Lending Club has been sweeping the investment world – and the borrowing universe – at the same time.
And why not?
Who wouldn’t be interested in a financial facility that enables investors to earn more than the going rate on their money, while borrowers pay less?
Lending Club is an online peer-to-peer (P2P) lending platform that takes the banker out of banking. Investors lend money directly to borrowers through the site, enabling both to benefit from the rate of interest that’s established for each loan.
And just as important, the entire transaction happens online, eliminating the need for sometimes embarrassing face-to-face meetings that are common with bank loans. It’s a win-win as both investor and borrower benefit from the Lending Club process.
As of March 31, 2015, Lending Club has issued loans totaling well in excess of $9 billion. This includes more than $1.6 billion issued in just the last quarter.
Let’s take a look at how Lending Club works for both an investor and a borrower.
Investing Through Lending Club
With interest rates on safe, fixed income investments sitting generally at below 1%, Lending Club offers a real opportunity to get returns that are dramatically higher. In fact, you can get average returns of between 5.06% and 8.74% (do I have your attention now?).
Those are attractive rates, but just so we’re clear, there are more risks with Lending Club investments than there are with bank certificates of deposit, and there are certain requirements that you have to meet as an investor.
Notes are not available in all states. As of this writing, they are not available to residents of Kansas, Maryland, Ohio, Oregon and the District of Columbia.
Depending on which state you live in, there are income requirements to invest in Lending Club. In most states it’s a minimum of $70,000 per year, though it may be higher in some states. Generally, the income requirement does not apply if you have a minimum net worth of $250,000. The platform also requires you invest no more than 10% of your net worth in Lending Club notes.
The minimum opening account with Lending Club is $25, which is also the minimum requirement to invest in any single note.
Lending Club IRA
You can also hold Lending Club investments as part of an individual retirement account (IRA). You can do this through a Lending Club Self-directed IRA. Lending Club will pay the annual IRA fee if you open the account with a minimum of $5,000, and keep that balance level for a minimum of 12 months.
After the first year, they will continue to pay the fee as long as you maintain a minimum invested balance of $10,000 in Lending Club notes.
Choosing Notes to Invest In
There are two ways to invest with Lending Club. Manual investing is where you browse available loans and choose which ones you’ll invest in one at a time. But you can also use automated investing in which you set investment criteria, and notes are selected automatically based on that criteria.
While you can invest in individual loans, it’s generally best to buy them in fractions, which are referred to as notes. You can purchase notes in increments of $25. At the very least, you can purchase a fractional interest in 200 loans with a total investment of $5,000. This will enable you to minimize the risk involved in investing in any single loan.
Collecting Investment Returns
It’s important to understand the notes you’re investing in are not like certificates of deposit. Each note represents a loan, which will be repaid to you over the term of the loan, in payments that will include both interest and principal. That means at the end of the loan term, the loan will be completely extinguished, including 100% of your original principal invested. For this reason, you will need to reinvest payments received on a continuous basis, as the payments come in.
Loan Types and Loan Grading
Loan terms are currently either 36 months or 60 months, and are fixed rate. More than 80% of the loans are taken to refinance existing loans and credit card balances. Borrowers are evaluated – and loans are priced – based on credit and credit scores, debt to income ratio (DTI), the length of your credit history, and your recent credit activity.
Each loan is assigned a loan grade, ranging from “A” (the highest), to “G” (the lowest). The higher the grade, the lower the rate. For example, as of March 31st, an A grade loan has an average rate of 7.51%, while for G grade loans it’s 25.13%.
Within each letter grade, Lending Club also assigns a numerical rank of between 1 and 5 (A1, A2, A3, A4, A5). These numeric sub-grades adjust for other factors, such as loan size and loan term. For example, a loan amount of $5,000 would be seen as low risk, and actually result in an improvement in the sub-grade. By contrast, the maximum loan of $35,000 is a higher risk, and could turn a B1 grade into a B4 or B5 grade, resulting in a slightly higher interest rate.
Buying and Selling Notes Before they Mature
Lending Club offers a Note Trading Platform through Folio Investing where you can sell the remaining portion of a note under certain circumstances. This is a marketplace where investors can buy and sell Lending Club notes to one another. In order to participate in this marketplace, you must also open a Folio Investing trading account through Lending Club. There are no fees if you buy notes on the trading platform, but there is a1% fee charged if you sell a note.
It’s important to realize investments held through Lending Club are not bank assets, and as such they are not FDIC insured. Individual loans can go into default, and if they do, you will lose that portion of your investment.
In addition, a missed payment by a borrower means you will not get the payment on that loan in that particular month. Lending Club does use “best practices” to collect payments from delinquent borrowers, but some will default nonetheless.
When a payment is past due, you as an investor will pay a collection fee of 18% if the loan is at least 16 days past due but no litigation is involved. If litigation is required, you will be required to pay 30% of an attorney’s hourly fees, plus attorney costs.
If collection efforts fail, and it is apparent the borrower cannot repay the loan, the loan will be charged off once it is 150 days past due. When that happens, the remaining principal balance of the note will be deducted from the investors account balance. Any funds subsequently recovered on the defaulted loans will be returned to the investors on a pro rata basis.
Minimizing Investment Risks
Just as is the case when you’re investing in a portfolio of stocks and bonds, there are ways you can invest in Lending Club that will reduce your overall risk. The most obvious strategy of course is to spread your investment over many different loans – hundreds if you’re in a position to do so.
You can minimize your risk by setting certain loan requirements. For example, you may decide to set a credit score that is some number higher than what is required by Lending Club (currently 660). You can also emphasize loans in which borrowers are refinancing existing debt, rather than taking on new debt. Employment stability is also a factor. A person who has been employed in their field for a number of years is likely to be more employable than one who is just starting out.
A low DTI is also a positive factor. For example, you can make sure the borrowers whose loans you invest in have a DTI of less than, say 30%. This means their fixed monthly expenses, including their housing expense, the new loan payment, and any other fixed payments do not exceed 30% of their total gross monthly income.
There are fees charged to investors with Lending Club. However, the fees are collected only when you receive a payment from a borrower. For example, there is a 1% service fee collected on each payment received.
Investing through Lending Club can be an excellent high income diversification in a fixed income portfolio comprised entirely of certificates of deposit and Treasury securities. Just by investing a portion of your fixed income allocation in Lending Club notes can increase the overall yield on your fixed income investments.
Open an Investment Account with Lending Club
Borrowing Through Lending Club
In addition, you can typically get lower interest rates on loans through Lending Club than you can at a bank, there is also the comfort factor. You can apply for a loan without ever leaving your home. Everything is done online through the website, virtually eliminating the need for an uncomfortable face-to-face meeting at the bank offices. And if your loan is approved, your funds will arrive within a few days.
How the Loan Process Works
This is a simple multi-step process, that looks something like this:
- Complete an application on LendingClub.com.
- Your application is evaluated and your credit score is pulled (this is a “soft inquiry” that will not have a negative impact on your credit score).
- As described in the preceding section, you are assigned a risk grade of somewhere between A1 (highest grade, lowest rate) and G5 (lowest grade, highest rate). Once again, this grade is based on a combination of your credit score and credit history, employment, income, and debt to income ratio (DTI).
- Your loan is given an interest rate based on your risk grade.
- You are presented with a variety of loan offers.
- Investors will review your criteria and loan grade, and decide if they want to invest in it.
- Once all parties agree to the transaction, the loan goes through and your funds are available within a few short days.
If you’re concerned about privacy during the application process, you don’t need to be. Lending Club investors will never know your identity so you‘ll be able to borrow on a completely anonymous basis. The site also promises it will never sell, rent, or distribute your information to third party sites for marketing purposes.
Loan Terms and Rates
You can borrow any amount up to $35,000, and while the loans are typically used for debt refinance or consolidation, you can also borrow for other purposes, such as unsecured home improvement loans. Current terms are fixed rate loans of either 36 months or 60 months.
Interest rates on personal loans range from between 5.49% for A1 risk grades, to a high of 28.69% for G5 risk grades. Origination fees range between 1% and 5% of the initial loan amount. There are no application fees involved in the process.
Lending Club also offers business loans in amounts as high as $300,000, and for fixed rate loan terms ranging from one to five years. There are specific requirements based on the size and nature of your business, and they are currently advertising rates as low as 5.90%, and origination fees of between 0.99% and 5.99% of the initial loan balance.
In order to keep interest rates as low as possible, Lending Club sets up your loan with automatic draft payments from your bank account. In the event you need to pay by check, they will charge a $15 check processing fee per check.
Best of all, there are no prepayment penalties should you decide to payoff your loan early.
Lending Club Personal Solutions – Medical Loans
This is a loan type who’s time has truly come! Given that health insurance deductibles and co-insurance provisions are increasing, Lending Club Personal Solutions gives you an option to finance uncovered medical expenses. And here’s something even more interesting, the loan can even be used for procedures such as hair restoration, weight loss surgery, fertility, and dental – procedures that are typically excluded under most health insurance plans.
Lending Club offers two types of loans for this purpose:
- Extended Plans – You can get a loan for between $2,000 and $50,000, at rates that range between 3.99% and 19.99% per year, depending on the size of the loan and your credit history. The terms can be 24-, 36-, 48-, 60-, 72-, or 84-months. This loan can be used to pay for fertility, dental, hair restoration, and weight loss surgical procedures.
- True No-Interest Plans – This loan program offers 0% APR for terms of 6-, 12-, 18-, or 24-months, and for loan amounts ranging from as little as $499 up to $32,000. After the no-interest term expires, a variable rate of 22.98% APR applies on the remaining balance (this arrangement is similar to the one offered by Care Credit, but at a lower rate of interest after the initial 0% interest period). And if you can pay off the loan within the 0% interest term, you can get funds for medical procedures without having to add interest to the cost of an already expensive operation.
There are other P2P lending platforms popping up all over the web. But Lending Club has become the gold standard for the entire industry. Whether you are an investor looking for an above average rate of return, or a borrower looking for more affordable loan programs, you’ll find what you’re looking for at Lending Club.
This company has continued to grow and prosper over the years. We can expect even better things from Lending Club going forward. And it’s probably not an exaggeration to say that Lending Club just might be the banking platform of the future.
How I am Using Lending Club
What I really want to do today is walk you through how I am investing with Lending Club. I have been investing with Lending Club for a few years now. I don’t have a whole lot invested, and you’ll actually see that here in a minute because I really didn’t understand it and I wanted to test drive it first. I wanted to test drive it before 1) I put more money into it and 2) before I told more people about it as far as suggesting someone to take a look at it. Here is the website and I went ahead and logged in where you can see where I’m at right now. Right now I have invested a total of $2200 so not a big investment by any means.
My net annualized return is 10.8% so right off the cuff you can see that I’m already making more than the average investor in Lending Club is making, almost a full percentage point more. That’s not because I am any great investor. I’m actually very passive in the way that I choose my notes, which I’ll show here in a minute. Some of the details, I currently have $525 sitting in cash in my Lending Club account that I need to invest, and that’s what we’re going to show today to show you how I invested and how you can actually do some research on that.
Really quick, how we do it is we go to invest, click on the link and here is really why I love Lending Club. For the people who don’t like to spend a lot of time doing a lot of research, they make it very, very simple where you can either choose option one, option two, or option three. Let’s just assume that you are a very high-risk person and that you are looking at the 17%. You look at that number. You’re drooling over it. You want it. That’s how much you want to make.
By quickly clicking that option, they then will show you where you are investing your notes. And a note basically is the agreement that you have with that person that you are lending to. They’re ranked then just like they would a report card or like a bond, A ranking, B ranking, C ranking.
Initially, you’ll notice by going the more aggressive direction you do not have any of the A or B type investors. These are your higher FICO score credit people. They are less likely to default on their loan so this is definitely more of a high-yield approach when it comes to peer-to-peer lending. Of that $525 I have to invest, $100 of that is going into C investors, $200 of that is going to D investors, $150 going to E, and $75 going to F. Immediately Lending Club breaks it down for you automatically. And I can’t tell you how much I love that. That’s actually the strategy I have done. I don’t do the option three. I typically do the option one, but immediately they break down the notes for you.
They also show you your average interest rate on that is 17.9%, but because some of those folks are going to default on their loans they are estimating that 4.42% you’ll lose based on default. Then there is Lending Club’s charge of 0.52% so your projected return after it’s all said and done is going to be approximately 12.25%. And that’s approximately. Maybe all of those people do pay you back where you’re all good and you actually make more, but that should just give you a range.
Lending Club Notes
Let’s just go to the next step real quick. Here is another thing where you can start seeing what some of these loans are used for. For example, credit card, consolidation August 2011 $24,000 loan, debt consolidation loan, small business loan, small business loan, etc. You can actually see what these notes are. Amount left is how much more that that person needs to borrow to take care of that debt. If you want to take it one step further you now can see more about the individual, their gross income per month you, if they’re a homeowner or not, length of employment, their current employer, where they are located, debt-to-income, their credit score range. It just gives you a lot more details about the creditor.
Even more, if you want you can ask them questions if you’re not confident or just need some reassurance, for this example here they asked,
“What type of business are you starting?”,
and they said,
“We are purchasing an existing flight school and looking for help with a short term loan to assist with down payment.”
Lending Club actually gives you some direct questions to ask this. They did change that a little bit over the past few years, I think as far as privacy act as far as some of the questions you could ask, but they give you a lot of the good basic questions to ask. That’s where you can learn more about it.
One thing I didn’t mention is that of that $525 that I have to invest typically only $25 of that is going per individual note, so that’s where the diversification comes into play where you’re not putting all your investment into one person, therefore you can diversify. I am going to do option one. I’m much more comfortable. My projected of return is to be lower, but as you can see I’m actually doing better than that. I think I might have done some high risk in the beginning, but typically I have stuck with option one altogether. You can see I’ve got a lot more of the B borrowers and none on the F and G side. I’m not much on the high yield. I like to be a little bit more conservative with this aspect. Immediately they break it down and it looks like I’m doing some overlap of my last entry so let’s see if we can get that straightened out.
Note: Lending Club’s minimum investment is only $25. That’s it.
The other thing too is you could actually choose the term of the note. Lending club initially just started out with a 36-month, three-year note. They now offer a 60-month note, a five-year note so that’s actually a little bit more return on that one, but you are locked into your own money. You can also sell these notes too, so if you are not wanting to hold it for the maturity you can find a buyer, just like selling stock on the open market to find someone to unload those to.
Choosing Note Options
All right, let’s see if I can finally get this figured out. I just want to invest. I should’ve started with the option one to begin with. Let’s start over. Sorry about that. Option one, continue, and really quick you can see some of those, pool project, other, debt consolidation loan, home improvement loan, etc., etc. I can actually go in there a La carte. I can add more money to one note, take some money away from another note, etc. You have the ability to do that. You also have the ability to build your own portfolios from scratch so if you want to go through all of the different notes that are available you can do that as well. I personally don’t have interest in that so I don’t. So with $525 I’m going to invest into 21 different notes and my average rate of return will be approximately 9.58%. A quick look at the notes and we are going to place the order.
You can then give your portfolio a name. I haven’t done a very good job of managing this so I’m just going to assign it to portfolio 10 and we can go from there. I will soon get a confirmation.
The one thing with Lending Club that I have noticed is I’ve just invested $525 into 21 individual notes. Most likely what will happen is that not all of those notes will get the entire funding. Typically, how that happens is the investment that you thought you made you don’t make. You get it refunded back to you, and then from there you can go out and find some new notes. That most likely will happen, just FYI.
That is it as far as how to invest with Lending Club. That’s how simple it is. As far as who I would recommend this to; this is not a savings account replacement. This is not a CD replacement. Even though it is a three-year and five-year note you might think of that as a three-year or five-year CD.
There is definitely more risk involved with this so do not make this an apples-to-apples comparison.
Typically, where I see this in my own investment portfolio is we have our emergency fund, we have our savings account; this is just something to complement what I’m doing in my stocks. Like I said, I only have a small investment now but we are planning on shifting some more money there. We were building a house, had some other improvements that we were doing, having a third child so we want to have more in cash then we probably should, but we just felt more comfortable doing that. Now that we have some of those things out of the way I am definitely a lot more comfortable moving some more cash into here and start making some or interest.
I should also say I have never had any notes on Lending Club default up to this point. I’ve been doing it for just over two years, I believe and have not had a default yet. I’m not saying that I won’t, but I haven’t had one yet. If I do I will definitely report it.
If you have any more questions let me know on this. You’ll find a link below that is an affiliate link, so if you do click and open an account I do earn a bit of money for doing that. You can also go to LendingClub.com directly. I won’t get the affiliate and that’s fine by me as well. If you have more questions on Lending Club or if you have any experiences please share. I’d love to hear more about it as this becomes more of a mainstream approach for a lot of people.
While you can always invest in a more traditional investment platform or borrow money through a bank or credit card there are only a few other options in the Peer to Peer lending world. The most prominent competitor to Lending Club is Prosper.
These two are the heavyweights in the Peer to Peer lending marketplace. So much so that we put together an in depth Prosper vs. Lending Club comparison. You can learn more about all the features on Prosper with our Prosper review.
Check out everything Lending Club has to offer, and see if you can’t get a better investment – or a better loan – than what your bank is offering you.
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