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.
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.)
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:
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!