Alternative Approaches for Investing With Lending Club

A reader named BC recently wrote in to share his experience investing via Lending Club even though he lives in an ineligible state. For those that are unaware, residents of 22 states are ineligible to invest directly in Lending Club notes*.

In most cases, however, there is a workaround, as you can still invest in Lending Club notes via their trading platform. I first talked about the note trading platform this past Friday when I mentioned that I wanted to unload a couple of sketchy notes before they defaulted.

The good news is that, while many investors use the trading platform to sell off bad loans, there are a number of good loans listed there, as well. The reasons for wanting to sell a note with a favorable payment history vary, but some investors do this when they run into a liquidity problem and need to raise cash.

Anyway, here’s what BC had to say about his experiences:

As a Michigan resident, I am not able to fund Lending Club notes at origination, so my only way to acquire notes is through the trading platform. This is a bit more time consuming, but it does allow me to buy notes with a favorable payment history.

I also only buy notes at par or at a discount and avoid notes where the borrower’s credit rating has declined since the issue date, and I avoid all business loans. This limits my population of acceptable notes, but so far I haven’t had any trouble putting my money to work.

He then went on to detail an interesting note trading strategy, which involves immediately marking the loans up and re-listing them for sale to other investors.

I have devised a strategy where I place every note that I purchase up for sale at a premium. The amount of the mark-up depends on how many days I’ve owned the note and takes into account: (a) my original investment, (b) payments I have received on the note, and (c) the selling price less the 1% transaction fee.

Believe it or not, notes do sometimes sell for a premium. This effectively reduces the return of the note for the buyer, but some investors seem to prefer to buy “proven” notes with a decent initial payment history.

This is a very interesting approach. BC has apparently been able to sell about 35% of the notes that he’s bought, and the short hold time on these notes (an average of 18 days) combined with the small profit that he makes when selling annualizes out to a return of roughly 40%. At the same time, he’s earning over 10% on the notes that he winds up keeping.

All in all, I’m impressed. This isn’t really a viable strategy for me, as it takes a good bit of effort to keep tabs on everything, though I must admit that it’s tempting to start putting my notes up for sale at a premium just to see what happens.

*Note: For those that are curious, here’s the current (as of 03/22/2010) list of eligible states for investing directly in new Lending Club loan originations:

  • California
  • Colorado
  • Connecticut
  • Delaware
  • Florida
  • Georgia
  • Hawaii
  • Idaho
  • Illinois
  • Kentucky
  • Louisiana
  • Maine
  • Minnesota
  • Missouri
  • Mississippi
  • Montana
  • NewHampshire
  • Nevada
  • NewYork
  • RhodeIsland
  • SouthCarolina
  • SouthDakota
  • Utah
  • Virginia
  • Washington
  • Wisconsin
  • WestVirginia
  • Wyoming

If you live in another state, you’ll likely have to rely on the note trading platform to get your Lending Club fix. I have, however, heard of people in ineligible states being able to invest directly. I’m not sure how/why, but I suspect it might have to do with linking a bank from an eligible state (e.g., ING Direct) when setting up your account.

If you have any details on this, please share them in the comments.

10 Responses to “Alternative Approaches for Investing With Lending Club”

  1. Anonymous

    When investing in the secondary market (Note trading Platform) should I always compare the Principal + Interested with the Asking Price?
    What is gonna happen if the P+I is smaller than the AP? I will pay a premium?

  2. Anonymous

    I am also able to invest from an ineligible state. I did opened my account very early on. I am assuming that I will have no protection from the state if something was to happen. So, as long as I report my earning on my tax form why should the state care where I earned my money, like online gaming or winning lottery in another states. I am a little nervous. My loans are piling up.

  3. Anonymous

    I have live in an ineligible state and can invest directly. I believe cause I had loans before they went through their registration with the SEC. I was trying to get with Prosper after they went live again and could not.

  4. Anonymous

    One thing to consider when using the trading platform is that it makes things VERY cumbersome at tax time. All of your sales are reported individually to the IRS. However, FolioFN does not produce tax forms for you. You must actually find the cost basis yourself for each transaction and then create a spreadsheet with several statistics for each trade to send to the IRS. There are a lot of great deals on the trading platform but you should keep your own records of your transactions or you will be kicking yourself when you do your taxes.

  5. Anonymous

    I was considering the strategy of “selling notes at a premium on the trading platform” as well and it was nice to hear that the strategy actually works. Thanks!

  6. Anonymous



    I too would like to know how to sign up for a secondary account when your state is not an available option. Thanks.

  7. Anonymous

    I tried signing up to buy notes just to check it out but it asks for my address and doesn’t list DC on the list of options. How can I take part in the secondary market if I can’t sign up?

  8. Anonymous

    My state is not authorized for direct purchasing either, and I have been buying notes on the secondary market. I actually imagined this same scheme at one point, but have not acted on it.

    When I first started buying notes, I didn’t pay much attention to the markup, just to the resultant interest rate. Now I always buy at a discount.

    I have purchased about 15 notes altogether, totaling about $600, and have had no defaults and 2 early payoffs in the 6 months I’ve been buying. All with a 13% average interest rate.

    I think that even if my state started allowing direct purchasing I would consider sticking with the secondary market since the loans on there are already seasoned.

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