How Much Can You Make With Lending Club?
Posted by Kevin McKee on March 04, 2013As you all know I think Lending Club is a great place to invest money; I like it much better than investing in the stock market. I was actually talking with a friend who recently signed up for Lending Club and he asked, “How much will I really make with these investments?”
It’s actually a really good question.
There are actually three really important questions that are not very clear when you buy a note on Lending Club:
- How much money will I make when the note is fully paid?
- What is my overall return percentage?
- How long will it take for me to get my initial investment back?
Answers to these questions aren’t given when you are trading notes on Lending Club. That’s why I built the Lending Club Profit Calculator (my very first javascript calculator!) to help.
You give it four pieces of information (interest rate, remaining payments, outstanding principal, and asking price) and it tells you how much money you’ll make, your return %, and how long it will take until you break even.
If you trade notes on Lending Club, this is a really great tool that I recommend you use when trading.
Why Are My Returns So Small?
If you invest in a note at 15.99% that has 58 remaining payments, $24.00 in outstanding principal and a $24.50 asking price, your total return will only be 8.54%.
But why do I only get 8.54% when the interest rate is 15.99%? Is Lending Club lying?
No they aren’t lying. The reason the return LOOKS low is because every month your borrower makes payments and they will pay interest on a lower balance.
If you lend $25 at 15.99% APR, the borrower will pay about $0.33 cents of interest on the next payment. If the balance is only $10 at 15.99% APR, the borrower will only pay about $0.13 cents of interest on their next payment.
As the value of the loan goes down, so does the amount of interest the borrower pays. You are still getting 15.99%, just on a smaller balance.
How Do I Increase My Returns?
If you really want to get a full 15.99% return on your investment, you can do it on Lending Club. The key is to REINVEST!
Every month your borrowers (hopefully) make payments and you have extra cash on hand. If you don’t reinvest that money then you’re getting 0% on it. However, if you reinvest it at 15.99% again, then obviously you will make more money if your new borrower pays on his loan.
If you want to keep your returns high then you’ll want to reinvest. If you would rather have the cash in your pocket then you don’t need to reinvest. If you don’t want a return but don’t want to reinvest in Lending Club, you can pull it out and put that money in the stock market or a savings account. It’s entirely up to you.
If you are interested in opening an account with Lending Club, you can sign up on their website. You may want to read my tutorial about trading notes on Lending Club and remember to use my new Lending Club Profit Calculator!
Readers: If you are using Lending Club, what kinds of loans are you investing in? If you’re not using Lending Club, what else are you investing in?
Lending club is awesome!
I signed up in august with around 50$ and have continued to add money as I have gained confidence. I’m currently at 2,100 with 12% apr. Last week I started throwing around the idea of taking half the money in from my money market account and dropping it into lending club. 10K would make a nice chunk of change in 3 years when I’m ready to purchase a house.
The question is how liquid do you want your funds? I’m guessing you can pull from your money market account fairly easily. If that 10k is in Lending Club, you’ll probably have it tied up in investments/loans so the only cash you could pull out would be the interest you earned. You should think about how you are going to get that money out of LC in 3 years before dropping 10k in right now.
Sidenote: I currently have money invested in Lending Club but it’s not my first choice if I need the cash sooner rather than later. It takes a while to sell notes and get money out if you need it for that downpayment.
Stu and Gabe – Lending Club is fairly liquid. With current and performing notes it is possible to divest yourself pretty quickly and easily. I have sold $500 dollars in notes in less than a day before and most were at a two plus percent premium. Any grace-period or late loans will require a discount, but all notes can be sold if priced correctly. If your timeline is three years for the money, you will have ample opportunity to invest the money, reinvest the payments, and sell out a few months prior to purchasing a house.
I am currently using Prosper, which is basically the same thing. I have only $75 currently. Which in the future I am planning on adding more but currently focusing on reducing my debt and planning a trip.
It is really nice to see a decent return on such a small amount. I am currently receiving more interest than what my ING savings account (currently Capital One 360) incurs.
I have most of it in a high risk loan and a medium risk loan. I figured with such a small amount I can afford that risk. When I start investing in it more, I plan on spreading it more evenly across the different risk levels of loans.
I’m still cloudy on what this site is for. Is it basically for you as an individual to lend money to others for an interest rate return?
Thanks for the calculator!! Works like a charm! I had a few loans default at first that really messed up my returns but so far I’m doing pretty good and being much more cautious. I learn best by losing first so now I’m a pro
.
Does it require monthly investments?
Nope, you can deposit money in any timeframe suited to you!
Does it require monthly investments?
Can not quite figure out what this is but if you are a lender here, there is a lot of risk that may not be evident. Also, in light of all the scams and bad investment ideas that have left people with nothing, I would be very careful here.
Steven – Peer-to-peer lending is an industry that has been around since 2006 with the start of Prosper. Today both Lending Club and Prosper have combined to lend almost $2 billion in loans. While there is inherient risk in all investments, peer-to-peer lending has proven to be a successful and dynamic place to invest you money.
I’ve been investing in lending club for about 2.5 years now. I started off with $500 to see how things would go, then eventually added another $500 to play with. I set some clear specifications that each note I would invest in would have to meet, and have done quite well so far.
1. Never invest more than the $25 min per note….I’ve broken this only once for a note I felt like was graded incorrectly and it paid off…but I try to stick to $25.
2. Always invest in low value notes…I try to do nothing over $10k. If someone is going to file for bankruptcy, likely under $25k or so in total debt won’t be worth it. So I look at total debt+value of the loan.
3. Always check for verified income. While lending club can be fooled, you have a much better chance of having a legit note if someone has faxed in their pay stub.
So far I’ve only had 1 default, and a couple early playoffs.