Lending Club, for those unfamiliar with the name, is the world’s largest peer-to-peer lending company. With headquarters in San Francisco, Lending Club offers an array of loans and investment products to the public. Today, we will focus on the peer-to-peer lending section of their business and see how it measures up to the hype.
What Is Peer-To-Peer Lending?
Peer-to-peer lending, frequently called P2P Lending, is a money lending practice in which individual lenders get matched to borrowers. This practice, which was pioneered by Lending Club, has gained popularity among lenders — with some referring to it as social lending or crowdlending.
How Does Lending Club P2P Lending Work
Getting a peer-to-peer loan on the Lending Club website is pretty easy and straightforward. Here’s how the procedure works:
- The borrower fills out a simple loan application on LendingClub’s website.
- Lending club screens the borrower, using data and technology, to determine the appropriate amount, interest rate, and payment plan that best fits the borrower and his or her credit profile.
- Applicants who are deemed qualified for the loan will receive offers in a matter of minutes. They can evaluate those offers to see which one they like best. This process does not impact their credit score.
- Investors select the loans they want to invest in based on the loan terms, their risk tolerance, and investment goals.
Who Are The Investors?
Investors, in the Lending Club P2P business model, are people with money to lend. They can invest by purchasing a fraction of a loan, or purchasing the whole loan.
They do this by purchasing a note that corresponds to a fraction of the loan in which they’re investing. For example, an investor can buy a $1000 Note as an investment in a $40,000 loan.
Historically, investors receive a 3 – 8% return on their investment, which is better than the average APY on CD.
How To Join Lending Club P2P Lending As An Investor
Joining the Lending Club: Joining the platform is pretty easy. All you have to do is sign up by providing your information, i.e., name, dob, social security number, address, e-mail, and more. Once you complete the process of setting up your account, you get to choose from multiple account types, including general investment, retirement, and corporate.
Once you choose your account type, which will be a general investment account in this case, you then move to the next step — picking a strategy.
Picking a strategy: Picking your peer-to-peer investment strategy is essential to your success. Investors can automate their investments based on a pre-selected strategy, or they can browse loans and purchase Notes manually. Whatever strategy an investor chooses, Lending Club has resources to guide them along the way.
Funding your account: Investors can fund their account in three different ways: by ACH, wire transfer, or by check. Investors can also withdraw Investment earnings at any time.
How To Borrow From Lending Club P2P Lending
Borrowers can choose from the following kinds of loans:
- Personal Loan: This loan can be used to do anything — from debt consolidation to home improvement, and money to purchase a home. In this category, borrowers can borrow up to $40,000.
- Business Loan: These loans have a term of one to five years, and customers can borrow anywhere between $5000 – $500,000. There are fixed monthly payments, with no pre-payment penalties. Depending on the borrower’s credit rating, APR can range from 4.99% – 35.98%. To qualify for a business loan, you must meet the following requirements.
- The borrower must be in business for 12 months or more.
- The business must have at least $50,000 in sales.
- There can be no bankruptcies or tax liens on the business.
- The borrower must own at least 20% of the business
and have at least fair or better personal credit.
- Auto Refinance Loans: An auto refinance loan is a great way to lower your monthly car note payment and save money. For a borrower to qualify for an auto refinance loan, the borrower’s car must meet the following conditions:
- The vehicle must be ten years old or less.
- Less than 120,000 miles.
- It must be a personal-use vehicle.
- The borrower’s loan balance must be between 5,000 – $50,000.
- The borrower must have at least 24 months of payments remaining on their loan.
- Patient (Medical) Loans: Medical loans helpful in covering medical expenses not covered by your insurance company. Lending Club offers competitive rates for loans up to $50,000. Anybody can qualify for these loans
What We Like About Lending Club P2P Lending
Lending Club’s Peer-to-peer lending is excellent, and they have distinguished themselves from the competition in the following respects:
For Borrowers
- They offer competitive market rates
- No pre-payment or early payment penalties
- Extended repayment terms for loans — up to 5 years
- Convenient fixed monthly payments.
- Good customer service
For Investors
- An average of 3 – 8% return on investment, which is relatively high.
- Investors can diversify their portfolio by spreading their risk among multiple loans.
- Investors can open multiple account types to fit their needs — whether a retirement account, an active investment account, they have options.
What Lending Club Could Improve
Lending Club runs a massive operation and is projected to generate upwards of $795 million in revenue in 2019. The company, however, has been losing money. In 2017, Lending Club lost over $150 million. Though we are not in the business of giving corporate advice, here are some things we would like to see Lending Club improve, from the customer’s perspective. Here they are:
Origination Fees
Origination Fees: Lending Club charges a one-time origination fee of up to 5% of the loan amount. For example, if someone is looking to borrow $6000, they may end up receiving $5,700. Five percent of the loan amount, which is $300, is subtracted from the loan amount. The borrower, however, is responsible for repaying the entire $6,000.
This is an issue because borrowing money is not just about the mechanics of the transaction; it is also the psychology. When people borrow $6000, they want to receive $6,000. Taking any money out of the total amount the customer is borrowing makes them feel cheated.
Also, there are many other reputable loan companies out there that don’t charge an origination or transaction fee. So this fee on the part of Lending Club seems like they’re shooting themselves in the foot.
Return On Investment
Return on Investment: Even though Lending Club has a historical rate of return of 3 – 8%, there’s no guarantee that an investor will see those percentages as a return on their investment. The lack of a fixed rate of return on investments can be concerning. An investor wanting to invest in a note needs to study the pros and cons of that investment and how they can recoup their investment and make a tidy profit.
Automated Investing
Automated Investing can be risky: Investors on the Lending Club platform have an option to use an automated or manual strategy to invest. While the automated approach may seem appealing, it can, however, cause investors to lose money or significantly reduce the rate of return on your investment.
Manual investing is a better option because you get to parse through the loan opportunities and invest in the ones you find most promising. However, the manual option comes a lot of work and meticulous research. These two dichotomies make selecting an investment strategy on the platform a delicate balancing act.
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Bottom Line
Peer-to-peer borrowing may be useful for you if you want to find an alternative to traditional lending institutions like banks and credit unions. However, to qualify for excellent rates on a P2P lending platform like Lending Club, you will still need to be creditworthy with a good credit score.
There isn’t any discernable advantage to borrowing from a P2P lender as opposed to borrowing from a regular bank. However, peer-to-peer lending is considered social lending and can be a way to support social causes. If you’re concerned about specific social issues, then finding a peer-to-peer lender who aligns with those issues can be a motivating factor to go with P2P lending.
From the investor perspective, P2P lending may be good if your only other options are placing your money in a savings account or a CD. However, that’s hardly the only option out there. Other investment opportunities will give you higher returns on your investment than peer-to-peer lending — especially automated P2P lending on Lending Club
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