Is Lending Club a distraction or proper diversification? I have an important decision to make. Should I invest in Lending Club? As you know, Lending Club is a peer-to-peer (P2P) company much like Prosper and others. Investing in Lending Club presents an opportunity to diversify my sources of passive income. However, it can also serve as a possible distraction. I’ve signed up for a Lending Club account, but have not yet transferred funds. I’m still on the fence. Let’s discuss.
Lending Club – Overview
As a P2P lender, Lending Club allows individual investors to lend money directly to individual borrowers. The company handles much of the legwork including engaging in “best practices” to collect from borrows that don’t pay on time. For more on the services they provide, visit the company’s website.
Investing in Lending Club is not without risk. While investors can make a return that greatly exceeds the rate given in a savings account, the returns are not guaranteed. Moreover, there is the risk of defaults. From my readings into Lending Club, it seems that default can occur even with supposedly safe loans like “A” loans.
Moreover, the money is fairly illiquid. The loans are 3-5 year loans. Lending Club allows an investor to invest a minimum of $25 into each loan. As such, an investor can spread the risk over several loans. So, if I wanted to invest $1000 into Lending Club, I could spread that over 40 loans at $25 per loan. However, the interest that I receive will be over the course of 3-5 years depending on the length of the loan.
Diversification
There is an argument that I should invest in Lending Club because it offers diversification of passive income sources. Right now, my main source of passive income is my dividend portfolio. Of course, I am just getting off the ground. I’m trying to build a solid foundation so that as I experience growth, it’s strong growth that will last me years to come. I firmly believe in the dividend growth investment strategy. But, that is certainly not the only way to generate passive income.
Were I to invest in Lending Club, the funds would come from my 20k bonus from work. I wrote about it in my post about how to invest $20,000. However, because I’m just getting started, I would only invest $2,500 into Lending Club. That’s the minimum needed to utilize their automatic investment feature.
With Lending Club, you can invest manually where you decide which borrower you want to lend money to. Or you can let the system choose the loans for you. I would let the system choose the loans for me based on the criteria I set up. I would then automatically reinvest interests into new loans as soon as I receive $25 in interest. As mentioned, Lending Club would verify the information borrows have on their loan application including employment verification, etc. All that’s needed for the investor to do is decide how much money they want to invest and how they want to invest it.
Distraction
There is also an argument that investing in Lending Club is a distraction. Since I’m just starting with my dividend portfolio, it may make more sense to build that up first to a sizable sum before I diversify income streams. There definitely is a power in having focus.
Dave Ramsey talks about this subject in getting out of debt. One reason why he suggests the snowball method where you attack the smallest debt first before going on to the next is in part because of the power of focus.
I don’t know what the future brings, or how much money I’ll make (or lose) with Lending Club, but perhaps I would be better served putting that $2500 into my dividend portfolio.
Opportunity Cost
One of my favorite concepts in Economics is the notion of opportunity cost. As stated by Investopedia, “opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action.” What benefit am I losing by investing $2500 in Lending Club? I could receive a benefit by investing it in my dividend portfolio or even in stock options, such as the covered call strategy, for example. Hindsight is 20-20. So, all I can do is make the best decision considering my risk goals. But, opportunity cost is real and should be considered part of the equation.
Conclusion
P2P Lending is enticing. The idea of being the bank and the person lending money definitely has its pros. With savings rate at an all time low, do-it yourself investors has to look at various ways to make their money work for them. After my 20k bonus, I’m going to have about 12k to work with. That’s a decent amount of money. Most will definitely be going towards my dividend portfolio. However, I’m seriously contemplating taking $2500 to give Lending Club a try.
What do you think? Is Lending Club proper diversification or just a distraction? We didn’t get into the prospects that if the economy goes south, the risk of default will likely increase. So, now might not even be the best time to invest in P2P lending. However, if I’m ok with the risk, do you think now is a good time to invest in Lending Club?
Let me know what you think in the comments below.
I have about $400 left in my Lending Club account. I can’t get out fast enough. I just don’t like the lack of mobility. I mean sure you can always list your notes on the market. But that isn’t the same as saying I’m moving my money into something else instantly. Not terribly fond of the tax hit either. It counts as earnings. I think we also need to call it what it is. Lending money to strangers over the internet.
That’s interesting seedling and also very true. I haven’t pulled the trigger yet but we will see.
Hi DD you probably know my opinion about P2P. Its to risky for me. Dont forget this is not a bank. This is people coming that got rejected by the bank. I dont think that any normal person would take 15% loan from P2P if he could get 5-10% from the bank. Its ok now as economy gow, but when ot will go dow. I bet that most of P2P will go with them. Banks are regulated and deposits are secured by state and P2P is a wild wild west. So if your looking for a L/T stable income P2P is not it. It bears great risk, which you dont see today. All the fancy guaranteez P2P give to you is just smoke and mirrors. Also one very importnant qestion – what happens when your P2P investors like you suddenly starts to take out their money? Yes very simular as so calles “bank runs”, but banks has developed mechanisms over time to secure them selves. P2P cant as they have to generate 10% retur to their investors, so all they can do is atract as many investors as you. This P2P looks like the next “toxic bonds” that will make the next collapse. But that is just my toughts 😉 But dont get to excited on that P2P, its a leveraged high risk instrumen.
Fair enough P2035. The economy going south is definitely a concern. You never know what’s going to happen 3-5 years from now. I initially wanted to transfer $1000 so worst case scenario, I only lose $1000. The only reason I suggested $2500 was because that was the minimum to invest in the automatic lending.
I suppose I still could transfer only $1000 and manually select 40 loans. But, call me lazy, but I didn’t want to have to do that.
if your ready to lose it all then its ok. Just keep in mind that ita not risk free 😉
I’m considering alternate options instead of Lending Club.
Hope i did not talked you out of it 🙂 You can invest and have a nice return for few years, just that you have to exit at the right moment 🙂
Nah, I haven’t made my decision as of yet. The fact of the matter is that some investors are doing well in P2P lending, and it’s unlikely that I will lose ALL of the money invested in it, even if I end up with a loss. Even though $2500 is not a small amount of money, it’s also not so overwhelming a loss if I were to lose it all. I’m not a huge fan of the fact that the money is tied up for so long, but then again I am investing for the long haul.
Nice work, I have a little bit of money in a P2P lender and so far it is doing well. Cheers for sharing.
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BHL, did you do manual investing or automatic, and out of curiosity, which P2P lender do you have?