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Lending Club Review: Earn A 7% Return With Peer To Peer Lending

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Investing is an incredibly tricky subject. Just watching the stock market go up and down sends chills down my spine, wondering if the money I’ve put into it is actually going to yield a decent return.

For the past 6 months, I decided to try something different to help diversify my portfolio by investing a bit of cash into peer-to-peer (P2P) lending through a company called Lending Club. So far, I’m already on track to receive a 7-9% annualized return, and I couldn’t be happier with this result.

While this number may sound great, no matter where you decide to place your money there’s a risk that comes with it. We’re here to discuss the best tricks you can do to get the highest return possible and discuss what risks come involved with Lending Club.

How Does Lending Club Work And What Is Peer-To-Peer Lending?

I had to go to Wikipedia for some help on this definition. To put it simply, Peer-To-Peer Lending is where you take a specific amount of money and lend it to your peers (in this case, strangers) and charge a specific amount of interest.

This way the person receiving the loan doesn’t have to go through a financial institution and get approved for a loan. Most of these loans are considered “unsecured, personal loans” that are made to individuals.

To be clear on the definition above, what we mean by unsecured loans is that there is no collateral. In other words, if someone decides to default and not pay back their loan, there is nothing you can hold them liable for, such as there car, house, etc.

Usually what happens is that borrowers with a reputation for defaulting tend to agree to higher interest rates, whereas those with a long-standing history of never defaulting can often receive lower interest rates.

What Is Lending Club?

Lending Club is an online platform as an intermediary for P2P lending. Their main goal is to make it very simple to participate in P2P lending, bringing borrowers lenders and visa-versa.

This is advantageous on both sides, since borrowers can easily find a quick way to receive a loan and lenders can easily find a quick way to park there money with a decent return (with risks involved, of course).

Formed in 2006, Lending Club is one of the world’s largest P2P lending platforms and has been ranked by Forbes as one of America’s Most Promising Companies. I mention these credentials to you in order to show that this company has been around for a decent amount of time and can be trusted.

What Risks Are Involved?

Now that we have introductions out of the way, let’s talk about what really matters: your money. Despite my past mistakes with investing, every financial decision that I look into comes with carefully researching the risks involved, and Lending Club is no exception.


Simply put, borrowers do not have to pay you back. If something happens or if they just don’t feel like it, they can keep your money and run. We’ll explain below why a borrower wouldn’t want to default.

No Collateral

This turned me off Lending Club for years, even though I always had it in the back of my mind. Unlike a bank or other financial institution, borrowers don’t need to put down a car or some other type of asset in case they default on their loan. If they don’t pay you back, there’s no way you can get your money back.

The Type Of Borrower

The typical borrower goes to sites like Lending Club because they are unable to get a loan from a typical financial institution, and hence why they’ve turned toward their last option of P2P lending. Furthermore, we’re doing all of this through an online platform, so we’re not going to meet them in person.

Lending Memo mentions that lending platforms can sometimes make mistakes when posting information about borrowers. While these platforms do their best do their best to catch those who submit fake information or those who shouldn’t be borrowing due to horrible borrowing history, sometimes a few slip through.

Fortunately, over the years Lending Club has gotten increasingly better at stopping such borrowers before they receive any sort of funding. This has decreased default rates greatly.

Times Of Financial Crisis

It is possible that during times of crisis a borrower who once thought he/she was able to pay back their loan is now unable. Take the 2008 mortgage crises for example. It ruined a lot of people financially and is incredibly difficult to predict exactly when it will happen.

Long-Term Loans

When Lending Club first opened, all loans were either 3-year or 5-year loans. Let’s say a borrower is paying back a loan steadily every month and something suddenly happens after 2 years and they default.

A lengthier loan means more time to default. Furthermore, your money is going to be tied up for a longer period of time. However, now they have a new note-trading platform that allows you to enter and exit loans in a shorter timeframe (more below).

They Go Bankrupt

As with any company, Lending Club could go bankrupt and you won’t get any of your money back. This can also be said of companies that you invest in via the stock market.

There are also other risks involved, but these are just a few that we’d like to point out.

What Are The Positives Involved With Lending Club?

Okay, so we’ve been pretty pessimistic so far about P2P lending, but we wouldn’t be writing about it if the pros didn’t outweigh the cons. Here’s why you should give it a shot.

Borrowers Don’t Want To Default

If borrowers default on their loan, it’s going to directly affect their credit score. Causing their score to go down will only prevent them from making loans in the future, and getting your score back up can take a long time.

The Returns

Experts say that you should be getting on average a 7% return by investing through the stock market. Yet this is an incredibly difficult to do. On average, lenders make an annual return of 6-9%, even with all of the defaults involved.

No Commission

Stock brokerage firms charge an average of $10 per trade. You don’t have to worry about that with P2P lending. There’s no commission fee involved each time you decide to make a loan.

Easy To Invest

Deciding which companies to invest in can be extremely difficult if you’re not educated in reading financial statements (at least it is for me). On Lending Club you’re evaluating individuals, which is much easier. You get access to all of their borrowing history.

Low Startup Cost

You can get started with as little as $25 per loan. However, in order to minimize risk, we highly recommend that you loan across a large number of people.

Lending Club Is A Great Company

They’ve been around for 2015 and are getting new borrowers and lenders everyday. While it is possible, I doubt they’re going to go out of business anytime soon.

What Is The Borrower Selection Process?

Before we get started on investing our money, it’s important to understand how borrowers are chosen through Lending Club. If anyone could sign-up to borrow cash like this there’d be no way I’d trust their platform.

Thankfully a strict screening process is involved where a borrower’s credit report, past loan applications, and behavior data are all taken into account before approval. The models that they use take into account the performance of billions of dollars loaned out that have already passed through their marketplace.

For more information and specifics on this subject, you can read more on their FAQ.

How Do I Minimize These Risks & Get Started To Earn 7% Annually?

There’s always going to be risks when investing your money, whether it be in stocks, real estate, or anything else. Yet what we can try and do is minimize our risk and maximize our returns.

I personally believe that after giving Lending Club a shot, they have an ideal platform that helps us achieve just that. Here we’re going to break it down into exactly what steps should be taken on their platform so that you can invest your money wisely and get a good return.

Note: Before we begin, we’d like to mention that if you are struggling financially or feel uncomfortable with P2P lending, we highly recommend holding off for the time being.

1. Register. You can register for a new Lending Club account by clicking this account here. Enter in the information that they request.

2. Add funds. This can be done via a bank transfer, wire, or check. We recommend depositing at least a minimum of $2,500 so that you can greatly diversify your funds over 100 different notes (more on this down below).

3. Choose auto-investing or choose yourself. This step is a bit lengthy. You can do one of two things: have Lending Club choose loans (also called notes) for you at an estimated risk/return, or you can choose them yourself. We’re going to discuss both.

Interest rates are determined completely by Lending Club based on the criteria that we mentioned above. Higher risk means a higher return and lower risk means a lower return.

A. Auto-Investing

As you can see from the image below, auto-investing allows you to automatically invest your money with an expected return. We range from the A & B option, which gives you a projected return of 5.91%, all the way to the D & G weighted option with a projected return of 8.1%.

Lending Club rates each of its borrowers. A is the best rating you can receive. People under this class typically have a great credit score, always make their payments on time, and have never defaulted on their loans.

On the other end of the spectrum, we have G borrowers. Sometimes they’re late on their payments or have possibly defaulted in the past for a small amount in the past.

If there’s a certain piece of information that you want to weed out (such as income level), you can even choose the option of filtering out individuals below a certain income level.

This is not a bad option for those who don’t want to take a lot of time going through different investors and want to get started immediately. If you’re more cautious, you might want to select individuals based on the criteria below.

only recommend going with the first selection of A & B. Although the return is much lower compared to other options, you’re putting much less risk into your money, and 6% is still a decent return.

I’m not against going with the D & G weighted option, but that’s only because I personally can’t stomach the risk. Just be sure to research each option carefully before you decide to invest.

B. Manual Selection

This is where you can manually pick who you give out loans to. Even though Lending club has tons of borrowers, their filtering system makes it really quick.

You can find these loans by clicking on the “Browse Loans” link. On the left-hand side, you’ll see options for filters. Click the “More Filters” option to see all filters available. Look at the image below to see what factors I find important.


From there, you can specify your filters on the left-hand side of the screen. Here is what I base my criteria on. Keep in mind that I tend to be very conservative about my loans.

  • Minimum Income of $3,000 Monthly
  • A Rating (A1 – A5)
  • 36-Month Loan Term
  • Loan Purpose: Refinancing Credit Card, Consolidate Debt, Investing In Learning A Skill, Wedding Expenses, Dream Vacation, Car Financing, Home Down Payment
  • Total Loan Value Under $25,000

If you have any advice on selecting specific criteria when filtering borrowers, please let me know in the comments below. Yet so far I haven’t encountered one default.

In any case, we recommend avoiding the following types of loans. Based on previous experience and talking with other investors, they typically go bad.

  • Business Startups
  • Home Improvement
  • Loans over $25,000
  • Major Purchases

From there, click on each borrower to view their complete stats. If there’s anything that irks you, don’t hesitate and choose another borrower; there are plenty to choose from.

4. Diversify your funds. This is probably the best amount of advice I can give you. Lending club suggests that you deposit a minimum of $2,500 to spread the minimum loan amount across 100 different borrowers.

If you invest only $250 into 10 different borrowers and one defaults, you’re already down 10% of your money. If you invest $2,500 into 100 different borrowers and 3-4 default, you’re only down 3-4%. See the difference?


5. Reinvest. Instead of cashing out, make more money by reinvesting your returns. If you earn the average of 7%, you’re already on the right path to acquiring wealth with little to no work involved!

Lending Club’s New Trading Platform

We mentioned above that one of the downsides of P2P Trading is that you typically have your money tied up for 3-5 years, so you have to be really certain that you’re not going to need it until your loan matures.

There’s now a new note-trading platform that allows you to take over loans from lenders who don’t want to continue tying up their money. Click on the “Trading Account” link and you’ll be redirected to their Notes Trading Platform.

This is great because instead of a minimum loan term of 3 years, it can be reduced to half the time or even less. The approval process for this type of transaction is a bit more strict, as they want to be thorough about your income and employment history.

Some Quick Tips

Here are some tips that we’d like to mention when it comes to investing, specifically with P2P lending.

Don’t Use Lending Club To Replace Other Income Streams

If you already have money in a CD or the stock market, don’t stop immediately to put it all into Lending Club. The best thing you can do to minimize risk is to diversify your income streams and also how they bring in money.

Although the risks are minimal, they still exist. Furthermore, you don’t want to put your faith into just one company. They aren’t a bank and therefore aren’t FDIC Insured, meaning you won’t get your money back if something happens.

Start Small

You don’t have to start off with $10,000. Try investing the minimum recommendation of $2,500 for 3-6 months and see how it goes. If you’re doing well, consider adding more or simply reinvest your profits.

Do This Only If You Have The Means

If $2,500 is all of the money you have in the bank, wait until you get a little more money. Emergencies do happen and Lending Club isn’t going away anytime soon.

Start Young

The greatest advantage anyone can have over investing is time. For example, if you saved just $1,200 a year at the age of 18 and invested the same amount every year until you hit 65, you’d have just over 1 million dollars at a 10% annualized return (compounded annually).

Do the same thing at age 30 and you’d have to invest roughly $4,000 a year to get the same amount.

Final Thoughts

Lending Club can be a great way to help supplement your income. If you’re careful about who you choose to invest in, it can end up being a great return. While there are risks involved, it’s rare that a loan defaults given that you’ve done your due diligence.

I’d be extremely curious to know how others have done on Lending Club thus far, and also if they have any specific advice on what to look for when browsing notes. Good luck investing!

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