1) You didnt screen the loans
2) You put all your money in
This article is in response to all the negative articles and videos out there from people who claim to be financial (Passive Income) "experts". These "experts" who have tried LendingClub and now recommend not using it, usually in a video with a tile like this "LendingClub Exposed...". Pretty much all of them clearly made the same two mistakes.
If your thinking of investing I hope this article will be helpful in protecting your investment. In general vet any information you get including mine so you can make educated decisions with your money, a lot of people in this space are just doing this for the traffic/ad revenue. There a lot of reasons to not invest in LendingClub, maybe to risky for you, your investing short term, you don't like the tax treatment, you have better plans, etc... But these are two common problems "experts" complain about and how to avoid if you choose to invest. I have made money with LendingClub but I would never put all my money LendingClub or all my money in a single asset class. Don't expect that reading this means you will make money in LendingClub, you will still need to do a lot of learning before you invest a penny.
1) You didnt screen the loans
"experts" have said:
- The loan data is self reported by the borrower so it could be false (a lie to fraudulently get a loan) FALSE
- LendingClub doesn't do credit checks FALSE
- These people have bad credit so of course they will default FALSE
- Banks won't lend to them FALSE
Here is one example that these statements are FALSE. You can use a loan buying strategy to only invest in loans where the credit score is above 740 and there are <=1 credit inquiries in the past 12 months. The loans in this list would have borrowers considered to be either "Very Good" or "Exceptional" and banks would give similar loans to these borrowers.
How I screen: If your going to do this, you need to do the research. I like loans where the barrow has
- a good credit score: this shows they have a good history with paying bills
- owns a home: a great responsibility not easy to achieve
- is dual income: multiple earners in a household, less likely to default if one is laid off
- the longer its been from last derogatory on credit report
- not a lot of new credit accounts open recently
But those are just a few of the ways I pick loans, they are not the only and not necessarily the best, and they are not used all together. I currently use 6 strategies for buying loans, each strategy may have one or more of these criteria.
2) You put all your money in
First, never put all your money in anything, you need an emergency fund before you invest in anything and then don't forget to diversify in multiple asset classes.Next problem, if you have $6k to invest and you invest all $6k on day one, all your money will be at a single vintage of that specific day. Loans return most interest in the first 1/3 of the loan term and are not as likely to default in same time period, so you will notice higher return rates at first, maybe 14% or higher. But then at about the 1-2 year mark those loans will experience higher rates of defaults. You may even experience months or negative returns in this example. Loans tend not to default in the beginning or the end or the of the term of the loan. There is a higher rate of default around the 1-2 years into the term. I have seen a lot of people bragging they got 14% plus returns in year one and they are so upset because in year two they are getting 7% or worst returns. Last I looked LendingClub said there platform average return 4-7%.
Solution, had you spaced out your $6k investment instead, let's say you invested $500 per month for 12 months, there would be 12, one month vintages and let's say you reinvested the repaid principal and interest. This way of spreading your risk across vintages has multiple advantages, but let's look at how it effect defaults. When your in month 12 of this plan, the oldest vintage is about to start experiencing a higher rates of defaults while the youngest vintage is getting it highest rates of returns. This will averages out those ups and downs that caused the "experts" to get so emotional in the videos after 1-2 years of investing in LendingClub (strangely when defaults should hitting hardest).
Spacing out your vintages has other advantages but it solves one problem universally complained about by the "experts". The "experts" all complained that "I cant get my money back". So many "experts" complained about this and it's just ridiculous. If you think you need your money in the short term, don't invest it in anything like: stocks, real estate, lendingclub, etc... None of these are short term investments, and all have very real risks of short term liquidity. Every one of these "experts" mislead people into thinking LendingClub has zero liquidity but that is false, Lending club has some liquidity, each loan repays each month principle and interest generating you a positive cash flow. You have access to a portion of your principal each month, and that provides real value that the "experts" have covered up with the lie that "I can't get your money back".
The common example from these "Experts", "what if I need that money for an emergency, I'll have to wait 3 years" my answer: don't invest a single dollar until you have an emergency fund. That's just common sense, and common advise, I have no idea why these people market themselves as "experts" and don't know this already. Additionally let's say you spend your entire emergency fund and its gone, you can rely on the principal and interest payments from LendingClub to be there for you each month, that cash flow might help you make rent if your job is downsized or pay for gas to get to job interviews. Keep in mind that a $6k investment has really good monthly cash flow, more than some people make in a week.
In summary these experts made so many mistakes it's entirely possible they aren't really experts at investing at all, they might just be people marketing to you to generate passive income in the form of ad revenue. Oh there god, I think they are: EXPOSED!
Look there is no reliable way to get rich quick and easy, but if you want to get rich slow and hard keep reading and check out my videos.
