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
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.
