Alternative investments have been a buzz word in our industry over the past few years. It has been even more prominent since the 2008 financial crisis as investors were running to the hills away from stocks.
If I told you that there was an alternative to investing to the stock market, would you be interested?
What if I told that this “investment” has been averaging just over 9.64%? Now would you be interested?
I thought so.
Trust me. I was, too.
Peer to peer lending has gained a lot of popularity over the years and at the leader of the pack has been Lending Club. I first heard of Lending Club through their impressively active social media marketing campaign and began investing with them a few years back.
First, a few disclaimers. I’ve only invested a couple thousand with Lending Club at this point, so it does not make a large portion of my overall investment portfolio. Mostly, because I didn’t know much about them and wanted to test drive them first. Thus far I’ve been more than pleased.
Going forward as our emergency fund is well above an 18 month surplus, the wife and I have talked about finally starting to try and make some interest on our money. We have almost her entire paycheck going into her 401k at work and I’m getting close to maxing out our SEP IRA, so it only makes sense to move some money into a different bucket. Enter Lending Club.
My next plan is to do a post to show you how to build a portfolio with them. I’ll also share how my returns have been, too. For now, I wanted to introduce to what Lending Club is. To do so, I decided to go straight to the source and interview them. Here’s what they had to say.
Interview with Lending Club
1 In 140 characters or less, can you describe what Lending Club does?
We connect investors directly to creditworthy borrowers, bringing value to both by reducing the cost of the traditional banking system.
2Okay, now expand upon that and fill us in on how the Lending Club idea first got off the ground.
Our CEO, Renaud Laplanche, used his credit cards to expense his previous startup. When he looked at his bill, he realized that — despite a great credit history — he was paying 18 percent interest and someone was therefore making a LOT of money. This discovery inspired him to do some research. He learned just how inefficient the traditional bank lending model is: Banks give 1 or 2 percent interest on savings accounts and CDs, while pocketing 16 to 19 percent on credit card loans. Renaud realized there had to be a better way, and founded Lending Club in 2006 to give investors access to that interest income, while also providing creditworthy borrowers with better interest rates.
Lending Club provides lower cost loans to prime and super prime credit consumers. Our rates are typically 20-30 percent below traditional marketplace alternatives. The loans are funded directly by investors who receive steady cash flow and predictable, strong returns. Since inception, the platform has generated a 9.6 percent net annualized return – this includes a time that saw the worst credit crisis since the Great Depression.
Most importantly, the entire process – for both borrowers and investors – is transparent, fast, easy and automated. We make information on every loan ever issued through the Lending Club platform available on our website. Lending Club has passed $300 million total loans funded. That’s amazing.
The Lending Club Difference
3With other peer to peer lender competitors in the mix, what do you contribute to the success of Lending Club?
The key to our success has been our focus on prime and super prime borrowers. This focus has allowed us to deliver a fantastic experience in the form of lower rates to borrowers and steady returns to investors. We now have 4 years of history and $320 million in funded loans to this population — a tremendous amount of data which we are continuously mining to get even smarter and deliver an even better experience.
4How much as social media had an impact on the building of your brand?
We got our start in 2007 as a Facebook application. It drove strong demand among enthusiastic investors who really helped carry the message virally to a much larger audience. We quickly expanded beyond Facebook to reach a more mature demographic as we grew, but social media has remained a valuable way for us to engage with borrowers, investors and those interested in learning more about our business.
The Right Fit
5Who is the ideal client for a Lending Club loan?
We cater to borrowers with good to excellent credit. While you may be approved for a Lending Club loan with a FICO score of 660, our borrowers have an average FICO score of 716, an average income of $70,000 and are generally in their 30’s. For these prime borrowers, our low-interest, fixed-rate personal loans represent a money-saving alternative to high-interest credit cards.
Debt consolidation continues to be the top use for our loans, but we’re seeing substantial growth in loans for home improvements, small business, and for the funding of major purchases.
6 I’ve been investing with LC for a few years and have been very pleased. What risks would you disclose to anyone considering investing with Lending Club? What type of investor might your notes be too aggressive?
Congratulations on your success. Our growth has been driven by existing investors like you whose positive experiences have caused them to increase the size of their investments, add retirement accounts, and recommend new investors.
When speaking about risk, most investors generally think in terms of loss of principle. The good news is that for investors at a moderate scale who have built a diversified portfolio of 800 loans or more from Lending Club (which you can get for as little as $20,000), there has been NO ONE who has lost money. This includes all investors regardless of timing of investment (i.e. even before or during the recession) or their investment strategy. The average return of these investors has been over 9 percent, with 91 percent earning between 6-18 percent.
As you know, however, all investment involves risk and those associated with an investment at Lending Club can be reviewed in detail in our Prospectus which we would encourage you to read: https://www.lendingclub.com/info/prospectus.action.
Belly Up, Now What?
7 The question of all questions, if Lending Club were to go under how would an investor go about getting their money back?
Lending Club has an excellent cash position (more than $35MM) and the backing of deep-pocketed investors. In the unlikely event that we were to go out of business, outstanding loans would not be affected. Investors would still continue to own their Notes and receive their payments. Any cash balance in investors’ accounts is held in an FDIC-insured Trust Account at Wells Fargo and would be returned to investors.
In our absence the loans would be serviced by our back-up servicer Portfolio Financial Servicing Company (PFSC), one of the main backup servicers in the country with over $9 billion under servicing. The Notes are debt obligations by Lending Club to investors, while the loans are assets of Lending Club for an identical value. The servicing proceeds from the loans – which would be collected by PFSC – would be used to pay the Notes held by investors. It is important to note that Lending Club has no other material unsecured obligations that compete with investors Notes, and the sheer size of the platform provides protection to investors: even if other corporate obligations were to come up and add up to a few million, the $250M+ of notes would still capture 98 percent+ of the proceeds. We do have secured obligations, but those are over-collateralized and will not compete against the Notes held by Lending Club investors.
8 What are the next steps for Lending Club?
As we continue to grow and pass more milestones, we’re seeing increased interest from high net worth individuals and institutional investors. We are part of a new asset class, and now that we have four years of performance history under belts, these larger investors are increasingly confident and excited about investing on our platform. Bringing larger investors on board of course helps us to continue making large growth strides, and this growth helps us to provide our retail investors with more robust analytics and features as well.
For our borrowers, we’re continuously focused on differentiating ourselves from the banks with smooth processes, better rates and exemplary service and support.
9 Last and most important question: what’s your favorite burger? A) In-N-Out Burger B) Five Guys C) Some other burger joint?
Note from me: Good answer, Lending Club. Good answer.