To even try for the 15% return, you have to go for the LendingClub E,F,G category of borrowers – and those have default rates from 4% to 8%. Net return is no greater than 10%.
Chart is available on their Statistics page:
https://www.lendingclub.com/info/demand-and-credit-profile.action

My 2cents on this also is these are loans over a 3year period. The site has barely been in business that long – bringing up significant issues on track record. And borrowers in the later portion – year 2, year 3 – could easily transform from to a lower credit profile or just lose interest in paying off completely. Most borrowers are already trying to dodge paying their legitimate creditors with ‘consolidation’ loans, so what’s to prevent them from dodging paying off to a fly-by night site.

That being said, there is no way I would borrow to invest long in this market.

For example, Annaly (NLY) is in the business of mortgage-backed securities. I would not be very confident in their ability to continue to pay such a high dividend. Their decline in price reflects investors’ anticipation of a reduction in future dividends (and earnings).

I still think you are better off going this route, although it sound like it you already took out the loan. I do hope it works out for you — best of luck!

The only way that you are going to get the 15% return that Josh is talking about is with some dividends. There are some good stocks with some higher dividend yeilds out there. Annaly (NLY) is a good example. The current yield is 16.80%. Another one to consider would be Frontier Communications (FTR) with a yeild of 11.5%. The big problem would be that you would not be able to cover the payments since you would have to sell stock to cover the payments. Also the a dip in the stock price would hurt if you had to sell at a bad time to cover your payments.

I’m not sure where you’ll find an investment with a 15% return right now that has a monthly cash return like this — please let me know if you have something in mind — I’d love to take a look!

The difference between a 7.78 interest rate and a no interest credit card is only that your returns will be smaller and you are forced to take higher risk investments in order to get a return.

One way to get around the tax liability is to take your investing capital and put it into a tax-deferred IRA, however the downside to that then is you’re effectively paying your 10k loan using post-taxed dollars and putting it into an IRA…. so there are definite possibilities to avoid paying tax, but in my mind free money is still free money – even if it is a bit less as a result of your tax payments.

I think you are better off not taking a loan unless you can get a 0% rate from a credit card, especially since you will be taxed on income that is not really income (since you cannot deduct your loan interest).

[...] Social Lending Arbitrage Steals My Attention [...]

Ultimately its all about risk appetite — if you would feel uncomfortable putting your name on the line by doing this, then its probably not for you.

Although the future is always uncertain, I will say that the last 2 years really skewed that default rate — economic conditions are not normally that horrendous, so while I don’t want to make light of your situation, I am of the mind that such drastic downturns in the economy will not happen on that scale in the next few years, so the risk of a 25% default rate in the future is slim. Not zero however. I could be entirely wrong. Again, it all comes down to risk appetite.

My original model can be summarized as follows:
Borrow 10,000 @ 7.78% — total fees: 1.25% or $125. Total interest payments over 3 years: 1,244.60. Total fees: 1369.60, or 13.70%.

Lend 9,875 @ 15% — total fees: $119 (or approx 1% of interest/principle payments over 3 years).
Gain on investment: $2,450
Back off 1% Fees:
Adjusted Gross Gain:$2,330, or 19.28%
Back off interest:
Net Gain: $960

Worst case scenario assumes that I lend 10 people (2.5% of $25 investments.. approx) who never pay up — not one payment. This drops the $960 to $710, which is greater than the $500 I stated above.

Here’s what I found:
Amount loaned out: $10,000 at 15% Interest
Service Fee: 1% of each payment
Anticipated Revenue if zero defaults = $1,093.55
Anticipated Profit if 2.5% default = $848.55

In another scenario, I factored in the borrower processing fees of 2.25%. In other words, while the loan amount might be $10,000 you’re actually only going to receive $9,775. If you only loan out $9,775 the anticipated profit with a 2.5% default rate, is $571.19.

In either case all of my calculations had a higher return than Derek’s estimate. I’d love to know if I’m missing something in the calculation. Derek – if you’re reading, can you weigh in?

2 years on I have 25% of my loans in default and have lost $186.

I think the worst is over and while I may have one or two more defaults, the large part of my remaining 28 loans should keep producing. I think I will make a little money in the end, but nothing worth the time and effort you spend selecting loans, etc.

I like the idea, but social lending is still too new for me to want to try it. A lot of trust to place in other people in this economy. You’ve got to be willing to lose ten grand — something I can’t comfortably do at this point.

I would like to start adding more money to my lending club portfolio but is seems like the taxes would be overwhelming as compared to just keeping my money invested in stocks.