Hi PointsEarner,
I appreciate your perspective since you clearly understand finance pretty well. I get the sense that you have probably thought about LendingClub briefly with some suspicion but have never delved into the numbers. And after all - aren't we all interested in the numbers and only the numbers?
As you know, traditional retail banks have been making money on loans to individuals for hundreds of years, as have credit card issuers. The only difference is that LendingClub allows you to be the bank.
You are absolutely correct that creditworthiness, risk, and let's not forget loan purpose make all the difference. Just like stupid banks went under during the crisis, stupid lenders will not do so well in LendingClub. But the folly of the stupid should not lead to the disqualification of an excellent source of income.
Filters are extremely easy to use and can be customized to the full extent possible. So I only look at borrowers with low-risk characteristics who are looking only to get loads for debt consolidation, not for less safe ventures such as businesses or vacation money or medical bills. I would never give money to someone who needed it for a big expense.
Also, you mention defaults. Of course you need to think about defaults. That's why I mentioned the risk-adjusted returns, not the nominal returns. There is a database that shows the long-term performance, since inception, of every single loan ever made on LC. In fact, you can create a filter for a type of loan and look at the historical performance of that kind of portfolio since the beginning of LC, which by the way was at the beginning of the financial crisis in 2006-2007. I am saying that a well-vetted LC portfolio, risk-adjusted for defaults, can/will make 9-12% returns even after several years. If the sh*t hits the fan and another crisis comes along, I am sure that will drop to a lower number. But that is true for all investments, including fixed income.
The main reason I like LendingClub is that the historical RISK-ADJUSTED returns are higher than traditional fixed income, and that I can spread my credit risk among many more counterparties than I would otherwise be able to do with traditional fixed-income investing. LC isn't creating a new asset class, it is just opening the doors to one that has historically been monopolized by banks.
If you are truly interested in learning more with an open mind, I suggest the following links:
Good luck to all of you and remember to keep an open mind.