Lending Club PRIME Review

Lending Club Prime Acccount

Lending Club offers two kinds of accounts, standard and PRIME. I have both types of accounts, and today I am reviewing the Lending Club PRIME account. This week marks ten months since we opened our PRIME account so I thought it was a good time to provide a review. I opened a PRIME IRA account in April 2010 in my wife’s name when I rolled over and consolidated some of her old work 401k’s.

What is Lending Club PRIME?

[Update: In late 2011 Lending Club increased the minimum investment to open a PRIME account from $5,000 to $25,000]

PRIME is a “full service” account for investors with at least $5,000 $25,000 to invest. It is a special kind of account where Lending Club does all the work for you. Basically, you choose the rough interest rate of the loans you want to invest in, which equates to high, medium, or low risk loans and then Lending Club does the rest. There is no screening or filtering of loans, Lending Club just puts your money into a diverse group of loans based on your chosen level of risk.

How a PRIME account works

Once you designate an account as PRIME and you have transferred your money in, that is about all the work you will need to do. If it is an IRA account like this one, you don’t even need to worry about taxes. Lending Club will also reinvest all your principal and interest repayments for you. After the account has been open over a month you will notice regular emails from Lending Club as they are constantly reinvesting your repayments in new notes. I have found with our account we average an email from Lending Club about a reinvestment every two days or so. They don’t let much cash sit idle in your account and they keep you fully informed.

You can still login to your account at any time and check your returns and the notes in your portfolio. Everything is the same as a standard account except that you don’t do any investing. One important point to note: there is a one time charge for setting up a PRIME account, it is 0.8% of the balance. You just pay this charge on your total initial investment, the reinvestment of cash carries no charge.

My experience with a PRIME account

Lending Club PRIME account details

While the 0.8% charge definitely gave me pause I decided to go ahead with the PRIME account and I am happy I did. I chose the medium level of risk and as you can see in the chart above (click on the graphic for a better view) I am invested in over 700 notes with an average interest rate of 12.3%. These notes are producing a return of 10.48% as of today.

With my initial investment of just over $52,000 Lending Club took almost three full months to fully invest this money. The average amount invested per loan was $100, so I ended up with a very diversified portfolio. Now, as I said Lending Club is reinvesting the available cash two or three times a week and they have dropped the amount invested to around $75 per note now.

One word of warning about all Lending Club accounts, including PRIME accounts. Your Net Annualized Return (NAR) will likely be much higher initially than your long run return. This is because it takes defaults a minimum of five months to show up as a loss on your account. To give you an example, my NAR started off at just over 12% (it corresponds very closely with the average interest rate of your loans) and it has dropped with each default to around 10.5% now. I expect I will end up with an NAR somewhere between 8% and 9%.

Is a PRIME account for you?

According to Lending Club the average PRIME account has around a $100,000 balance. An account of that size will generate roughly $200 a day in principal and interest repayments depending on the terms of the loans. To keep that account fully invested could be a lot of work. For those people who have at least $5,000 $25,000 to invest and want the good returns of peer to peer lending without any of the work then a PRIME account is for you.

Almost by definition a PRIME account will net you average returns. If you want to earn higher than average returns and you don’t mind spending the time trying to achieve that then stick with a standard account. You may dislike the 0.8% service charge of a PRIME account, in which case you will have to take charge of your investment yourself. Either way, you will have the opportunity to earn the high returns enjoyed by most p2p investors today.

Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech.

LendIt Fintech conducts three conferences a year for the leading fintech markets of the USA, Europe, and Latin America. LendIt also provides cutting-edge content all year long via audio, video, and written channels.

Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.

Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.

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Phillip McFarland
Phillip McFarland
Feb. 14, 2011 7:28 pm

Great insight for the different accounts. I have always heard and wondered the difference. I still feel like I want to be in charge and essentially control my fate but this is definetely a viable option.

Dan B
Dan B
Feb. 15, 2011 1:44 am

What’s the breakdown between 3 & 5 yr loans in your account?

Dan B
Dan B
Feb. 15, 2011 2:00 pm

An account starting at $52,000+ with a return listed at 10.4% percent…………….& yet at the end of the 12 month period the total interest received for the entire year will be about $4500. Doesn’t sound like a 10.4% return, does it? Well, that’s because it isn’t. And that doesn’t include the close to $500 loss in principal & the $170+ in LC service fees for the year. So the “total return” for the first year in actual dollars will be around $3800+.

Just another example of how money sitting around (during the initial 3 months) really weighs down the real world returns. Of course this is a one time thing & the funny thing is that the 2nd year will get you more interest but a much lower NAR number (probably under 4%) after the account gets hit by AT LEAST another 20 defaults. Think I’m exaggerating the default numbers?? Think again, as that number will likely be an underestimate of defaults given the current rates. Talk to me in 14 months & you can praise me on my Nostradamus like predictions. 🙂

Dan B
Dan B
Feb. 15, 2011 4:22 pm

No, your returns will be around $4500. That’s $3700 thru now in interest plus $800 for the next 2 months which will get you to the 12 months.

Dan B
Dan B
Feb. 15, 2011 4:42 pm

Each default will knock your NAR down by approx. 0.4%. Assuming a normal distribution of defaults in the next 7-8 months & peaking towards the end of those months, the NAR will dip to as low as 2.5%……………..then recover to just under 4% by the end of the 2nd year (14 months from now). Of course the 3rd & 4th year will see a continuous rise in the NAR as newly invested loans will be spaced out & this initial block of loans is replaced by brand new ones & we’ll repeat the entire cycle again at that time.

Mike
Mike
Feb. 15, 2011 5:11 pm

Does Lending Club still take their cut when each loan is paid every month? Is the .8% fee a onetime hit or an annual charge?

Dan B
Dan B
Feb. 15, 2011 7:04 pm

@Peter…….You’re asking 2 related yet separate questions.
Yes, there are many factors that affect the amount that the NAR will decline with a single default. But you’re not facing 1 default, so the 0.4% is an average per default that will occur within the 12-24th month of a note. With 300+ notes, & into his 2nd year Matt over at Steadfastfinances had his 1st default recently………..it cost him 0.86% off his NAR.
I had around 500 notes & was into my 13th-14th month when I suffered my 4 defaults. Each of them cost me around 0.7%+ off my NAR.
You have 700+ notes & have already had 5 defaults (not 3) in your 1st year (3 charged off & 2 defaulted but not yet charged off)………..& each of the 5 lowered your NAR by an average of 0.35%. I’m not making this up. All this has already happened. So I stand by my 0.4% estimate especially given the fact that the defaults will be coming from the $100 notes & not the more recently purchased $75 ones.

Now for your 2nd question regarding real world returns…………. You should definitely bring in $5800 in interest………..actually more like $6800+ in interest next year given your 12%+ rate. In any case………..yes, a $80 default is a small amount compared to the interest you’re receiving annually & there lies the problem with the way NAR is calculated. The defaulted amount comes out all at once & not

Mike
Mike
Feb. 15, 2011 8:17 pm

Thanks, Peter. Looking over the loans that have been charged off, or are in the default or late categories, is there anything in the original listings that would have alerted you not to invest in these loans? Does PRIME sell any notes on the folio platform? If not, can you ‘intervene’ and sell notes that you choose to unload, or is the account on total autopilot?

Mike
Mike
Feb. 16, 2011 1:14 pm

If LC or Proper displayed their real world return as prominently as they do their NAR, it would lead to a lot fewer investors.

Following up on the other issue I raised, were there any clues in retrospect on your late/defaulted loans that you might have picked up on?

GaryH
GaryH
Jul. 17, 2011 7:17 am

I am in the process of opening an account at LC and am considering the PRIME Account. In reviewing the four Target Interest Rates (10% – 16%), I was wondering if LC reports performance data related to the results in
achieving those targets? I understand that the portfolios for
the higher target rates carry higher risk but it would not
make sense to select anything but the highest rate unless it was
underperforming compared to the other target rates.

Ron M.
Ron M.
Jan. 13, 2012 7:27 pm

Peter how is your account doing now ?