As 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?
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?
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