Hello, future borrowers and lenders! Today we are going to talk about the peer-to-peer lending service, Lending Club. Stay tuned for the advantages and disadvantages of this service and hopefully by the end of this overview you will know whether or not Lending Club is for you.
What is Lending Club?
Lending Club is a peer lending service that allows users to either apply for a loan or fund a loan by opening an investment account. Borrowers can apply for up to a $35,000 loan, get funded in just a few days, and make fixed monthly payments over a period of time at a lower rate than the banks are lending at.
Investors, or lenders, will get high returns compared to what they would get in a traditional savings account with relatively creditworthy borrowers. In fact, the average borrower has a FICO score of 703 and makes more than $70,000 a year. In other words, both parties can benefit greatly from using Lending Club for their borrowing or investing needs.
What is so great about it?
Number 1: The rates are high for investors and low for borrowers. Rates range from around 5% to around 24% depending on the borrower’s creditworthiness. These rates are way more than investors will get in a standard savings account, and sometimes even more than investors can make investing in traditional investments, like stocks and bonds.
These rates are also usually better than most borrowers can get from a traditional lender. It’s a win-win for both parties!
Number 2: Risk is limited for lenders. Can borrowers default? Sure. But for the most part, Lending Club works to reduce risk. Applicants must have a FICO score greater than 660. More than two thirds of the loan applications are rejected due to creditworthiness.
On top of that, lenders are able to choose which level of risk they are willing to take. The higher the risk profile of the borrower, the higher the interest rate. High risk, higher reward. Low risk, lower reward.
Number 3: Lenders have the option to diversify. Let’s say you invest $5,000. You have the choice to put all your eggs in one basket or spread the cash around — so you can loan $5,000 to one person or $25 to 200 different people. By diversifying, you won’t lose 100% of your investment if your sole borrower defaults.
Number 4: It is a cool option for an alternative investment. For those who are already investing in stocks, bonds, funds, and maybe even real estate, P2P lending is another investment option to shake up your portfolio. It almost makes investing sexy.
Why isn’t it great?
Number 1: While reduced, the human element adds risk. Any defaults or late payments will be reported to the credit bureaus just like any other defaulted loan, but people choose not to pay loans all the time. Investing does come with risk, prepare for losses along with gains.
Number 2: There are strict requirements for borrowers and lenders. As I said before, a borrower’s credit score has to be greater than 660. Lenders must have an annual gross income of $70,000 or more AND a net worth of at least $70,000, not including their home, OR a net worth of over $250,000 without an income requirement. There are also a list of states that are not able to use Lending Club.
Number 3: Many borrowers could probably find better rates elsewhere if they did some digging. Your local credit union will likely beat the rates of both loans from traditional banks and P2P loans. Borrowers should look into the other available options before using Lending Club to make sure they are getting the best rates.
How much is it?
Investors only need $25 to get started. They can deposit funds using ACH, wire, check, or PayPal and then they can start loaning!
Borrowers will pay as much interest as they owe, there is no money required to apply for a loan.
Now that you know what Lending Club is all about, I hope that you can decide for yourself whether or not it is the best peer-to-peer lending service for you. Please let us know in the comments if you have ever used Lending Club or any other P2P lending website and what you thought of it. Have a great day!