Betterment vs. Lending Club

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At first glance, Betterment and Lending Club appear to have nothing in common other than they both facilitate investments. In fact, there are significant differences between the two companies and the investment options and features each provides. The one thing they have in common is that they can both play a part in a diversified portfolio. Head to head, here’s how to two companies compare.

Overview of Betterment vs. Lending Club

Betterment is an automated goal-based investment platform. Customers pay low and highly transparent fees to invest in portfolios of passive index-tracking equity and fixed income exchange-traded funds (ETFs).

Lending Club is a peer-to-peer lending platform that allows investors to purchase notes, earning interest on the notes in exchange for low, transparent service fees.

To compare the two platforms, let’s take a look at a few of their characteristics.

Fees

Betterment makes money by charging transparent commissions based on portfolio size. For account balances of $0 – $10,000, Betterment charges 0.35% with a minimum $100 per month auto deposit ($3 per month without auto deposit). The larger your account balance, the lower your percentage rate. Between $10,000 and $100,000, the commission is 0.25%. Balances greater than $100,000 the commission is 0.15%.

Lending Club makes money by charging investors a service fee whenever they receive payment proceeds from a loan. The service fee is equal to 1% of the amount of borrower payments received within 15 days of the payment due date. If a borrower misses a payment, the investor is not charged a service fee.

Returns

Betterment portfolios are maximally diversified and comprised solely of low-cost, liquid, index-tracking, ETFs. Because the funds are made up of equity and bonds, expected returns depend on asset allocation and are subject to market risk. When the markets are up, your Betterment account balance will grow. When the markets are down, your account may lose money.

In times of turbulence in the markets, Lending Club may offer more predictable returns. As long as the borrowers on your loans do not default, your ROI should stay around 6 – 9% from year to year. Lending Club assigns grades (and corresponding interest rates) based on each loan application and borrower credit report. Loans with the highest rating (A1) currently earn interest at a rate of 5.32%. Loans with the lowest rating (G5) currently earn interest at a rate of 30.99%. Of course, the highest interest rates also come with the largest risk of borrower default.

For the most reliable Lending Club returns, you can employ a time-tested strategy to pick the best loans. Select loans where the borrower’s income is verified, zero delinquencies in the last two years, no inquiries in the last six months, either own or have a home mortgage, and monthly income greater than or equal to $5,000. Also, avoid loans in Florida, California, and Nevada, as those states have the highest default rates.

Account types

Betterment offers individual and joint taxable accounts, trust accounts, and Traditional, Roth, SEP, and Rollover IRAs.

Lending Club offers all of the same account types as Betterment, plus a few more options, including corporate accounts, custodial accounts for minors, and SIMPLE IRAs.

Liquidity

Neither Betterment nor Lending Club is the best place for money you need to be entirely liquid. With Betterment, you can withdraw your money at any time, but if the market is down at the time you withdraw, you may lose money on your investment.

With Lending Club, you can withdraw available cash at any time, but the amount you can withdraw is limited to the amount of principal and interest that have been paid on your loans. Lending Club notes have terms of 36 months or 60 months, and you will not be able to get your full investment back until the note reaches its maturity.

If you really need cash before the note matures, you may be able to sell your Lending Club notes via Folio Investing’s Note Trading Platform. Folio Investing charges note sellers a transaction fee of 1% of the purchase price of the note, so selling the note before its maturity date should be considered a last resort.

Account minimums

Neither Betterment nor Lending Club requires a minimum investment to open an account. A Betterment account can be opened with no money invested. Betterment does not charge a minimum account fee, other than the $3 per month fee for not having a $100 per month auto deposit.

Lending Club does not require a minimum funding to open an investment account, but there is a $25 minimum investment per note. If you want to diversify your Lending Club portfolio, you’ll need a larger investment amount.

Taxes

With Betterment’s taxable investment accounts, you will owe taxes each year on the dividends and other distributions paid to you that year. You may also owe capital gains tax when you sell shares that have appreciated in value. When you sell shares that have depreciated in value, you realize a capital loss, which can be used to offset other gains realized that year. When capital losses exceed capital gains, the excess may be used to offset other income, up to a maximum of $3,000. Any capital losses not used that year can be carried forward to future years.

Most ETFs pay dividends, which are generally taxable at your ordinary marginal tax rate (0 – 39.6%). High earners (married couples with modified adjusted gross income of $250,000 or more and single filers earning $200,000 or more) may also be subject to an additional 3.8% Net Investment Income Tax.

Income from Lending Club is entirely interest income, which is generally taxed at your ordinary marginal tax rate. Interest income is also subject to the Net Investment Income Tax for high earners. If a borrower defaults on your note, any amounts that are charged off are generally classified as capital losses.

Account features

Betterment offers its customers several account features that are designed to make goal-based investing simple. They provide automatic portfolio rebalancing and tax-loss harvesting and allow you to sync outside investment accounts so they can offer advice on how much you’re losing to fees and idle cash.

Lending Club offers two ways for you to build a portfolio: Manual Investing or Automated Investing. With Manual Investing, you browse loans currently listed on the site and build your own portfolio. With Automated Investing, you set your investment criteria, and Lending Club invests in new loans that meet your criteria as soon as they are listed. While Automated Investing may save time and effort, you may be better off selecting Manual Investing to ensure you follow the strategy outlined above for picking the most reliable loans.

Availability

Betterment is currently available to all U.S. residents with a permanent U.S. address, Social Security number, and a checking account from a U.S. bank.

Lending Club notes are not available to residents of certain states, including Alaska, New Mexico, North Carolina, Ohio, and Pennsylvania. In addition to residency requirements, Lending

Club also requires that investors meet certain suitability requirements. Currently, investors who are residents of states other than California must have a gross annual income of at least $70,000 and a net worth (exclusive of home, home furnishings, and automobile) of at least $70,000. If they do not meet the gross income requirements, they must have a net worth of at least $250,000 excluding home, home furnishings, and automobile.

Potential Lending Club investors who are residents of California must have a gross annual income of at least $85,000 and a net worth of at least $85,000 or a net worth of at least $200,000 without meeting the gross income requirements. If California residents cannot meet either threshold, they can still invest with Lending Club, but can invest no more than $2,500.

Risks

Betterment is a member of FINRA and the SIPC, which protects investors up to $500,000 (including $250,000 for claims for cash). If Betterment went out of business, your securities would be protected up to those limits. Of course, the SIPC does not protect against losses due to normal market swings.

It’s important to realize that Lending Club notes are not bank assets so they are not insured by the FDIC. If individual loans go into default, you will lose that portion of your investment. For that reason, you should spread your Lending Club investments over many different loans. Your Lending Club cash balance (consisting of all uninvested cash) is deposited in a pooled trust account at Wells Fargo Bank, which is an FDIC insured financial institution. Those funds are therefore covered by FDIC insurance on a pass-through basis, subject to applicable limits.

The bottom line

Both Betterment and Lending Club are good options for a diversified investment portfolio, as they each offer different investment options. It is important to diversify not just among various stocks, bonds, and ETFs, but also among different types of investments. Taking advantage of a diversified portfolio of ETFs in Betterment and a diversified portfolio of notes with Lending Club ensures you have a variety of investments that will not react the same way to adverse events. Although diversification cannot guarantee against loss, it is the most important component in reaching your long-term financial goals while minimizing risk.

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