Lending Club: The Cost of Inactive Money
Tip It!I updated our account in Quicken over this past weekend. In doing so, I was able to get a better look at the “real world” performance of my Lending Club portfolio. According to Lending Club, my net annualized return is currently right at 9.60%.
According to Quicken, however, I’m running at about 7.5%. Why the difference? The primary cause of this difference has been laziness on my part resulting in an uninvested balance that hasn’t been earning any interest.
When I transfer money in, I don’t always get around to investing it right away, and when payments come in, I sometimes let them accumulate for awhile before re-investing. Unfortunately, Lending Club doesn’t pay any interest on your idle funds.
While it would be great if they did pay interest on your uninvested balance, there are apparently a number of regulatory hurdles that a non-bank must clear in order to do so. The good news is that, as your portfolio grows, a small uninvested balance has much less of an impact.
Regardless, the lesson here is to actively invest/reinvest any available funds if you want to maximize your return. The good news is that Lending Club has an auto-reinvest function (see below) which will automatically create a new investment order when you have funds available, and then e-mail you when it’s ready.
I haven’t really used the reinvest function because I prefer to hand-select my loans. However, I could (and probably should) use it to at least remind when I have funds available. Once I get the notification, I can always login and customize the order.
Published on December 23rd, 2009 - 5 Comments
Filed under: Saving & Investing
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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December 23rd, 2009 at 2:47 pm
I certainly ran into this problem (idle funds not collecting interest) when purchasing their free self-directed IRA. It takes awhile to purchase $15,000 worth of Notes!
Another area of idle funds is when selecting Notes to purchase BEFORE their approved. During the 2 week approval period, the borrower can cancel the loan or Lending Club can terminate the loan request as a result of not meeting their criteria. While your funds are given back to you if a loan is canceled, they’re tied up earning no interest for the entire time.
As mentioned in the article, it’s a good idea to set your Reinvest criteria in order to receive an Email, even though you may not use the selection made.
December 23rd, 2009 at 8:48 pm
Thanks for the heads up. I recently invested more money in Lending Club and I soon realized that not all funds get invested to I have to keep checking back and reinvesting funds. I didn’t realize that they calculate your ROI with money in cash. That doesn’t seem right.
December 26th, 2009 at 10:31 am
Idle money in a regular savings account pays less than 1% interest, but there is zero risk. It’s a trade off.
John DeFlumeri Jr
December 26th, 2009 at 11:55 am
I have given up waiting for LC to invest the money per my instructions. I just keep track of the money available and purchase $100 notes when I reach that level. I will give it a year to see what my actual return is.
January 14th, 2010 at 7:36 pm
Lending Club fees can be pretty high.
I have $125 invested including the $25 bonus and I noticed that they take their 1% cut from the payments including principal and interest. Either that or they always round up to $.01 and they make a killing on $25 loans.
My account value has increased by $1.37, but the interest paid and interest accrued amount to $1.41. They have collected $.04 in fees or 2.8% of my interest payments so far. Let’s just say I think they have a solid business model. I am still making better yields than I would with a traditional CD or savings, but LC itself is making good money.