Lending Club, as one of the pioneers in peer-to-peer lending, has attracted many investors since its inception. But is it really a good investment option? This article will analyze the pros and cons of investing in Lending Club to help investors make informed decisions.
Low minimum investment makes lending club accessible
One of the biggest advantages of Lending Club is that it has a low minimum investment requirement. Investors can get started with as little as $25 per loan. This makes it very accessible even for those with limited capital. The low investment threshold allows investors to diversify their portfolio across many loans to reduce risk.
Potential for attractive returns compared to other fixed income investments
Historically, lending club loans have generated returns in the range of 5-7% for investors. This is higher than many other fixed income investments like bonds or savings accounts. However, investors need to be aware that returns are not guaranteed. Default rates and prepayment risks can reduce actual realized returns.
Automation and data-driven underwriting improves efficiency
Lending Club utilizes technology and data analytics to automate the loan application and approval process. This results in much faster processing and improved efficiency compared to traditional lending models. However, some feel the automated underwriting lacks nuance of human evaluation.
Higher risk than conventional fixed income investments
Lending Club loans are unsecured personal loans made to borrowers with varying credit profiles. The loans are not backed by any collateral. Hence, they carry a higher risk than conventional fixed income investments like bonds or CDs. Losses can occur if borrowers default.
Requires hands-on management and diversification
To generate consistent returns on Lending Club, investors need to proactively manage their portfolio, selecting loans and reinvesting payments received. Proper diversification across many loans is also critical to minimize risk and reduce impact of any defaults.
Lending Club can offer attractive returns for investors comfortable with the peer-to-peer lending model, but appropriate due diligence and portfolio management is required. It is higher risk than conventional fixed income, so diversification is key.