Are you an investor looking to earn more than the going rate?
Are you a borrower wanting to pay less than what the banks are charging?
Lending Club has been transforming the banking system because of their peer-to-peer lending model that makes those exact promises. And after I got my first taste of P2P investing, I realized I had to do a Lending Club review. It's a service suitable for those looking to invest as little as $25 or as much as $20,000. And they offer a multitude of loan products, from personal to medical to business — many collateral-free.
That said, there are some downsides, or at least things to be aware of. But I'll cover the in and outs of peer-to-peer lending through Lending Club from 3 different perspectives: as an investor, a borrower, and then finally from my personal experience after investing some of my own hard-earned dollars.
- Quick Look
- Peer-to-peer lending, which matches borrowers with investors willing to fund their loans
- $25 minimum investment
- Average returns between 5.06% and 8.74%
- Personal loans up to $40,000; Business loans up to $300,000; Medical loans up to $50,000
- Best suited for good-credit borrowers and higher income investors
What is it? And is Lending Club legit?
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 website, enabling both to benefit from the rate of interest established for each loan.
And just as important, the entire transaction happens online, eliminating the need for sometimes embarrassing face-to-face meetings common with bank loans. It’s a win-win as both the investor and the borrower benefit from the Lending Club process. Read more information here on getting a loan!
As of December 31st, 2015, Lending Club has facilitated loans totaling well in excess of $15 billion. This includes more than $2.5 billion issued in just the last quarter.
Lending club is legit for both investors and borrowers. This Lending Club review, unlike some others, will review the service from both sides of the deal. Make sure to read about my experience below before you invest or borrow with Lending Club. Check out other great ways to invest by reading our Motif Investing Review as well.
Lending Club Review: For Investors
With interest rates on safe, fixed income investments sitting generally at below 1%, Lending Club offers a real opportunity to get dramatically higher returns. 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. Plus, there are certain requirements you have to meet as an investor. Remember, the higher the potential reward, the higher the risk.
Notes are not available in all states. As of this initial 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 $1,000 and $25 is 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.
Lending Club IRAs come in two flavors, Traditional IRA or Roth IRA. As you know, I'm a big fan of the Roth IRA. This is just one more way you can invest in your future. But, I wouldn't keep all of your retirement money there. Roth IRAs aren't for everyone, so be sure to speak with a financial adviser before you sign up for this specific type of investment. Learn more about Roth IRA contribution limits here.
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. These payments 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 you receive payments.
Lending Club Loan Types and Loan Grading
Loan terms are either 36 months or 60 months, and are fixed-rate. More than 80% of the Lending Club loans are taken to refinance existing loans and credit card balances. Similar to other peer-to-peer loans, borrowers are evaluated – and loans are priced – based on credit and credit scores, debt-to-income ratios (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, when initially checked, a A-grade loans had an average rate of 7.51% while G-grade loans had an average rate of 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 their 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 a 1% fee charged if you sell a note.
Risks with Lending and How to Minimize Them
It’s important to realize investments held through Lending Club are not bank assets, and as such they are not insured by the FDIC. 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 investor's account balance. Any funds subsequently recovered on the defaulted loans will be returned to the investors on a pro-rata basis. This is a known risk if you invest in Lending Club, and you rarely see it come up in any complaints that people have about the site.
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 provide you with excellent high income diversification in a fixed income portfolio. Just by investing a portion of your fixed income allocation in Lending Club notes can increase the overall yield on your fixed income investments.
Lending Club Review: For Borrowers
Not only can you invest with Lending Club, you can borrow with Lending Club as well! Truly, whatever your needs are, you can get a fantastic deal through Lending Club.
You can typically get lower interest rates on loans through Lending Club than you can at a bank. You can also 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 Lending Club 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 your 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 websites for marketing purposes.
Profile of Lending Club Borrowers
The Lending Club screens borrowers and businesses with their credit screening process. That being said the decision to fund the loans is made by individual investors.
You will be required to have a minimum of a 600 credit score to even be considered. You will not find this information posted anywhere on LendingClub.com because they do not openly share their lending criteria. You can be assured that if you have a decent credit score, a credit history of several years and a debt to income ratio that is reasonable that you will get approved for a loan.
Per the most recent data available the average borrower with Lending Club had:
- Credit Sore – 699
- Income – $74,414
- Credit History – 16.2 Years
- Non-Mortgage Debt to Income Ratio – 17.9%
Remember that there are a lot of small business owners borrowing through Lending Club, so if you don't meet these averages it should not dissuade you from applying.
What Types of Loans Are Available?
Most P2P lending sites make either personal loans or business loans, but very few make both. Lending Club has both business and personal loans, and they also make specially designed medical loans too.
Here is a rundown of the types of loans that are offered through Lending Club.
Lending Club's personal loans can be used for just about any purpose. This includes credit card refinancing, debt consolidation, home improvement, major purchases, home buying, car financing, green loans, loans for business purposes, vacations, and moving and relocation. You can even take a personal loan to have a swimming pool installed in your backyard.
Credit card refinancing is perhaps most interesting of the personal loan offerings. When you consolidate several credit card balances into a single personal loan, it usually results in an increase your credit score. This is because the payoff of the credit card balances results in both a lower credit utilization ratio, and a smaller number of debts with open account balances. Both outcomes have a positive impact on how the credit bureaus calculate your credit scores.
Most other P2P lending sites cap their personal loan amounts at $35,000; Lending Club recently increased their limit to $40,000. What's more, all personal loans made through Lending Club require no collateral. That even includes personal loans used to purchase automobiles.
All loans made through the platform are installment loans, that are fixed rate with fixed payments, and fully paid by the end of the loan term. Those terms can be two years, three years, or five years.
Many P2P lenders offer business loans, but what they really are is personal loans that can be used for business purposes. Lending Club has an actual business loan program. In fact, it's not just business loans, but also business lines of credit.
Business loans are fixed rate, fixed monthly payment loans with terms of between one year and five years. The business line of credit works similar to a credit card or a home equity line of credit, and that you are granted a line of credit which you can access as needed. Interest is charged only on the amount of the outstanding balance. And as you pay down the balance, you free up the line for future borrowing purposes.
These loans and lines are available in amounts up to $300,000. Lending Club does not ask for business plans or projections, or for appraisals and title insurance. If you have ever taken a business loan from a bank, you know that those requirements are virtually industry standards.
What's more, for loans and lines taken for less than $100,000, no collateral is required. For higher loan amounts, collateral is usually provided by a general lien on the business, as well as personal guarantees from the owners of the business.
The purpose of loans and lines are almost unlimited. You can use them for debt consolidation, to refinance existing debt, purchase inventory, acquire equipment, set up a new business location, remodel your business, or pay for marketing expenses.
This is a loan type whose 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 – These are installment loans that are used to pay for medical procedures that are generally not covered by health insurance. This includes dental procedures, fertility treatment, hair restoration and weight loss surgery.Extended plans are installment loans that include fixed rate, fixed monthly payments, that will be paid in full by the end of the term. These loans are available in terms of 24, 36, 48, 60, 72, or 84 months. You can borrow from a minimum of $2,000 to a maximum of $50,000.
- 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 CareCredit, 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.
Lending Club works with thousands of healthcare providers who accept financing arrangements through the platform. It's always important to be sure that a provider is one of those participants before having any procedures..
Loan Terms and PricingYou can borrow any amount up to $40,000, and while the loans are typically used for refinancing debt or debt 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.
Exactly how much you will pay in interest rates and fees depends upon the type of loan that you are looking for, as well as your loan grade..
As noted above, your interest rate will be based on your credit grade, which can run between a high of A1 and a low of G5. A1 has a best rate of 5.99% APR. The highest interest rate currently possible is 35.96% for a G5 loan with a 36 month term.
Lending Club does not have an application fee, but it does have an origination fee, which is typical for P2P lenders. Lending Club's origination fee ranges between 1% and 5% of the loan amount. The fee is deducted from the loan proceeds, therefore it will only be charged if you actually take the loan.
Lending club does not charge a prepayment penalty on any of its loans.
These loans carry an entirely different pricing structure. Depending upon your credit grade and the finan