What started out as an interesting and exciting new investment path has turned down a dark road.

If you don’t know, Lending Club was the first of the peer-to-peer lending Fintech businesses. Linking those with money to those wanting to borrow, bypassing the big banks in the process.

For the past 6 months I have stopped reinvesting my money into new Lending Club loans and have withdrawn the money instead. This follows a year in which I had stopped my regular contribution of $25 per month.

It simply isn’t worth it anymore. And it isn’t because their former CEO was found to be acting fraudulently either.

Here’s why I am getting out of Lending Club.

My account, for reference

Taxes

Unless you had placed your Lending Club investment into an IRA, you get a whopper of a 1099 tax form to deal with. Believe me, it is NOT fun to deal with. Still don’t understand? Every loan write-off is a line by line entry. Every partial recovery is the same thing.

Add in the fact that any returns are taxed at your regular income tax rate and you better have some good returns to make up for all this extra effort.

Not true at all.

I’m currently getting an adjusted return of 7.13% according to LC (which is something to be skeptical about as they seem to fudge the numbers to their benefit), and dropping.

Underwriting

Is this loan a scam? An Engineer that spells his job as “Inginer”?What was billed as a way to help credit-worthy individuals save a few percent on their loans has turned into LC only having some of the most desperate people apply. I believe that this is because of the high fees charged by LC to stay solvent. Anyone who is a decent credit risk has gone to their bank instead of Lending Club. Also, who would borrow and repay20,000 over 5 years at 17.99% interest? That is in itself a red flag.

Lending Club loans are also unsecured debt. Meaning that there is nothing to repossess should the borrower not pay. Seems like you should be given an above-average return chance for the above-average risk you are taking on when you invest into one of these loans, no?

It seems that people are taking LC loans with the direct intent to never pay a dime. Whether they are taking the loan as themselves, or even identity thieves posing as a potential borrower, the amount of loans with little to no payments made is high.

Which leads me to the next point.

Recovery and Charge-Offs

I’ve only ever got 56 cents worth of late fees.LC is absolutely HORRIBLE at getting late payers to pay up, or to reclaim any money should the borrower default. The reason being is that this activity costs money, and LC doesn’t really get much in return. So it seems as if they just call or email the late paying borrower and ask that they pay – if not, oh well it isn’t our money.

LC only seems to be interested in the origination fee, which is 5-6% or so.

To combat this image, LC recently started putting a 5% “Skin-in-the-Game” amount into each loan. Pretty nice that it is the exact percentage they get for the originations. They get the borrower to pay for LC’s ‘skin.’

Oh well, at least they have a 5% reason to go after these delinquents now. Still, not enough for me to stick around considering all the other problems with the platform.

At least I can have a chuckle about people falling for these obvious scams – send Lending Club iTunes gift cards as payment, seriously? What morons fall for this?

Conclusion

I loved the idea of Lending Club. Bypass the banksters. Allow someone in need of a loan to have a reduced rate while you get to have way more interest than you would get in any bank account.

It seems that the experiment is falling apart. During a time when consumers are in the midst of a strong job market, you’d think consumer loans would be performing excellently. Instead, LC’s loans are seeing diminishing returns.

I always manually chose which loans to invest into and purposely only invested into small loans. Like this one for $2,800:

Yet, even something with a less than $100/month payment is about to be defaulted upon. I mean I could sneeze up a few hundred dollars every month with minimal effort.

So I am done with Lending Club. I hope they can sort out the problems, but if I ever feel the need to invest in debt I will just buy bonds instead.

At least that way there won’t be much of a tax headache and if the company defaults the bondholders will be first in line to get paid.