Lending Club IRA Review – Using their Notes as an Alternative to Bank CDs

January 15, 2013 15 Comments »
Lending Club IRA Review – Using their Notes as an Alternative to Bank CDs

I’m really getting tempted to rollover my Roth IRA into a self-directed IRA with Lending Club seeing how productive their returns are for investors. Couple that with current state of our FDIC-insured savings environment and the temptation to rollover my IRA into Lending Club becomes even more alluring.

I’ve always enjoyed browsing and purchasing notes through Lending Club as a savings accounts (I’m currently netting 10.54%), however, I’m thinking of just moving to an IRA because of the additional earnings from tax savings.

Lending Club’s earning claim for their IRA products – $100,000 to $1,500,000 in 30 years.

lendingclub-IRA-earnings

If you open the ‘self-directed’ IRA it gives you the freedom to still invest in basically whatever you want. Real Estate, stocks, bonds, minerals, businesses and even debt – which is where Lending Club’s actual services come in to play.

[Read more about the Pro's and Con's of self-directed IRAs before opening one.]

What is Peer to Peer Lending?

If you already know who Lending Club is and what the whole peer-to-peer lending thing is you may want to scroll down to our ‘Lending Club’s FAQ section’ where we dig into the IRA program a little further. Directly below is a recap on P2P lending.

Peer to peer lending may still be a relatively new concept for most conservative investors, however even the most conservative of investors should take a second look. Lending Club, the leader in P2P investing, has been featuring average returns of 9.65% since their inception in 2007. On top of that, they haven’t had one single investor loose any of their principal. (See image below.)

100-positive-returns-lending-club

How Lending Club works:

1) Lenders apply for an account in the same way they would if they were applying for a mortgage or auto loan with a bank. Their FICO credit scores are pulled, along with their monthly income, years at current employment, debt-to-income percentage, and total assets. Note, all this data is available for potential investors to wade through before deciding which loan notes to invest in.

2) The loan request, which is typically between $5,000 and $30,000 with terms of either 36 or 60 months, then goes through the approval process based on all the criteria mentioned above.

3) Investors fund their account and can then purchase shares of any number of loans which are graded on a scale of A through F (and 1 through 5) depending on the borrowers credit standing. So the most credit worthy borrowers will have A1 notes associated with their loan as well as the lowest returns for investors, while the least credit worthy borrowers would have F5 ratings associated with their loan as well as the highest APY’s for investors.

4) Borrowers pay automatically and as loans are repaid, investors can reinvest.

 

Lending Club IRA Program FAQ’s:

 

What types of retirement accounts can you open with Lending Club?

You can pretty much open any IRA available – traditional IRA, Roth IRA, SEP IRA, or Simple IRA. You’ll just have to use their custodian SDIRA Services as an administrator.

Is there an annual maintenance fee associated with their IRA?

Not unless you can open the account with $5,000 and then add at least another $5,000 in year two. If you can’t do that, you’ll incur an annual fee of $100.

Additional Statistics Potential Investors Should Take Into Consideration:

1) Lending Club’s approved loan applications sit at roughly 14% (only prime borrows approved)

2) Extremely low default rate – less than 3% after 18 months

3) Lending Club typically offers a loan amount of 1% above the investors returns (example – investor receives 7% APY, borrower pays 8% APR)

4) When browsing notes to add to your portfolio you can see a plethora of important factors. The borrowers requested amount, what the loan is for, and the length of the desired loan are all on the note comparison table. When clicking for more information you can then see the borrowers length of employment, monthly salary, debt-to-income percentage, whether or not he/she rents or buys and what their FICO credit score is.

To give you a better idea, here’s a screenshot of some of the notes I’ve been browsing today:

Lending-Club-Notes

 

2013 P2P Market Update: There are two market leaders in peer to peer lending as of 2013. These are Prosper and Lending Club. Both are claiming similar yields on the savings side, however, Prosper has a significantly lower rating with plenty of disgruntled comments surrounding the company circulating the web. As far as the complaints go for Lending Club go, we’ve heard of just a few. Many times customer service is at the core of these complaints with a few lenders complaining of waiting up to one week for a response from the company regarding their particular issue. (View our reader comments below).

Our Take: Peer to peer lending is still a relatively new concept for the majority of the population. It’s been around for quite some time in the non-profit arena especially with the emergence of micro-finance. If you’re going to proceed with their IRA program, be sure to diversify in other investments other than Lending Club’s notes despite the high returns. A well diversified portfolio (both of loan notes in Lending Club’s case and net assets in your overall IRA’s case) is the key to succeeding in the long term.

If you have experience in Lending Club’s IRA program, please share by leaving a comment!

Related Posts

  • Trentin Vestor

    I’ve used this service before. It’s a way better option than investing with giant, inefficient banks. The whole concept of micro-finance needs to be discussed more in the main stream media. You get to help people out financially and reap 8% – 12% gains in the short term while you’re doing it.

    Good post, I hope more financial media outlets discuss this in the future.

  • Adam

    Yea I use it as well. IMO banks can’t hold a candle to peer to peer investing. Plus banks are shit right now.

  • Randal

    Do you personally get to choose who you loan to? Can I review their credit score along with other vital stats before I decide if I want to loan?

  • Adam

    Randal,

    No they do that for you. They use strick filters and only loan to people with prime credit. I have had no problems.

  • bankguy

    this isn’t helping people if they are required to pay 13% + APR on a loan even if their credit is SUPERERB

  • stan lee

    It could be a win win, how much would someone get a business loan through a bank for with excellent credit? 9% 10% 13%???

  • john

    You’d be lucky to get a business loan for those rates these days. Micro-financial companies do a good job at cutting out the overheard that most banks have.

  • BankVibe

    If you have a 680+ credit score and have been in business for 2+ years, I’ve seen business loans advertised for under 5% APR.

  • Linden

    Great to see this concept being mentioned more nowadays. I’ve been a lender for sometime, and after defaults, I’m still making 7-8% returns.

    My recommendation is to start slow ($500 will get you into 20 loans) and learn from picking those loans, then once you understand how it works, move your long term savings into it (money you would have tied up in CDs anyway).

  • Pingback: High Yield Savings Is Dead

  • nobo

    yep people with prime credit are desperate to use peer to peer lending lol

  • farmerfrank

    I guess I’m not very observant. I opened an account with Lending Club with $1,000 and began buying notes. When nothing went through, I re-read everything on their website and discovered I live in one of the majority of states in which the notes can’t be bought. I closed my account yesterday. It’s only an option for certain people, depending on where you live. I feel shortchanged, but will probably survive it. Que sera?

  • Savy Sam

    I have been with lending club now for 6 months and am set to make around 11% APY this year. I am diversified into a bunch of different borrowers and am going after a higher return. No defaults yet, but even if I had a few it would only knock my overall earnings down to 9.5 – 10% APY

    Cool savings product, two thumbs up!

  • http://www.bloggingbanks.com/ Blogging Banks

    But isn’t P2P lending a little too risky. Some lenders show that their total returns are lower than comparable no risk CD investments.

  • Peter

    Lending Club won’t let everyone invest. It’s based on how much income you earn, your total net worth, and where you live. I find that to be ridiculous!