Is Lending Club A Scam?

You might have heard about Lending Club, the peer-to-peer lending network. But is it legit or is it a scam?

We’ll with the number of people invested, the transparency of the company, and the general positive reviews, including my own, it is pretty unlikely that Lending Club is any kind of scam. Lending club is a legitimate way for investors to lend money to people looking to borrow. Of course you should do your homework and if you do decide to invest, start slowly with a small percentage of your overall retirement savings. There are some real risks as with any investment. And although the returns have been great for me so far, peer-to-peer lending is new. With anything new, you need to be cautious.

To get a overview of how lending club works read my Lending Club Guide. Also read my personal reasons for investing in Lending Club: Why I Invest in Lending Club for more information on why I made the decision to invest with them.

Lending Club Risks

There are some very real risks with Lending Club. It allows you to invest your money into notes, made up of other peoples loans. Which means these people could end up defaulting on the loan, leaving without a dime. One of the ways to prevent losing everything is to diversify your investment. Never put more than $25 dollars into any one Note so that if you do happen to get some defaults you’ll only lose part of your investment.

Defaults are part of lending money and the default rates are freely given by Lending Club. So although defaults are bad they are expected and you can still make a reasonable rate of return with some notes that default. The real risk is more of a major economic downturn. A huge drop in the rate of employment could result in a larger number of defaults than normal, which could result in a loss of some or all of your investment.

We did just experience such a downturn, so there is some data available on how default rates can fluctuate. It appears that Lending Club can withstand such downturns but that risk is still something to consider. Notes are either three or five years so even in good economic times, a lot can happen over the course of that many years.

It is worth noting that Lending Club does pursue delinquent payments. I’ve had several notes go 60-90 days late and not go into default or be written off.

Another Risk:

Because peer-to-peer lending is so new and is growing so fast the default rates might not be accurate. So many more Notes are being services each year than are reaching completion. Most defaults happen towards the end of a Notes life so there is a chance default rates could be higher than advertised. There is a helpful website LendingStats.com that lists lots of solid data for both Prosper.com and Lending Club.

Biggest Risk

The biggest risk is to Lending Club itself. The company does appear to be both profitable and stable (read the Prospectus) but if it does happen to go bankrupt you could lose everything. Lending Club itself does have a plan so the loans will go to another company, but if borrowers see the company go under, they may decide to quiet paying.

Should You Invest

Personally, I invest a small amount of money each month in both Lending Club and Prosper.com, another peer-to-peer lending service. The reason is that I’m young and am looking for higher returns than those that bonds can give me at this point. I’m having really great success so far but you should still take it slow and see how things go for yourself.

You can start a Prosper.com account with as little as $25 dollars and $250 for Lending Club I believe. So if you want to try it out to start that is an option without a huge amount of risk.

Also, follow along on this site to see how my investments continue to do, as I’ll be adding monthly reports showing my returns and the amount and types of Notes I am investing in.