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Lendingclub is a Peer-to-Peer lending network which matches individual lenders to individual borrowers.
Their goal is to provide better loan rates to borrowers and higher returns to loan investors by cutting out the marketing, administrative, and infrastructure costs of the banking and credit card industries.
According to their site, the average loan rate is 13.9% APR and the average return for investors is 9.5%, which is much – much higher than even the highest money market accounts, high yield savings accounts and CD accounts nationwide!
LendingClub also claims the following statistics since inception:
- issued $112,368,600 in loans
- investors have earned $7,882,287
- 79.80% of investors have earned between 6% and 18% net annualized returns
How LendingClub Works for Borrowers and Investors:
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Borrowers can sign up at LendingClub.com and create a listing by providing details about themselves and the loan they require. They can expect to get loan rates from 7.34% to 25.07% depending on their credit score and risk level.
Anyone can sign up as an investor at LendingClub.com. However, in order to lend more than $2500, you must meet a minimum net worth and/or have a gross income $70,000 a year. After signing up, lenders can browse through the different loan listings created by the borrowers and select the borrower they wish to lend to. The minimum amount you can lend is $25.
The borrowers and lenders remain anonymous – Lendingclub.com does not reveal their identities to each other. Lender’s are not permitted to contact borrowers or try to collect on their outstanding loans – LendingClub takes care of collections for you.
Lendingclub’s site says their credit policy results in less than 10% of loan applicants from being approved to list their loans but as long as your FICO score is at least 660 you can login and create a loan listing.
Lendingclub.com assigns a credit grade (A-G) to the borrowers based on their credit report. Each credit grade is assigned an interest rate. Each credit grade is further subdivided into 5 categories (1-5). Each category is assigned a slightly different interest rate. The site has features that allow a lender to search for borrowers based on risk information and other characteristics they enter. Lenders cannot increase or reduce the interest rate. It’s take it or leave it. Interest rate is the sole discretion of Lendingclub.com.
Now nothing comes for free. Lendingclub.com charges both lenders and borrowers. Borrowers have to pay an origination fee on the loan based on their credit grade. As of May 2010, the origination fee is:
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Other fees charged to borrowers include:
- Unsuccessful payment fee in case an automatic payment is rejected by the borrower’s bank – $15
- Late Payment Fee after a grace period of 15 days – the greater of 5% of the unpaid installment amount, or $15
- Check processing fee – $15 – charged for loan payments made by check
For lenders there is a service charge of 1% of all amounts paid by the borrowers to Lendingclub.com. Lenders are also share the costs of loan collection:
- 30% if the loan is less than 60 days past due and no more than 90 days from the date of origination
- 35% in all other cases, except litigation
- 30% or hourly attorneys’ fees in the event of litigation, plus costs
The biggest benefit for borrowers is that it allows borrowers to get loans that meet their exact requirements. The interest rates are low and the processing is quick. There are no hidden fees and you can borrow any amount from $1000 to $25000. The loan tenure is 36 months or 60 months. Loan payments are free to make and require no effort if they are setup as direct debit (ACH) from a checking account.
Lenders benefit from the potential to earn higher returns by investing more directly in consumer lending without having a bank as the middleman. Lenders can browse through the requirements of different borrowers and then choose and pick the one they want to lend money to. The borrowers’ credentials are verified by Lendingclub.com and assigned a credit grade.
Higher returns usually come with increased risk, LendingClub is no exception.
Here’s what you need to be careful about as a lender:
- The loan is unsecured
- The borrower is anonymous
- The borrower may not have steady income
- The borrower may not have any savings or liquid assets with which to make loan payments in bad times
- There is no face-to-face interaction so LendingClub.com has no way of verifying the character/integrity of the borrower
Risk is somewhat mitigated by the ability to diversify your loan portfolio. Also, risk is lowered through the increased liquidity created by the LendingClub loan marketplace where lenders can trade, buy and sell loans that have already been taken out.
As a borrower, you need to know the following:
- Good credit scores – You need to have a credit score over 660
- Credit grade – You will be assigned a credit grade when you sign up based on your credit history, debt to income, etc
- You may get a lower interest rate on personal loans from some local credit unions
In conclusion, LendingClub.com is part of a new industry of direct lending between individuals; as with any new industry, it will become more stable and hopefully less risky over time.
In Part 2 of our LendingClub review, we will highlight strategies for maximizing your returns and minimizing risk.
In the meantime, feel free to check out LendingClub.com for yourself, there is ample information on their site to clarify most FAQS. If you’d like to stick with less risk, however, CLICK to view the nation’s highest money market account rates.
