Making Money On LendingClub: When Do You Get Paid?

Investing Simple is affiliated with LendingClub. This relationship does not influence our opinion of these platforms.

LendingClub is a peer to peer lending platform that allows investors to earn interest by lending money to borrowers. LendingClub provides a medium of exchange between borrowers looking to take out loans and investors looking to lend money. This new method of lending takes the bank out of the picture, allowing individual investors to benefit and earn monthly cash flow from the notes they invest in.

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How LendingClub Works

How Does LendingClub Work?

Peer to peer lending is an alternative lending process that takes a new approach to traditional borrowing and lending. With peer to peer lending, you are essentially taking the middleman out of the picture. Lenders will directly lend money to borrowers who apply for a loan. Borrowers then pay back their loan over time, paying both interest and principle with each payment to the lender.

To reduce risk, each investor on LendingClub has the option to invest a minimum of $25 in each note. The investor may then purchase 40 or more notes in order to diversify their portfolio and reduce risk. This will allow investors to spread risk across a number of notes. Rather than lending one person one thousand dollars, you will lend 40 different people $25 each. This greatly reduces the risk for the investor in the case the borrower defaults on their loan. This is similar to diversifying investments in the stock market. You don’t want to have all of your eggs in one basket!

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LendingClub Diversification Explained

LendingClub gives you the option to use their automated investing tool to match your risk with your optimal portfolio. Automated strategies allow you to invest in preset strategies that align with your investor profile. You may also choose to manually choose your notes creating strategies based off of loan grade, interest rates, or borrower criteria.

When Do I Get Paid On LendingClub?

LendingClub notes are installment based loans meaning borrowers must pay interest and principle back monthly. These monthly payments made by borrowers mean that investors will receive payments on a monthly basis as well. It is important for investors to understand that with each payment they are receiving a portion of their initial principle investment as well as interest earned for that period. Investors who want to maximize their return may want to reinvest their principle in order to keep earning interest on their capital.

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LendingClub Notes Explained

What Happens If Borrowers Don’t Pay?

LendingClub collects the majority of monthly payments by automatic electronic transfers directly out of the borrower’s bank account. Once the funds are available, the funds are withdrawn out of the borrowers account, then sent to LendingClub, and finally disbursed to the individual owners of the notes.

If a borrower fails to make a monthly payment then LendingClub’s collection team will reach out to the borrower the same day via telephone, email and letter. If the borrower fails to respond then LendingClub will evaluate their best course of action for collecting and bringing the account current. Once the payment is 30 days delinquent then LendingClub will turn the account over to their external collections agency. This agency has more resources and will make efforts to contact the borrower and learn information about changes in information or recent locations. External collections may negotiate with the borrower to structure a new payment plan, or they may take further legal action to collect the amount owed.

Once the Note is 121 days past due then it officially enters Default Status. Once the note is in default a Charge Off will occur within 150 days past due (no later than 30 days after it has reached default status). Once the note is charged off, the remaining principle will be deducted from your account balance. Bankruptcies may be charged off at the time LendingClub is notified of the bankruptcy. LendingClub adheres to the Federal Fair Debt Collections Practices Act (FDCPA) which ensures collectors use fair and non-harassive collections policies.

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What Is The Average Return On LendingClub?

Investing Simple is affiliated with LendingClub. This relationship does not influence our opinion of these platforms.

LendingClub is one of the most popular peer to peer lending platforms available to investors today. On the platform, users can invest in a variety of notes ranked by different grades representing the investment’s risk. LendingClub was founded in 2006 and has had a relatively short track record compared to other traditional investments. In this article, we are going to talk about the variety of different returns investors have earned on LendingClub. If you are new to LendingClub, read our full review here.

LendingClub offers a variety of charts on their website displaying historical returns over specific time periods. The LendingClub site shows that investors have earned a 12.9% average annualized return over the 3rd quarter of 2018. This is an average return across a variety of note grades and maturities.

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It is strongly recommended by LendingClub to diversify your note portfolio. By investing in a variety of different maturities and note grades, you may lower the overall risk in your portfolio. Your note allocation may have a direct impact on your expected and realized returns. Below you can see how returns have varied over time across different types of notes.

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As you can see in the chart above, LendingClub ranks their notes in risk from A to G with A grades being the safest and G grades holding the most risk. Similar to most traditional investments, the higher the risk the higher the potential return or loss. You can see in the chart that F and G grade notes had an average interest rate of 25%. However, after accounting for the amount of loan defaults and fees, investors earned an annualized return of 2.84% if they invested in F and G grade loans over the 3rd quarter of 2018.

Below you can see a breakdown of the LendingClub return calculation after fees and charge offs that are required when individuals default on their loans. Here is a hypothetical scenario…

lendingclub investingsimple return

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You can have multiple investment strategies in LendingClub to aim for your own ideal return. For example, your strategy may be to invest in notes that are graded between A and D and are strictly business loans. Or you may want to place even bets across grades A to G for borrowers that have verified their income. There are a variety of different strategies you can use to mitigate your investment risk while maintaining a worthy return on LendingClub. Some investors may be willing to take on higher risk in order to earn a higher potential return, some investors may want to take a more conservative approach and invest in the highest grade notes only. Just like any other investment you must understand the risks involved, and there are no guarantees for positive returns.

LendingClub also offers automated investing on its platform where they will choose the portfolio of notes you invest in. You will select the criteria for your risk and investment duration and LendingClub will select notes based on that criteria.

LendingClub is still a growing platform and more and more borrowers are using it’s platform to take out loans. Below you can see the total loan issuance since 2011 and the significant growth over the last 5 years.

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Overall, LendingClub offers a dynamic lending and borrowing platform that takes the bank out of the picture. Direct peer to peer lending has allowed a new type of investment platform to emerge as well as providing a new medium for borrowers to take out loans. Investment returns on LendingClub have varied over time based on investment risk, time horizon, credit risk, and a variety of other factors. Just like any other investment, positive returns are not guaranteed.

Click here to get started with LendingClub today!