan.
The money basically comes from people who have money and are willing to lend it to these borrowers at an agreed upon rate.
So the borrowers get their money while the investors get an opportunity for their money to grow. Based on what I’ve seen so far, I can say that LendingClub is a legitimate opportunity.
The company’s longevity is a clear sign that this is not just a fly-by-night opportunity. The money you invest can also really grow, but it will require some work on your part.
Of course, like any other investment, there are also issues about LendingClub. One of the most common issues I saw about this opportunity is that it is riskier compared to other types of investment.
This investment also requires more work and diligence compared to other types of investments. There’s also an annual fee and the gains are taxed as regular income.
You also have to deal with lower returns and not everyone is allowed to invest in this opportunity. I’ll discuss in more detail these issues as we progress further in this review of LendingClub.
Who Uses LendingClub?
LendingClub is designed for two types of people with one being those who need access to money and has a good credit rating. The other type are those who are looking for investment opportunities.
For borrowers, the company gives them another loan option other than banks.
The requirements are also not as strict as banks and the process is simple and easy. Interest rates are usually low, but it will depend on your credit rating.
To be eligible, borrowers would need a credit score of at least 600 and a minimum credit history of 3 years. A debt-to-income ratio of less than 40% is also required.
For investors, LendingClub offers them an investment opportunity to grow their money. The opportunity is simple, you will just loan money to borrowers and you earn from the interest rate of the loan.
You can view the different borrowers’ criteria and credit score, as well as the rate, that the company will provide and you can decide whether you will loan your money to them or not.
There are some requirements that you’ll need to meet to become an investor at LendingClub. In the next section, I’ll discuss in more detail what the requirements are and how this investment works.
How Does LendingClub Work?
LendingClub is a peer-to-peer lending company that provides an opportunity for both borrowers and investors.
Borrowers can ask for a loan without the hassle and strict requirement of a bank, while investors can choose to lend their money to the borrowers at a specific interest rate.
To become an investor, you need to meet certain requirements first. Now, this opportunity is not available to all states, so if you live in the states that aren’t supported you can’t be an investor.
There is also an income requirement and it depends on the state you are living in. In most states, though, the minimum income requirement is at $70,000 per year.
But if you have a net worth of at least $250,000, the minimum income requirement won’t apply. The minimum investment you need to put in your account is $1,000.
You can put in more money, but you’re only allowed to invest no more than 10% of your net worth. The minimum amount you can invest in a borrower is $25.
You can also put your LendingClub investment as part of an individual retirement account (IRA). The minimum amount needed for a LendingClub IRA is $5,500.
Once you meet the requirements, you can open an account and start investing. You can choose to invest in individual loans or in notes, which are fractions of loans.
Notes are the ones that you can purchase for as low as $25. The beauty of this method is that your exposure to a loan is only minimal, allowing you to get more notes.
The company offers two ways to invest, automated investing and manual investing. In automated investing, you just need to set the criteria and the company will purchase the notes based on your criteria.
The manual investing is where you will be the one to view all of the available loans and notes and select the one you want to invest in.
It’s important to remember that the higher the interest rate on the loan, the riskier it is. This means these are the borrowers that are more likely to default.
When it comes to collecting the returns on the investment, it’s important to remember that the money you invested in a loan will be returned to you over the terms of the loan.
Loans usually have a term of 36 months to 60 months and the interest rates will depend on the grade of the loan. An A grade will usually have a 7.5% interest rate while a G grade will have around 25.1%.
You can choose to sell your notes before they mature as there are other investors who are also willing to buy them. LendingClub has a Note trading platform for this. There’s just a 1% fee to sell a note.
Speaking of fees, it’s also important to remember that there are also fees charged to investors. You will be charged 1% for every payment that you receive. There’s going to be a 1% annual fee per note you own within the marketplace.
What Are People Saying About LendingClub?
A lot of people who have tried LendingClub have said that it was a good investment when it started, especially as a lot of the alternative investments at that time weren’t really giving anything.
The peer-to-peer lending company provided a good alternative to making money grow during the financial crisis and people were earning well.
Lately, though, investing in LendingClub has become harder and the interest rates you can earn has also decreased, which is just one of several issues about this opportunity.
Some people were saying that when it started it was possible to average around 9% to 12% interest rate on your investment. But now, the average has lowered significantly to around 4% to 7%.
It’s still possible to get high returns, but it’s harder now. One of the main reasons is that a lot of the loans are not performing, which is also why this type of investment is considered riskier.
In a lending business, the difference between making money and losing money is if people pay back their loan.
Though LendingClub has several criteria in place when it comes to screening borrowers, it’s still easy for people to get accepted by lying about certain details.
Credit information can be verified, but the other information is all submitted by the borrower so its easier to lie about these details.
The ranking system, based on risk, that the company offers is also not that helpful as a lot of investors have noticed that grade A investments are just as likely to default on their loans as grade G.
Since the investment is riskier because of the possibility of people defaulting, you’ll have to do more due diligence when it comes to selecting the kind of notes or loans that you will invest in.
This requires more work on your part, compared to other forms of fixed-income investment. The company does have an automated investing option.
But in order to get high returns and lessen the risk of investing in loans that borrowers are likely to default on, you need to manually choose the loans you want to invest in.
You also have to deal with several fees, like an annual fee and a fee for every payment you receive. The money earned here is also taxed like regular income, so you pay more in taxes here compared to other investments.
The last issue with LendingClub is that this opportunity is not really available for everyone. You have to meet certain requirements before you can open up an account with them.
The state you are currently residing in and your annual income or net worth are two of the major requirements that can hinder you from participating in their investment program.
What I Like about LendingClub
Now that we know what LendingClub is and what they can really offer, it’s time to discuss what I like about this opportunity.
- One of the first things that I like about LendingClub is that they offer the possibility of getting high returns on your investment compared to other fixed-income assets. If you are savvy enough in choosing the loans you want to invest in, it’s very possible for you to obtain high returns on the money that you put in.
- I also like that LendingClub has an auto investing feature, where you just set the criteria that you want and the company will be the one to invest your money for you. Sure, it is still better to do the investing manually since you’ll likely achieve higher returns this way, but it’s still a big plus that this option is available. People who don’t really have the time to scrutinize and analyze available loans can just automate their investment using this method.
- Another thing that I like about LendingClub is you don’t need to put out a lot of cash to invest. The minimum amount you can invest in is just 1,000, which is more affordable than some of the other investment vehicles. In this way, even average people can easily invest their money into the company.
- I also like the secondary market of LendingClub, which allows you to buy and sell notes so you can exit early from an investment or purchase good loans that other people are selling.
What I Dislike about LendingClub
Of course, not everything about LendingClub is good and dandy, as there are also things about this opportunity that I don’t really like.
- One of the things that I don’t like about LendingClub is that the investment is riskier compared to fixed-income investments. The ultimate risk with this peer-to-peer lending is that borrowers could default on their loan, thus you won’t earn anything. Though the company has put in place several checklists to minimize the risk of the borrower defaulting, there is still no guarantee that they won’t default, even the ones considered as a low-risk borrower.
- I’m also not a fan of LendingClub’s investment opportunity requiring more time and work on your part if you really want to achieve high returns. Though the company has an automated investing method where you just identify the criteria you are looking for and they will do the rest, the best way to really maximize the potential of this investment opportunity is to do it manually. This means that you need to analyze each loan available and make an intelligent guess on which among them are likely not to default. From there, you can build a nice portfolio and just monitor it constantly to adjust when necessary.
- I’m also not a fan of the many fees that you need to pay to use LendingClub’s investment service, as well as your earnings being taxed as an active income. Though I understand the reason for the fees, it’s just a bit annoying as these fees and the taxes will eat up your earnings. This means that you really have to aim for high returns since your money might only end up paying for the fees and taxes.
Is LendingClub To Be Recommended?
After learning more about what LendingClub really is and what it can bring to the table, I would say that this is an opportunity that is worth checking out.
You just have to make sure that you meet all of the requirements to open an investment account. I don’t fully recommend this opportunity due to several reasons.
The major reason is that the investment is riskier compared to fixed-income investment. This means that you have to be willing to accept possible losses on your investment.
In the case of LendingClub, the risk is basically investing in a loan that a borrower could default on. This is really one of the major problems that investors experience with this opportunity.
LendingClub does have some checklists in place and they have categorized loans based on their risk. The ones with the lower rate are usually the less risky ones and the ones with higher rate are the riskier ones.
But there are still a lot of investors who experienced a less risky borrower still defaulting on their loan. So this will be your biggest consideration when you decide on investing here or not.
You can minimize the risk, but it would require more work and time on your part as you’ll be scrutinizing available loans that you can invest in and analyze which ones are likely not to default.
So you either accept the possibility of losses when you rely on the automated investing or exert more time and effort here to minimizing the possible loss and maximizing gains.
However, I do also recognize the potential that this opportunity offers, which is why I recommend that you check it out yourself.
See what the company is offering and decide if it is an investment opportunity that you want or add to your portfolio. Just be aware that, like any other investment, there are risks involved.
So don’t come in and expect that you’ll always make money when you invest here. Expect that there will be the possibility of losses as well, so you can do something to minimize them or prepare for them. If you don’t, you’re just setting yourself up for disappointment.