What I Checked Before Buying Loans with Lending Club

Is Lending Club Safe? As a platform for peer-to-peer lending, Lending Club itself is safe. It’s lending money through Lending Club that carries risk. However, by carefully evaluate and select each loan, risk can be reduced and return can be improved.

I have been gradually building up my Lending Club loan portfolio in the past few weeks. Currently I have bought 29 loans through Lending Club Note Trading Platform, with loan returns from 10.20% to 15.68%. So far three payments have already been received with no late payment, which is a good and encouraging start. However, all these three loans are current, meaning that payments have already started before I acquired the notes. The rest notes I own are all new loans with first payment expected sometime this month. I will have a better feeling about my investments until I receive first payments on the other 26 loans.

And I am not done yet. In the next few weeks, I will be looking to add a few more loans to my portfolio. Since right now I am only welling to buy small loans (loan amount at $25) at discount, good loans with right prices are not always available. In addition, with current total expected monthly payment of $35 from my lending, I should be able to fund a new loan every month if everything goes well.

So far I have discussed the process of selecting a note within the Note Trading Platform and mentioned that I can get the original loan listing to find out more about the borrower. In the following, I want to share what I considered before lending money to other people through Lending Club. Though I can only lend on the secondary market, what discussed below can also be applied to lending through the primary market, i.e., lend directly to the borrowers.

Above is a screen shot of a detailed listing of one of the loans I own. Since I can only buy loans on the secondary market through Note Trading Platform, initial screening, such as loan rate, loan amount, remaining payments, sale prices, etc, has already been done from inside the Platform. Once I found a note that I am interested in, the next step is go to the initial loan listing and dig out some details.

For every listed loan, the details are divided into six parts, including Loan Details, Borrower’s Profile, Borrower’s Credit History, Loan Description, Borrower’s Affiliations, and Questions & Answers. Each part carries some information that can help me determine whether I want to lend my money to the borrower or not.

Loan Details

Loan details give me a quick summary of the loan I am interested in. In addition to loan amount, purpose, monthly payment, grade and rate, and status, I also pay close attention to the percentage of funding received and the total number of lenders committed to the loan since the date the request is submitted. The reason is clear: Since I am not the only one lending money to the borrower (if it’s a large loan, there will be a lot of lenders to fund the loan), I want to get a sense how other people feel about the borrower. Every lender evaluates the loan independently using his/her own criteria and priorities. If a large number of people signed up to fund the loan in a short period of time since it was listed, then there’s a consensus on the trustworthiness of the borrower. And that could make me feel a little bit comfortable about lending the money to the borrower as well. If, on the other hand, a long time has past and the loan is still not fully funded, then I will be cautious too.

Borrower’s Profile

The borrower’s profile tells me the borrower’s employment, homeownership, and most importantly, monthly gross income and the debt-to-income ratio (DTI). According to Lending Club, the DTI is calculated with the borrower’s monthly debt payment obligation (from the borrower’s credit report) divided by monthly income. However, this calculation does not include mortgage accounts or the loan’s expected monthly payment. Honestly, I found this calculation quite weird though. The monthly loan payment as well as mortgage should be included in the DTI calculation in my opinion. What’s the likelihood of making late payment for the borrower who, for example, makes $2,500 every month but has to pay $500 monthly loan payment and $800 mortgage payment on top of $1,000 revolving credit balance? So in the case, I won’t simply look at the DTI and conclude that the borrower has a low debt obligation if the DTI is low. I will instead combine the borrower’s income, monthly payment, mortgage/rent payment, and credit card balance to determine the debt-to-income ratio.

Borrower’s Credit History

In fact, I don’t too much attention to the borrower’s credit score because, as we know, a lot of factores could affect a person’s credit score. If the borrower only has a short credit history, his/her credit score won’t be high, but that doesn’t mean the borrower is not responsible. When reviewing the borrower’s credit history, obvious information such as delinquencies are important, so are the borrower’s revolving credit balance, credit utilization ratio, and recent inquires. A high utilization ratio is alarming, but not necessarily mean the borrower abuses his/her credit (if, for instance, the borrower maxed out a 0% APR card he/she recently obtained, the ratio is likely higher). While I won’t focus too much on the credit score itself, I will, however, try to get a little more information if the borrower’s credit score dropped since the loan was initially listed.

BTW, the borrower’s credit history shows when the earliest credit was opened. I will be more interested in when the latest credit was opened.

Loan Description

The borrower gives potential lenders the story on why the money is needed and what it is for. However, since the description is not verified by Lending Club or anybody, there’s no way to tell whether what were told are true ot not. In general, I’d prefer a borrower tells us a story than those who didn’t say anything.

Borrower’s Affiliation

Here I can get a feeling of whether the borrower has a stable job, thus a stable income. In this economic environment, layoffs are massive and everywhere. A stable job (if there’s one) means payments are unlikely to be interrupted.

Questions & Answers

If I still have questions after going through all the information above, I can write to the borrower in the Q&A part, asking for clarification. For example, I mentioned that I will take the borrower’s monthly mortgage/rent payment into account when calculating the DTI, but the information is not directly provided in the borrower’s profile. I will need to ask the borrower to give me a number. Actually, I can submit any relevant question to the borrower in the Q&A section. If the borrower clearly answered my questions to my satisfaction, then I will be happy to fund the loan. If the borrower isn’t straightforward, then I’d rather stay away.

Final Thoughts

On one hand, I want to protect myself by avoiding investing in loans that appear to be too risky. On the other hand, peer-to-peer lending itself carries a significant level of risk. During the loan selection process, I want to evaluate every piece of information carefully from the beginning so I won’t regret my decision should something bad happen later. However, there’s no guarantee that a loan will stay current through out the 36-month period. The risk is always there. If you want to get into the P2P lending business through Lending Club, doing your homework (evaluating each loan thoroughly and carefully) may reduce the risk of default of your investment, but can’t avoid it. That’s why you could receive much better return from lending to other people than to banks

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