I love Lending Club. If you are a reader or follower of the blog, you probably know this. I usually talk about Lending Club at least once a month. I am just really happy with the services and incredible interest rate that I earn on my investments with them. You can read my review of Peer-to-Peer Lending, or you can also see how I have been earning over 15% return on my money annually with the loans I am making.
Today, I wanted to tell you how I finally got around to investing in “bad” loans or loans in default with Lending Club. You are probably wondering why in the world someone would invest in a loan where the borrower has not made all of their payments. It is because of the incredible rate of return. Many of these loans can be bought through Lending Club’s Note Trading Platform for pennies on the dollar. The Note Trading Platform is an electronic marketplace where individuals and organizations can buy and sell Notes corresponding to consumer loans issued through the Lending Club website. Sellers list Notes that they would like to sell and enter an asking price. Buyers browse Notes that are available for sale, review payment history and the evolution of the borrower’s credit score, and buy Notes at the asking price.
I recently bought a loan directly from another lender who had invested $25 dollars in May 2009. After seven months of paying on time, the borrower started having trouble making loan payments around Christmas. I ended up buying the remaining amount of the loan, approximately $15, for $5 in the hopes that eventually the lender will make good on his or her commitment. My hunch paid off, and yesterday, I received my first payment, interest, and late fee from the loan. The loan has 14 more months left which should net me a total of $15 on the $5 I spent to buy the $25 loan. So that is a 200% profit on my investment! While this is only a $5 investment that will pay $15, it just goes to show how great buying loans through this trading system that have already been issued to a borrower can be to an investor.
Of course, not all loans traded on the Note Trading Platform are in default or even late. Sometimes, people just want to divest themselves of their loans. Maybe they need money now for whatever reason and cannot be wait the standard three or five years that they will receive payments over the life of the loan. The loan trading system is a great way to supplement your normal Lending Club investments with an even greater potential rate of return than the site’s standard loans.
There are bad loans out there. Every lender makes them no matter how careful they are. It is a part of doing business as a lender. Lending Club’s annualized default rate is only 2.22%. Since they have formally registered with the SEC in 2008, Lending Club has funded over 12,000 loans valued at $116.8 million. Over $8.1 million has been paid to investors in interest. A complete list and breakdown of Lending Club’s statistics can be found on their website.