Is Lending Club No Longer a Good Investment?

Daniel Penzing
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To understand if Lending Club is still a good investment, it’s good to review if it was ever a good one at all. When it was first launched in 2007, Lending Club was an innovative way to make peer to peer lending easy, fast, and efficient.

However, it doesn’t really get much easier than the online platform. An investor only had to choose a loan, then a spread, and then the number of notes to purchase. Approximately 5 minutes later, the investor’s Lending Club account was funded and they were purchasing loans.

When the housing market crashed, Lending Club was in a market niche of people with good credit, income, have paid their bills on time, and were sound investments. Then everything changed. One by one, the banks went into a tailspin and stopped lending. The housing market crashed and the recession took over the country. Lenders were looking to cover their assets, and the best way to do that was to sell them in bulk. They sold off their large loans to Wall Street firms and others who bought them and bundled them into small chunks to put on the secondary market. In order to put them on the secondary market, the banks were required to put the loans into mortgage-backed securities (MBS).

It's a Big Stink About Nothing

With interest rates at almost zero on CDs and bank accounts, many people are looking for a better return than they're getting now. So they turn to peer-to-peer lending, or Lending Club, a site that matches up borrowers and lenders.

But the U.S. Consumer Financial Protection Bureau has issued a bulletin saying loan defaults have risen significantly.

Before making a judgment about this hot new investing trend, you need to understand that the CFPB bulletin says the increase in loan defaults is not a cause for worry. In fact, it's good news!

The bulletin points out some major changes in the way payments are made on the site. The changes can be expected to result in many more defaults until people and companies get used to them.

The finer points are easier to understand. In short, the changes that were made in late 2014 have caused fewer payments to be made on time in the last few months. That means that more people have been allowed to hand-pick their late fees for six months, rather than being automatically fined.

The site is still doing well financially, and analysts expect the company to continue to grow. The spike in loan defaults is more of a minor glitch than a major problem.