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Lending Club’s spike in defaults is a dead investment

When I started with Lending Club many years ago (pretty much when LC started) I was excited. I saw it as a great addition to my investment portfolio. I had a control over the notes I was invested in and I liked it.

Then came some changes and investing in Lending Club’s notes changed to gambling. With little information available about the borrowers, their ability to pay, any means of assessing their credibility, ability to ask them questions and see if they are worth lending them my hard earned money, good quality notes gone snapped away by institutional lenders who go priority to invest, I decided to stop investing with Lending Club.

The whole idea of a investor was gone, cannibalized by big banks. Now, Lending Club is yet another big bank. And, if you are lucky, you may buy a few notes which may survive til maturity.

Two years ago I decided to revive my investing in Lending Club notes. I changed my selection rules and decided to invest only in low risk, good quality notes (how would you actually determine that is still a mystery to me). My new screener was set to select notes where borrowers had no previous records in their credit report, good score, long employment, owned a house, and the amount of money asked was less than $10,000 dollars, ideally $5,000 only. Also, I was looking at the ratio of overall payments, salary, and all possible data I could digest from LC platform. And let me be clear, the data provided are poor, so it is still like a chimpanzee throwing darts at notes to pick rather than analyzing them.

I deposited $500 dollars to begin with and though, I might build up a portfolio and if I saw a progress, I might add more money.

But, after all the screening possible, about five months after I started my first so called good quality note went into a grace period, then late, then default, and charge off. That was a cold water to my heated up stove. But I said to myself, “well, this may happen, there is some ratio of defaults even with notes of “A” grade.

But few months later a second note went into a grace period, then late, then default, and charge off. I didn’t like it.

At that point I knew, Lending Club was not for me anymore. You have absolutely no control over the notes. Unlike other investments, mainly options I trade, there is no way to adjust your portfolio or defend it. You just hopelessly watch your money disappear.

And collection? Has anyone seen Lending Club to successfully collect on any borrower and recover the loan? I have seen none!

But I still decided to hold on. I just knew I wouldn’t add new money. I was only willing to let run what was in the account and see if this could overcome the defaults and be actually profitable. It was growing up, slowly, nothing exciting, but it was.

Then I noticed another thing – my screener stopped returning any notes available to invest which would meet my criteria. For at least two or three months I had nothing to invest. My cash started piling up nowhere to be invested.

And then, a third note went into a grace period. That was the last nail into my Lending Club investing coffin. I decided to cash out the account, collect what’s left, and move my money to may options trading account. I sold all notes, fortunately, on the secondary platform and move my cash out. Only two late notes are still left hanging in there, and I expect them to default and be charged off.

But today, I checked the platform and saw another note (already sold) went to a grace period. The borrower made only two payments, and got late after that.

Lending Club Defaults

All I can say now, I am glad, I cashed it all out. And I am done with Lending Club.

Another thing you may notice, is that, Lending Club and Folio both charge you exorbitant fees for pretty much nothing. Not anymore.

What is your experience?

2 responses to “Lending Club’s spike in defaults is a dead investment”

  1. DivHut says:

    Appreciate your truthful experience with LC. I remember when these lending platforms first hit the mainstream. Many of our fellow dividend investors have decided to try them and Prosper I believe was the other one? The idea sounds great but I guess reality is a lot different. I never went into the lending space but appreciate your take on it. In fact, I haven’t read much about this space in a long while. Probably for good reason.

    • Martin says:

      I haven’t read much either. I think it died off for smaller investors and when LC changed their platform it went down the barrel. If they want my money to be used, they have to make their platform more open to interacting with borrowers. They are now hiding behind the borrowers’ privacy statements but it is my money in the first place! You want my money, well, tell me everything you can about yourself and why should I lend you my cash. If you apply for a personal loan they strip you naked before they lend you a penny. And honestly, I lost my faith in LC screening process.

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