As I promised last week when I published my initial Lending Club review, I’m going to spend a bit of time walking you through the Lending Club loan selection and funding process. Beyond simply investing in a few loans, however, I decided to spice things up a bit by setting up an experiment to compare the performance of low vs. high risk loans.
As you can see from the screenshot below, I started with an initial balance of $1, 000. From this main screen, I simply clicked the “Invest” link to get started.
One of the first things that you’ll notice when you arrive at the investment section of the Lending Club website is that you have two basic options for finding loans in which to invest. You can either browse and select the notes manually, or you can rely on their automated LendingMatch system to find suitable loans for you.
Browsing and selecting loans
Picking out loans manually is actually a pretty interesting process. Over in the right sidebar, there are a number of checkboxes for things like your desired interest rate and the prospective borrower’s credit score, debt-to-income ratio, and delinquency history.
For starters, I filtered it down to borrowers in the highest credit score category with less then 10% DTI and no delinquencies in the past two years. Guess what? I came up empty… I guess people who are completely on top of their finances don’t need to hit up Lending Club for a loan.
I then backed it down to accept those with a 750 or better credit score, but with the same DTI and delinquency requirement. This time around I got eight hits.
This is where it gets interesting… When you click on the loans in the list, you gain access to a ton of information.
For starters, you get loan details including amount requested, the purpose of the loan, the loan grade (A1-G5), interest rate, monthly payment amount, and funding details. You also get to look at the borrower’s (self-reported and thus unverified) profile information, including home ownership status, employer, length of employment, and gross income and a synopsis of their credit history based on info gleaned from their credit report.
Beyond the hard data, the borrower is allowed to write out an expository description of what the loan is for, and you are free to post questions for the borrower to answer. Of course, Lending Club doesn’t verify the description or their answers to your queries, so it’s probably best to take this stuff with a grain of salt.
As interesting as this is, it’s also a bit of a time suck — especially if you’re looking to invest in a reasonable number of loans. The good news is that, as noted above, they also have an automated loan matching platform.
Automated loan selection (and the experiment)
If you’re rather not select your loans manually, you can use LendingMatch instead. As you can see from the screenshot below, all you need to do is enter your desired investment amount and then drag the slider to your desired interest rate (keeping in mind that higher rates correspond to lower quality borrowers).
I started by requesting $500 worth of the lowest risk loans. What I got in return was a portfolio consisting of twenty $25 notes with an average interest rate of 9.82%. As you can see from the screenshot below, these were primarily Grade A notes, with some Grade B mixed in.
Next, I decided that it would be interesting to compare the performance of these more highly rated notes against a riskier selection. As such, I cranked the slider to the other end and wound up investing another $500 in a collection of twenty $25 notes with an average interest rate of 15.42%. In this case, the vast majority were Grade D notes, with some Grade E, F, and G mixed in.
Assuming that Lending Club has priced the risk properly, these two portfolios should perform similarly after you factor in the higher likelihood of default in the ‘high risk’ group. Only time will tell, but I’ll be tracking the performance of the two portfolios and plan on posting periodic updates. Stay tuned!
Speaking of risk, another important factor is diversification. The more you spread your money around, the less likely you are to get burned by a particularly irresponsible borrower. The minimum note size allowed by Lending Club is $25, and I took full advantage of this, investing a total of $1, 000 in 40 different notes.
All in all, I’ve been quite impressed. The Lending Club interface is very intuitive, and they promise great rates. It’s far too early for me to be able to comment on actual investment performance, but I know several very satisfied customers. Hopefully I’ll be joining them.
If you’d like to play along, then by all means…