Lending Club just announced a new sign up bonus, and it has the potential to be a big one if you play it right. Happy Free Money Friday!

Lending Club is offering a 1% sign up bonus, starting at $50, for new lenders!

How to Get Your $50+ Sign up Bonus

1. Sign up as a lender using this special link: Lending Club $50+ Sign Up Bonus.
2. Make an initial investment of $5,000 within 45 days of signing up.
3. Get your 1% bonus within 15 days deposited to your account.

Here’s the kicker, I can’t find a maximum limit anywhere in the terms and conditions. So, while $50 is the least you’ll earn, it looks like the bonus may be limitless. Can this be true?

Lending Club Terms and Conditions

• To be eligible for the bonus, all funds must be newly transferred to your account within 45 days of your registration date, continuously maintained in your Lending Club account and fully invested on the Lending Club platform within 45 days of your registration date.
• Your bonus, if any, will be placed in your Lending Club account within 15 business days following the determination of your eligibility.
• Transactions in the secondary market (the trading platform operated by FolioFN) do not count as “investing funds” or towards unlocking the bonus.
• This bonus payment is taxable so please consult with your personal tax advisor. You are responsible for any taxes related to this offer.

For more lender details and information about Lending Club, check out our full Lending Club Review.

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Jill and I were discussing Lending Club tax reporting last weekend, and we thought it would be a helpful discussion for everyone, since many of you have taken advantage of Lending Club sign up bonuses.

Is Lending Club taxable? How do you report interest earned on Lending Club loans on your taxes? What do you do if you don’t get a Lending Club tax statement?

Let’s take a closer look at all of the Lending Club taxation topics.

Is Lending Club taxable?

Yes. How’s that for a direct answer? Just like income you receive from a savings account or other investment, your net earnings from Lending Club loans are taxable. So do yourself a favor and report it.

To get started, you’ll need three sets of statements for your Lending Club tax reporting: your year end statements, your monthly statements and your tax statements. You can find all three in your Lending Club account under the statements tab.

How do you report interest earned on Lending Club loans on your taxes?

Lending Club will produce various 1099s for you based on your investments. The most common is the 1099-OID (which stands for original issue discount). Here’s how to report it:

1. 1099-OID: If Lending Club sent you a 1099-OID, you’ll report it on Schedule B, Line 1. The 1099-OID for newer Lending Club loans replaces the 1099-INT they sent for loans a few years ago. More specific instructions for how to report OID tax forms are in publication 1212 on page 6, under how to report.
2. Reconcile your 1099-OID with your year end statement.
3. If there are differences (which I’m going to bet there will be), add any net earnings not reported on the 1099-OID to your taxes (see below for how to calculate the amount).

What do you do if you don’t get a Lending Club tax statement?

Chances are, if you are investing only $25 in each loan, you’re not going to get a 1099-OID.

Lending Club will only produce a 1099 for you when an individual loan has interest above $10. So, even if you have dozens of loans that together were greater than $10, you’re still not going to get a tax statement.

So that means many of you who are diversifying across lots of loans, as the social lending model is built on, are going to be in this situation.

Here’s how to handle it, since the Lending Club earnings are still taxable, even if you don’t get a tax statement.

1. Review the earnings summary on your year end statement.
2. Calculate your taxable earnings. Taxable earnings = loan interest + late fees – servicing fees.
3. The loan interest and late fees are displayed on your year end statement.
4. Unfortunately the servicing fees aren’t, so you have to look back through your account to add those up. They are displayed on your detailed monthly statements. Hopefully, Lending Club will fix that in the future, because I have to be honest, that’s a pain point.

If you are adding your self calculated net earnings to the amount on your 1099-OID, be sure you don’t double count any of your loans by mistake.

Lending Club Charge Offs

Another tricky Lending Club tax topic? The charge off.

I had a charge off awhile back which was even stickier when it comes to taxes. Based on all of the regulations I’ve read, there could be a few different ways to report your charge off.

By the way, because I know some of you are going to ask…. I handled the charge off by reporting it as a personal bad debt and showing the net loss as a capital loss on Schedule D.

Lending Club Taxes

When it comes to taxes, Lending Club investments do take a bit of work; it’s something we need to add to our Lending Club Review.

But obviously, if you scored a Lending Club sign up bonus, free money is worth a little extra paperwork.

Hopefully the instructions above will help make it a little easier! I realize it’s a lot to take in, and I wish there was a more straightforward way to explain Lending Club taxes.

Be honest. Does this make the Lending Club tax situation more clear? Or are you even more confused than before?

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Our social lending arbitrage expert, Derek, is back! After one of my Lending Club loans defaulted, I really wanted to know how Derek’s loans were doing! We’ll check in with him and see how his strategy is working…

Social Lending Arbitrage

Its been six months since I first introduced my Social Lending Arbitrage method to the mydollarplan community, and Madison has asked me to provide an update on where I stand with my method.

To summarize the idea, this method basically plays an arbitrage game similar to the no-interest credit card arbitrage popular on the site but with a slightly different twist in that I’m borrowing money at a lower interest rate and lending it out at a higher interest rate — and pocketing the difference.

Social Lending Arbitrage Numbers

I borrowed $10k from lenders at the Lending Club website at an interest rate of 7.78% and turned around and invested that capital (minus some service fees taken out by Lending Club as a part of the loan) to other borrowers with a higher risk profile than myself. It is a method wherein I profit off of varying appetites of risk. I have a higher risk appetite with this money than other lenders and as such, I make a return off borrowed money (Note that I have enough cash held in reserve from other sources that I am able to cover my loan should the social arbitrage world end tomorrow, so my sense of risk is appropriately higher than someone who does not have that).

Metrics as follows:

• Amount Borrowed: $10,000
• Interest Rate: 7.78% (Or $1,245 over 3 years)
• Total Fees: 1.25% (note that this has since gone up to 2.25%) (Or $125)
• Total Cost of Capital (3 yrs): $1,370 (13.70%)

Loans:

• Amount Loaned: $9,875 ($10,000 minus $125)
• Loans filled ($25 per loan): 395
• Est. Default Rate: 2.5% ($247 in total)
• Net Invested: $9,628
• Average Annualized Return: 14.69%
• Service Charge: 1%
• Net Return: 13.69%

Total Return of Invested Capital (3 yrs): $2,166 (22.5%)

Arbitrage Gain (3 yrs): $797

Social Lending Details

I personally choose all 395 loans, which I feel was incredibly time-consuming, but also ended up being to my benefit, as the default rate is lower than normal (outlined in more detail below). I have not decided whether I would go that route should I do this again in the future, since it was more time-consuming than I was ok with.

The beauty of this system is that I have isolated all transactions related to this set up to one bank account which is fully automated — I don’t touch it month over month. My only real work after initial set up was to determine whether my default rate is staying below my forecasted rate of 2.5% (which I update quarterly).

I am 1 year into this plan and thus far, of the 395 loans I have funded, I have had 2 default (one with 3 payments made in total, the other with 6), which translates into a 1.50% default rate (assuming I will have another 2 default per year through the remaining 2 years). This equates into more of a return than I had originally forecasted. Happy day!

While it is next to impossible to determine which loans could potentially default in the future, I was highly surprised that of the sheer number of loans I have funded, 10 have had any late payments, and of those, only 2 have defaulted. My thought behind this is that barring unforeseen financial hardships that could occur to my borrowers, I would expect those that have been paying so far to continue to do so through the end of the loan term.

Selling Riskier Loans

I have kept a close eye on the credit scores on all my loans with a lower than B rating (the riskier loans in my portfolio) to see if they are getting “riskier” than they were when I originally funded the loan. Should any fall substantially far below their original rating (something at this point I consider subjective from both a rating perspective as well as my own viewpoint), I plan on selling the debt to someone with a higher risk appetite than myself.

How to do so? Luckily for me (and others), Lending Club and Prosper have provided their members the ability to sell the debt they own to other members on a trading website Folio Investing. This adds a degree of flexibility to lenders in case they want to pull out on one or many loans. It effectively provides me the ability to increase my liquidity should I need it (although there is the potential I would lose my return or even my principal should I have to firesale the debt). In my mind, the more options I have for worst-case scenarios, the better I can exit this position and minimize my losses should the worst happen.

Social Lending Projections

Using the updated default rate, my new forecast calls for me to earn approximately $835 over 3 years. This assumes I do not reinvest the return I make on new loans (which at this point I am not doing), so theoretically this return could be higher than that should I choose to do that (which I am considering, but have not had the time to properly research new loans). The idea that by reinvesting, I compound my return makes this plan all the more enticing! Not only am I receiving free money, I begin to see an even greater return as the free-money snowball gets larger over time.

I must reiterate that this investing method is definitely not for everyone. Every investment has a level of risk and while I feel this is easy enough for myself to earn a small return, others may not like the inherent risks of investing in a new vehicle such as social lending is. This is a relatively new type of investment and while the intent behind the system is very noble, some may consider the relative ease of borrowers’ ability to game the system to be riskier than worthwhile. Others may consider the return in actual dollars to be too small for some people to consider – this may be more work than worthwhile. Again, its a personal decision.

For myself, free money is free money, and is completely passive income, which in my mind makes the process worthwhile. What kind of free money returns do you have?

Lending Club is giving a sign up bonus to try out social lending for free. If you haven’t taken advantage of it yet, you can try it out at: Lending Club $25 Sign Up Bonus.

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Lending Club has a new bonus that’s a fantastic follow up to the great discussion earlier this week on social lending arbitrage. It is this week’s Free Money Friday offer!

Lending Club rolled out a new website, and sent an email to current investors detailing the bonus offer.

How to Get Your $150 Bonus

1. Be an existing Lending Club investor and apply for a new loan.
2. List the loan by February 28, 2010 and make sure the loan is fully funded prior to midnight PT on March 15, 2010.
3. Bonus will be given after first loan payment is received.

Lending Club Offer Details

I sent an email to Lending Club to get some more information on this bonus program. They confirmed the following details:

• This offer is exclusively for existing Lending Club Investors who wish to take a loan.
• There is no minimum on the loan amount.

There was a link in my email that looked like it was tied to my personal information, so you’ll want to check your email for your own link to make sure you get credit for the bonus. The email was titled “Celebrate our new look with a $150 bonus” if you are looking for it.

Even though the link was personalized, the email did contain the following note:

• If the link above is unavailable, please copy & paste this URL into your browser: https://www.lendingclub.com/borrower/applyForALoan.action

Free Money Math

After I botched the math on the last Lending Club bonus offer, I’m certain the math works out better on this one… even with the service fee! A lower loan amount and the larger bonus will definitely lend itself to some free money.

So if I take a out a $1,000 loan, I pay $22.50 for the 2.25% servicing fee, less than $10 in interest for the first month (assuming great credit which starts at 7.89%), and get a $150 bonus. I net over $100. Right, readers?

This was just the offer I was waiting for to give the social lending arbitrage a try! Now I just need to make sure to apply and get the loan listed before the end of the weekend!

If you aren’t a Lending Club investor yet, you might want to sign up for an account (and get a free $25 Sign Up Bonus) so you’ll be eligible the next time one of these offers shows up.

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Social lending arbitrage. It’s the newest finance game in town. A reader, Derek, shares the details of how to pull off this fascinating arbitrage strategy. A special thanks to Derek for sharing his story with all of us!

Social Lending Arbitrage Explained

Let me tell you about my arbitrage strategy that I’ve used successfully for almost a year on both Prosper and Lending Club.

In this instance, I borrowed $10,000 using Lending Club at a relatively cheap rate of 7.78%. I say relatively cheap in that A) it was being offered to me, and B) the price tag in the form of interest was small given the fact that it was actually being offered. This is by no means free money, so your returns will be lower than if it were a no interest credit card offer, however I’ve noticed those credit card offers have disappeared with the credit crunch we’ve been seeing over the last two years, and bank lending has similarly been affected as well.

That being said, my risk appetite is somewhat greater than the average person’s, and my investments tend to reflect that. I took the $10,000 I borrowed from Lending Club, and put it right back into Lending Club (with a balance also going to Prosper as well), looking for somewhat riskier borrowers than myself. I applied $25 per lending note and spread the total notes by risk class (A, B, C, ratings, etc), taking into account current default rates by risk class to get an estimated return. Looking at all the notes I invested in, I know about 2.5% will default based on current data. But the fact that I diversified my investment into as many notes as possible will (hopefully) minimize my default rate.

A Closer Look at the Numbers

Taking all that into account, my return on investment is close to 15%, with a 2.5% default rate means my net return is close to 12.5%. I pay 7.78% on that capital, and pocket the difference (4.72%), or about $500 over three years.

Yes, this is a lot of work for $500, but not only does it add up quickly, its something that can be built off itself very quickly — the compounding returns only make my returns bigger over time. In my mind, I’m also helping people fulfill their needs by supplying them capital to accomplish their goals. If I can make money and their needs are satisfied, then everybody wins.

I do understand this game isn’t for everyone – I have enough cash in the bank to cover my debt if all my notes default (which has next to no chance of ever happening). But it is free money, and its a very fun 10-minute a week hobby.

More about Derek

I think its good to frame what I do with how I go about doing it. I’m a financial analyst at a growing company (a rarity these days) and because I look at capital flows professionally, over the last few years, I’ve picked up on a few tricks used by companies to grab a decent return on their capital, as well as increasing their capital on-hand for capital buildouts and revenue streams. That being said, I’ve modeled some of those strategies (albeit on a much smaller scale) in my personal life as well. Some with great results, others not so great.

One of those strategies is finding good returns on capital, and having capital offers come your way at a relatively cheap price.

Action Plan

Of course, Derek had me at hello on this one! I’m considering a small scale social lending arbitrage experiment at Lending Club for some reader enjoyment. However, it might have to wait until our credit card arbitrage strategy is exhausted. Either way, stay tuned for more details on social lending arbitrage!

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