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I'm an undergraduate student with some money made from summer jobs, the few loans that I have are all subsidized so I'm not paying any interest. I'm looking to invest some of my savings into something better than .05% APR.

I just learned about Lending Club and thought it was a really cool way to make micro loans and make some money at the same time. My question is about the accreditation process that Lending Club goes through, if anyone knew more about it.

Lending Club (or some other legal authority really) requires 70,000 in income for lenders. I'm wondering how they follow this up, if I have the money to give them, it doesn't matter, right? Is there any legal implication for me if I check the box saying that I do have that much income? Or will I just get "caught" by them and not allowed to put money forward?

  • The default rate for lending club is very high, I think they are weak in their collection and screening processes. While not much you can earn .8% with an online savings account. – Pete B. Oct 27 '14 at 12:28
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To what end would you want to break the law? Why would you think it is beneficial to you in any way?

The reason for these limitations is to protect people who have no financial reserves and are not sophisticated investors from making dangerous and risky investments with the little money they have to invest.

You need to remember that there's no guarantee of principal with these loans and the rate of default is pretty high. From my own personal experience with Lending Club (and I've only invested in A and some B-rated loans) - rate of default is about 10%.

This may be a nice exercise in microlending - but if you want to put all your savings into this, you're taking a huge risk. Risk which is completely unjustified since not only the returns are pretty low (again - from my aforementioned experience: <6% APR, you take higher rate loans - you get higher rate of defaults), but they're also taxed as ordinary gains.

Why would you not, instead, invest in a more conservative bond or bond/stock mix fund which will pay you dividends that will get preferential tax treatment and appreciation would be subject to capital gains tax? No reason. And the limitation on who can invest in Lending Club is there for exactly this purpose - to weed out people like you who have no idea of what they're doing.

  • What I'm looking for is to take the money that I have now and turn that into a bit more so I can pay off loans in the future, rather than start a retirement fund. I wanted to try it to see what it was like so that I could make a decision but since I don't make 70,000 dollars annually, I'm not really in a position to do that. -- Why should I be weeded out if I understand the risks and commit my money? Of course I wouldn't commit my bank account to it. But 200 dollars to play with isn't really a risk as far as I'm concerned. – Throsby Oct 27 '14 at 2:48
  • @Throsby generally, investing in instruments other than publicly traded is allowed to SEC-accredited investors, which means net worth of 2MIL. So Lending Club got a break here, but still - if you can't get to even that (much more lenient) limitation, you should probably look elsewhere. Why? Because you clearly don't understand the risks. – littleadv Oct 27 '14 at 2:50
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    Another thing to consider, of course, is that Lending Club are not interested in investors with $200. They won't earn anything from you, but they have something to lose: you'll invest $200, earn almost nothing, get disappointed and not invest with them again - they lost a customer. They would much rather have you invest your IRA savings with them (tax free) than get disappointed over miniscule amounts of money. – littleadv Oct 27 '14 at 2:53
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    Do you really think that I don't understand I could lose the money that I put into an investment? I have other stocks, I was looking to diversify past that and learn about a new instrument. And if 200 dollars isn't important to them (and I certainly understand it's a small hypothetical amount), I wasn't really a customer to begin with, was I? If it's really nothing, it shouldn't matter. If it is nothing and it DOES matter then what is it? That seems REALLY illogical. – Throsby Oct 27 '14 at 2:58
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    @Throsby you're only one specimen. Statistically, a person with less than 70K income is very unlikely to understand fully the repercussions. The laws are not written against you personally. That said - I still haven't seen you addressing my question. What good will it be for you? Why do you think it is beneficial for you? And why would you not prefer better investment options? – littleadv Oct 27 '14 at 3:38

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