About Lending Club IRAs
Investors can now take over the role of a traditional bank through the peer-to-peer (P2P) lending service Lending Club. P2P lending is brand new concept that has just been introduced in to the market a few years ago, and while Lending Club has made loans of over $7 billion already, this new investment vehicle is still carving out its place in investor’s portfolios.
What is Peer-to-Peer Lending?
Peer-to-Peer lending is the practice of lending money to individuals of no affiliation without going through a financial institution such as a bank. P2P loans can be sought for anything from credit card debt consolidation and home repairs to small business loans. This form of investing is still brand new and regulated by each state (see state restrictions below). The main advantage of P2P lending for both investors and borrowers is the interest rates, where borrowers are offered better rates through P2P services than banks, and investors have the opportunity for larger returns than traditional investment vehicles.
P2P Lending Risks
In the case of P2P lending, investors act much like a bank and therefore take on similar risks to creditors where late payment and eventually default is the primary concern. This risk is amplified due to Lending Club fees (see below) tacked on to late payments and situation where litigation is needed to solve a dispute. Furthermore, P2P loans are highly illiquid and cannot be bought and sold as freely as other investments such as stocks and bonds.
How Does Lending Club Work?
A borrower looking for a lower interest rate loan can turn to Lending Club where they can receive a personal loan up to $35,000. This singular loan is broken down in to pieces as small as $25, called “notes” which are sold to investors. Investors can purchase notes of all different increments and are able to diversify their holdings across many different loans, reducing default risk. Notes are graded based on borrower’s credit score, employment history, mortgage payments, and other related metrics.
IRA Choices
Unlike other alternative investment platforms, Lending Club offers a wide array of retirement account options, including:
- Traditional IRA
- ROTH IRA
- Rollover IRA
- SEP IRA
- Simple IRA
Secondary Trading Market
As risky as P2P loans are to begin with, the secondary trading market holds that much more risk. As stated on the platform:
“Notes are highly risky and only limited information is available about them. They are suitable only for investors whose investment objective is speculation. You could lose most or all of the money you invest in them. Folio Investing has no role in the original issuance of the Notes and is not responsible for and does not approve, endorse, review, recommend or guarantee the Notes or the accuracy, reliability, or completeness of any data or information about the Notes.”
However, since the secondary market is the only place these notes can be bought and sold, investors may have to take on these risks if they wish to liquidate a position earlier than expected.
Fees and Account Minimums
While there is no fee to open an account, there are some fees associated with the P2P lending service that investors should be aware of. A service fee of 1% is charged for any payment received within 15 days of the payment due date. That service fee jumps to 18% for payments that are more than 15 days late, and up to 30% of hourly attorneys’ fees if litigation is needed to settle payment.
Platform Features
Lending Club makes it easy to browse and filter a search for notes in a certain category. Investors can search for notes with the highest interest rates, borrowers with the best credit scores, note prices, and more. The platform is easy to use and all information is easily accessible, but due to the nature of the investment, there is not much additional research that can be done on each note.
Customer Service
Investor support is available by phone from 7:00am-5:00pm Pacific Standard Time, Monday through Friday. There is also a separate support line specifically for IRA accounts that holds the same hours of operation. There is an extensive investor support database that has answers to most questions for beginners, but those with questions specific to their account would be advised to contact customer service directly.
The Good
As a new investment vehicle, Peer-to-Peer lending has a great deal of room to grow for investors. Lending Club’s 1% service fee is reasonable, and investors who have background knowledge in personal and small business loans should be able to use the site with ease.
The Bad
In a bind and need to liquidate a Lending Club note? It won’t be easy, as the secondary trading market is underdeveloped and inefficient. State restrictions put a damper on the opportunity for an investor as regulation has yet to be standardized and those that can invest in notes won’t be able to do much more additional research than the basic information provided by Lending Club itself.
Lending Club IRA Review Conclusion
Alternative investments are always risky, and Lending Club is no exception. Attempting to get returns on a retirement account from another’s credit card debt is a risk that most should not be willing to take, especially when that investment is very illiquid. However, for those looking to diversify a growing portfolio and have the necessary knowledge-base, this new space is an exciting opportunity.
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