Peer-to-peer lending has come on strong since the financial meltdown – and not by coincidence. That was about the time that banks decided they weren’t lending to anybody. The decision opened up an opportunity for the free market to provide another way for people to borrow money. And that’s when the peer-to-peer phenomenon started getting popular.
There are a lot of reasons why P2P lending has grown so quickly. But is it a good loan source for you? Learn more here on getting a loan as part of your decision-making process.
The complete guide on peer-to-peer lending:
Table of Contents
What is peer-to-peer lending?
Peer-to-peer lending can loosely be thought of as non-bank banking. That is, it’s a process of lending and borrowing that takes place without the use of traditional banks. And for that reason, it looks a whole lot different than conventional banking.
Peer-to-peer lending is mostly an online activity. Borrowers come to the various peer-to-peer lending websites looking for loans – and better terms than what they can get through their local bank – while investors come looking to lend money at much higher rates of return than what they can get at a bank.
On the surface, it may seem as if the higher rates paid to peer-to-peer lending investors would result in higher loan rates for borrowers, but that’s not generally the case.
Commonly known as “P2P”, It’s an arrangement that “cuts out the middleman”, more commonly known as the banker.
Peer-to-peer lending brings borrowers and investors together on the same websites. Commonly known as “P2P”, it’s an arrangement that “cuts out the middleman”, more commonly known as the banker.
Here’s the thing, it costs money to operate a bank. You need a physical bank branch that has to be purchased and maintained. You also have to staff the operation with employees, and that requires paying multiple salaries, as well as related employee benefits. Then there’s the acquisition and maintenance of costly equipment, such as in-house computer systems and software, as well as sophisticated security equipment.
Now multiply the costs of that single bank branch by multiple branches, and you start to get an idea why you might pay 15% for a loan at the same bank where you will earn less than a 1% return on funds held on deposit there. It’s not exactly an equitable – or democratic – financial arrangement.
P2P lending doesn’t have all that bank branch real estate, hundreds or thousands of employees, or expensive equipment. And for that reason, you might see an arrangement that looks more like 10% loan rates, and 8% returns on your investment money.
Lending sites in the U.S.
Though the entire concept of peer to peer lending started in the Third World decades ago, there are now dozens of P2P platforms operating in the US. Most people have heard of Prosper and Lending Club, but there are several other lenders in the U.S. Market.
Some of the more common peer to peer lending sites include:
Lending Club: largest P2P lending platform
Started in 2007, Lending Club has since grown to become the largest peer-to-peer lending platform on the web. By the end of 2015, the site funded nearly $16 billion worth of loans, including more than $2.5 billion in the last quarter of the year. Obviously, Lending Club is doing a bunch of things right.
As a peer-to-peer lending platform, Lending Club is a site that brings investors and borrowers together to put together loans that will benefit both parties. The entire application process takes place on the website and can be completed in a matter of minutes. And after you apply for a loan, the site enables you to link up to Credit Karma where you can begin monitoring your credit. And you can get funded in as few as 3 days.
That last point can be important. Since so many of the loans arranged on Lending Club involve debt consolidation, borrowers often see an increase in their credit scores shortly after initiating the loan. The reason for this increase is the fact that the borrower’s credit card debt utilization ratio declines after several credit cards have been consolidated into a single loan on the platform.
As a general rule, Lending Club makes personal loans of up to $35,000. Loans are fixed rate and unsecured. Terms range from short term to long, after which your debt is fully paid. Interest rates range from 6.95% APR to a high of 35.89% APR, which is determined by your credit grade.
Credit grades are determined by your credit score and credit profile, as well as by your income, and both the amount and term of the loan.
The platform also charges an origination fee as a percentage of the loan amount that you are borrowing. These origination fees are not unusual in the personal loans space, and can still result in APRs that are much lower than those charged by credit cards. However, there are no application fees and no prepayment penalties.
Though Lending Club is best known for personal loans, they also make business loans and medical loans (under their “Patients Solutions” plan) that can be used for medical procedures that are not covered by health insurance, such as fertility treatments and hair transplants.
To get more information about this industry-leading company, see more in our in depth Lending Club review.
SoFi: peer-to-peer student loans and refinances
SoFi, which is short for Social Finance, has become one of the leading sources for student loan refinances available anywhere. This site is virtually synonymous with student loans, though they also provide mortgages and personal loans.
The platform was founded by people who are close to the college scene and well acquainted with the nuances of student loan refinances. That is an area of finance that is not adequately served by the banking industry. There are just a few major lenders who will provide student loan refinances, and SoFi is one of them.
SoFi is a peer-to-peer lending platform where student loan refinances are granted largely on the basis of non-traditional criteria, such as type of occupation, the college or university you graduated from, your GPA, and your major – as well as your income and credit profile. But this means that loan approval is not strictly based on income or credit. The education-related criteria weigh heavily in the decision.
This is important because while student loans are granted on a virtually automatic basis, student loan refinances require that you qualify based on your ability to repay. SoFi considers your educational background as part of the evidence that you can repay.
Also, as a peer-to-peer lender, SoFi is available seven days a week, and you can complete the entire application process online.
The site claims that the typical member can save an average of $14,000 as a result of refinancing a student loan with them.
SoFi currently has rates on student loan refinances that range from 3.50% APR to 7.49% APR on fixed-rate loans and between 2.13% APR and 5.68% APR on variable rate loans. You can also refinance the entire amount of student loan debt that you currently have, as the platform does not indicate any maximum loan amount.
You can refinance both private student loans and federal student loans, though the site recommends that you be careful in refinancing federal loans. This is because federal loans come with certain protections that are not available with private source loans, nor with a SoFi refinance. You have to appreciate that kind of openness and honesty in a lender of any stripe!
These are just a handful of the growing number of peer-to-peer companies in the United States.
Prosper: first P2P lending platform
Founded in 2005, Prosper is the first among the popular peer 2 peer lending sites. The site has more than 2 million members and has funded more than $5 billion in loans to date. The platform works in a fashion similar to Lending Club, but not identical.
Like Lending Club, Prosper brings individual investors and borrowers together on the same website. Some of those investors are large concerns, such as Sequoia Capital, BlackRock, Institutional Venture Partners, and Credit Suisse NEXT Fund. This institutional participation is important in itself; as peer-to-peer lending is rapidly growing, large, institutional investors are becoming more actively involved in the funding side.
Prosper makes personal loans for amounts of between $2,000 and $35,000. Proceeds of the loan can be used for just about any purpose, including debt consolidation, home improvement, business purposes, auto loans, and short-term and bridge loans.
You can also borrow money to adopt a child, purchase an engagement ring, or take out “green loans”, which enable you to finance systems that are based on renewable energy.
Loan terms range from 36 months to 60 months, with interest rates between 5.99% APR and 36.00% APR. Your loan rate is calculated on the basis of your Prosper Rating, which is similar to Lending Club’s credit grade and is based on your credit score and credit profile, loan term and loan amount.
Loans are fixed rate installment loans, which means that the debt will be fully paid by the end of the loan term. There are no prepayment penalties, and no hidden fees, though Prosper does charge origination fees similar to Lending Club.
Once again, the entire process takes place online where you can complete an application in minutes, and get your Prosper Rating. From that point, your interest rate will be determined, and your loan profile will be made available to prospective investors who will decide to fund the loan. Since funding is done in small increments from multiple investors, the loan will not fully fund until there is sufficient interest from enough investors. But that process could happen is little as a one or two days.
Learn more about the oldest of the P2P companies in the United States in our full Prosper review.
PeerStreet: real estate loans
PeerStreet is taking what Lending Club and Prosper did for personal loans and applying it to real estate. Founded in 2013, Peerstreet has expanded rapidly and their private marketplace is very easy to use.
Unlike other companies that are funneling their investors into REITs, PeerStreet allows investors to invest directly in real estate loans. The loans are not your typical 30-year mortgages but short term loans (6-24 months). The loans are for special situations like rehabilitation of a property that a landlord wishes to rent out.
The annual returns for the average investor work out to be between 6-12% and you can get started investing with as little as $1,000.
PeerStreet also does all their own underwriting on the properties and evaluate all their loan originators.
The one downside to PeerStreet is that you must be an accredited investor to participate in their marketplace. This pretty much eliminates most small investors from having a shot at this unique P2P lender.
Fundrise: property investment
Another crowdfunding source that only deals in real estate is Fundrise. If you’re looking for a way to invest in properties without having to do the day-to-day duties of a landlord, investing with Fundrise can be an excellent way to get your foot in the door.
One of the advantages of investing with Fundrise is you can start with as little as $1,000. Fundrise uses all of the smaller contributions to invest in larger loans. Fundrise is basically a REIT, which is a company who owns income-producing real estate.
According to Fundrise’s website performance page, they had a return of 8.76% back in 2016.
When you’re looking at fees, Fundrise has a 1.0% annual fee. This includes all of the advisor fees and asset management. While 1.0% might sound like a lot compared to some other investment routes, Fundrise has lower fees than other REITs.
There are several benefits to choosing Fundrise. If their returns stay on course, you might make more than you would with a traditional REIT or with other P2P sites. On the other hand, these investments are going to be a little riskier than other options.
Getting started and investing with Fundrise is easy. You can create an account and start investing in no time. Even if you don’t have any experience with investing in real estate, Fundrise makes it incredibly easy. In fact, they now have Fundrise 2.0, which will handle all of the investing for you. Fundrise 2.0 will select the eFunds and eREITS and diversify your investments based on your goals.
To learn more, check out my complete Fundrise review.
Funding Circle: business loans
Funding Circle is a peer-to-peer lending site for people who are looking for a business loan. This is important because the small business market is completely underserved by the banking industry.
Not only do banks typically have extensive requirements before they will make a loan to a small business, but they also have a preference for lending to larger businesses that are better established. The small, one man or woman shop is often left out in the cold when it comes to getting business financing.
The platform has made more than $2 billion in loans to more than 12,000 small businesses around the world.
With Funding Circle, you can borrow as little as $25,000, to as much as $500,000 on a business loan at rates that start as low as 5.49% (the range is between 5.49% and 20.99%). Loan terms are fixed rate and range from one year to five years. And of course, Funding Circle also has an origination fee, that is typically 4.99% of the loan amount you are borrowing.
You can borrow money for a variety of business purposes, including refinancing existing debt, buying inventory or equipment, moving or expanding your operating space, or even to hiring more employees.
One of the best features of Funding Circle is that you only need to be in business for as little as six months to three years. The application process takes as little as 10 minutes, and you can receive funding within 10 days.
The entire process takes place online, and you will be assigned your own account manager to help guide you through the process. Learn more about their small business loans and investing in our Funding Circle reviews.
Upstart: the non-traditional newcomer
A recent newcomer to the list of peer to peer sites, Upstart began operations in 2014 but has already funded more than $300 million in loans. Among the major peer-to-peer lenders, Upstart has the most in common with SoFi. Like SoFi, Upstart takes a closer look at non-traditional underwriting criteria, preferring to look at a borrower’s potential, which includes consideration of the school you attended, the area of study, your academic performance, and your work history.
They do take more traditional lending criteria like credit and income into consideration. The primary focus is on looking to identify what they refer to as “future prime” borrowers. Those are borrowers who are early in life but are showing signs of having strong future potential. For this reason, the platform carefully evaluates factors that contribute to future financial stability and makes loans accordingly.
For example, Upstart reports that the average borrower on the platform has a FICO score of 691, an average income of $106,182, is 91% likely to be a college graduate, and 76% likely to be refinancing credit cards. The last point is important – borrowers who refinance credit cards are typically improving their financial standing almost immediately as a result of lowering their interest rates, reducing their monthly payment, and converting revolving debt into an installment loan.
Loan amounts range from $3,000-$35,000, with terms of from three years to five years, and have no prepayment penalty. The site claims that their rates are 30% lower than those of other lenders on average. Upstart reports that rates average 15% on a three-year loan, though they can range from 4.00% to 26.06% for three-year loans, and between 6.00% and 27.32% for five-year loans. Like the other peer-to-peer lenders, Upstart also charges an origination fee, which can range between 1% and 6% of the loan. See the full details in our Upstart Loans Review.
PeerForm: individual and small business loans
PeerForm is a peer-to-peer lending platform that was founded in 2010 and makes loans to both individuals and small businesses. The site is somewhat more tolerant on credit scores in that they will lend to borrowers with scores as low as 600 (most others require a score in the mid-600s or better).
Much like the other peer-to-peer platforms, you start by completing a simple online application, that takes no more than a few minutes. You select the type of loan that you want, as well as the amount, and then your request is put into a loan listing on the site. That is where investors decide to fund your loan (the process can take anywhere from one day up to two weeks). Once they do, the information you provided in your application is verified, and the funding process begins.
Interest rates range from a low of 6.44% to a high of 29.99% and require an origination fee of between 1% and 5% of the loan amount. However, there are no application fees and no prepayment penalties. The loans are unsecured and require no collateral.
You can borrow money for a wide range of purposes, including debt consolidation, a wedding loan, home improvement, medical expenses, moving and relocation, car financing and more.
Loan amounts range between $1,000 and $25,000, and all loans are for a term of three years. Get all the details on this great company in our Peerform reviews for investors and borrowers.
Why would anyone invest through a P2P platform?
Higher returns on investment are a powerful motivator. This is especially true since interest rates on completely safe, short-term instruments like money market funds and certificates of deposit are commonly paying less than 1% per year. And even if you want to invest in longer-term securities to get higher returns, they’re not there either. For example, the 10 Year US Treasury note currently pays only 1.82% per year. That’s an incredibly low return considering that you will have to tie your money up for a full decade just to get it.
Your choices are: 1. tie up your money with a low return or 2. lend your money with more risk and more reward
By contrast, an investor can easily get a return in the neighborhood of 10% per year on a portfolio of five-year loan notes, with blended credit profiles, by investing his or her money through a peer-to-peer platform.
Yes, there’s more risk involved in investing/lending through a P2P platform – after all, there’s no FDIC insurance on your money. But the rate is much higher than what it is on conventional fixed income instruments, as well as the fact that a P2P investor can create his own portfolio to match his own risk tolerance.
For this reason, peer-to-peer lending platforms tend to have plenty of investor money to lend out. And if you’re a borrower, that’s a win for you.
Why would a borrower use P2P?
If investing through peer-to-peer sites makes good sense for investors, there are probably even more reasons why a borrower would want to get a loan from one.
- Lower Interest rates – Depending on the type of loan taken, rates are often lower on P2P sites than what you can get through a bank. This is especially true when you compare P2P rates with those that you will pay for credit cards and business loans. It gets back to P2P platforms having a lower cost of doing business than the banks. They’re not lower in all cases, but they’re always worth a try on just about any loan type you want to take.
- Bad credit, no problem – P2P platforms are not subprime lenders, but they will often make loans that banks won’t. You’ll be charged higher interest if you have credit blemishes, but that may be preferable to not being able to get a loan at all.
- Less restrictive – P2P platforms are a lot less restrictive when it comes to the purpose of your loan. One example is business loans. A P2P lender might make you a personal loan for business purposes, while a bank may not want to make a business loan at all, under any guise.
- Ease of application – The entire loan process is handled online, so you never have to leave your house. Even third-party verification and document signing can usually be done online. All you need to do is scan them, then either email them or download them to a portal on the P2P site.
- Speed – You can often handle the entire loan process, from application to receipt of funds, in little as two or three days. By contrast, certain bank loans can take weeks or even months to drag out.
- No face-to-face meetings – Some people feel uncomfortable when applying for a loan requires a face-to-face meeting, particularly at a bank. Such meetings can often have the feel of a physical exam and include requests by bank personnel for information and documents that make you feel uncomfortable. There are no face-to-face meetings when you apply for a loan through a peer-to-peer website.
- Anonymous processing – Investors will see your loan request, but you won’t be personally identified in the process. There’s little danger that a neighbor who works at a bank will have access to your loan information since a P2P is not a bank.
How it works
Each peer-to-peer lender works a little bit differently from the others, but there are some common steps to the loan application process.
Loan application steps
- Brief questionnaire: The platform does a “soft credit pull”, and you’re assigned a loan grade (we’ll get deeper into these with individual P2P reviews).
- Loan grade: Your loan inquiry will be made available to investors, who will review the loan request and determine if they want to invest at the assigned loan rate (which based on the loan grade).
- Investor Interest: When enough investor interest is shown in your loan, your loan will then be eligible to be funded.
- Documentation: Providing proof of income and employment, and a list of existing debts that you intend to repay with the new loan (refinances and debt consolidation loans are very common with P2P platforms).
- Application Review: The loan is then underwritten to make sure that the documentation supports your claims in the initial questionnaire; the package will either be approved for funding, or there will be a request for additional documentation.
- Funding Approval: the loan documents will be prepared, and sent to you for signature. Funds are typically wired to your bank account within 24 to 48 hours of the receipt of your signed documents by the peer-to-peer platform
Though the process may seem as if it takes several weeks, it will actually proceed very quickly if you are prepared to immediately furnish any and all required documentation. Since you can usually scan and email information, the entire application process can be compacted down to just a few days.
Loan Characteristics
Loan amounts granted are typically anywhere between $2,000 and $35,000, though many platforms will lend higher amounts for various purposes – all the way up to well over $100,000 depending on the loan purpose. You will usually be required to have a credit score in the mid-600s or higher in order to qualify, though loans for those with impaired credit are becoming more common. And loans typically run between three years and five years, but once again there is significant flexibility for different loan types and from different lending platforms.
P2P platforms usually don’t charge application fees or any of the various fees that are generally charged by banks in connection with loans. But one fee with peer-to-peer loans that you will need to be aware of is that they generally charge origination fees. They can represent anywhere from 1% to 5% of the loan amount provided and are usually deducted from the loan proceeds. So if you are approved for a $10,000 loan with a 2% origination fee, $200 will be deducted from the amount of the loan proceeds that you will receive.
The actual amount of the origination fee is closely tied to your loan grade, which is largely (but not entirely) determined by your credit profile. Other factors include the term of the loan, the purpose, the loan amount and your income or employment.
Types of peer-to-peer loans
As the number of peer-to-peer lenders has expanded, so have the types of loans that are available through them.
Common loan types available include:
- Personal Loans
- Auto Loans
- Business Loans
- Mortgages
- Student Loans (including student loan refinances)
- Bad Debt Loans
- Medical Loans (for uncovered medical expenses)
Not all peer-to-peer lenders do all of these loans, in fact, a single platform typically specializes in just one or two loan types. But never assume that a certain kind of loan is not available through a peer-to-peer platform somewhere; new sites are coming up all the time, and some are moving into previously unexplored territory.
Investing Software Services
As interest in investing through peer-to-peer sites becomes more popular, there is a growing demand for software services that can help investors select specific loans – or notes – that they want to invest in. These software services help with the construction, management, custody, and reporting requirements for a portfolio of peer-to-peer loans.
These software services help with the construction, management, custody, and reporting requirements for a portfolio of peer-to-peer loans.
An example of such a provider is NSR Invest, who entered the P2P investing software services market last year.
NSR Invest is a managed account investment platform that provides P2P investment tools to financial advisors. They launched a new generation of software that is enabling financial advisors to establish and manage separate investment accounts specifically through Lending Club. And though the specific software is new, NSR Invest has actually been working with Lending Club since 2011 and also has ongoing relationships with Prosper Marketplace and Funding Circle.
NSR Invest is hardly alone, even though the industry is new. Some of the more prominent peer-to-peer investing software services include:
- Lending Robot
- BlueVestment
- Peer Trader
- PeerCube
Each of these firms is actively working to improve the investment experience on P2P platforms. And as they do, the lending process itself will become increasingly streamlined and more efficient.
Despite the fact that peer-to-peer lending has been happening in the US for only a few years, the practice is growing rapidly. As general participation increases, along with the various loan types the industry will serve, peer-to-peer lenders will provide serious competition for banks when it comes to lending.
But the future is already here since hundreds of thousands of people have already taken loans through the many peer-to-peer lending platforms that are up and running. Have you tried to use one yet, either as an investor or a borrower?
Your review of LendingClub is far too positive. As the saying goes, “Past performance is not a guarantee of future results”. In a year or two I would suggest re-reviewing LC with your actual returns.
But here are the gaps that I see in your article.
One, notes you purchase are not easily sold for face value in the secondary market. If you want to sell a note you’re no longer interested in owning, you will have to sell it at a significant discount on the secondary market.
Two, some borrowers will straight roll you, meaning never even make a single payment. The worse part of this is that because your investment was less than 12 months, you can’t even deduct it as a capital loss, if you are investing in a taxable account. For IRAs, you’re just straight out of luck. And this doesn’t even discuss the fact that charged off notes will get sold off by LC and you’ll get pennies on the dollar (net of LC’s cut for the “recovery”)
Three, there are statistics pages on LC’s website that show the range of returns, and at present the vast majority of LC note investors are not getting anywhere near 10% return.
Four, if you decide to start an IRA account with LC, there is an administrative fee if your balance is too low. When it comes time for you to start taking minimum required distributions from your IRA, then you had better hope you are not forced to sell notes to avoid IRS mandated penalties (see point number one above).
Five, LC has been engaging with other financial institutions to buy up whole notes, never getting to the fractional market (retail lenders such as yourself) that got them started.
Six, this may have changed, but at least in past, if LC ever goes bankrupt your investment with the notes goes to nothing. You are actually not investing directly in the notes, you are investing with LC who then lends the money to the borrower based upon what notes you want to put money towards. So, make sure you know if LC is a going concern long enough for you to get your money back. And note that LC recently did a reverse stock split.
Seven, if you invest in a taxable account, net of taxes your returns will likely not be much better than U.S. Treasuries.
Eight, there are many long-time investors, on other forums, who are unwinding their LC investments. These are sophisticated people who’re using LC’s API to pull data down, score notes and make investments every four hours that LC makes notes available for sale.
Which brings up number Nine. If you’re investing notes, with the sophisticated operations that some investors have, you will be lucky to invest in the crumbs of notes that fall through the cracks.
And Ten, The previous two years and the current year-to-date, my charge-offs have exceeded my interest income. At first I had a real nice rate of return, and up until 2017 I was stable around 7%, thinking I had found a way to get good income, then 2017 happened, and 2018 and 2019 haven’t been better. Over the years of investing on LC, I’m looking at a net of taxes return of about 2% overall and that isn’t climbing when charge offs exceed interest income.
And just to go to Eleven, you might score a good note with high credit scores and high interest rates, but then another financial institution will come along and offer that same borrower another re-financing package with better terms and that borrower will pay your note back in full. So, don’t count your chickens until all your eggs are hatched.
And don’t even get me started on how much in fees LC takes from the loan payment as it relates to collections.
Does Lending Club lend money to persons from other countries or only within United States
The authors comments are unrealistically skewed towards the positive. In reality, after 3.5 years, my initial investment of $5K has only made a 3.2% return with 18% of the loans written off. Oddly enough, the highest percentage of loan write offs have been A and B rated loans with my loan portfolio containing A, B, C and a few D rated loans. In my opinion, Lending Club is not aggressive enough in pursuing payment and they charge you for the lame collection attempt they make. I am currently make a higher return in certificates of deposit and I recommend that course of investment over an unpredictable return and poorly administered collections procedures. Another sad fact of the Lending Club is that they promote the ability of selling loans out of your portfolio which in practice does not work.
Very interesting article – thank you for your effort. A couple of questions which you might have covered in your article. When is interested credited to your account and can the interest be withdrawn say on a monthly basis leaving the principal in the account for further investment when after current loans mature. I would like to receive to receive the interest as part of my monthly income.
Thank you for your help.
Great article. Informative and easy to follow. Will definitely be checking out this form of investing further. Thanks!
Quistion: If you invest 1000 with a posible return on 3% what is 30 anual, but you divide all this 1000 in miltiples notes. With one single person that don’t pay you, you lose the whole posible return. Is that true or i am missing something???
Please explain
Hi Angel – Each note is $25. So if that loan defaults, you will lose part of your investment return. But if you’re earning 10%, that would be $100. A single loan default would drop your net return to 7.5%.
Jeff, good morning. Your article is dates 10/19/2018 but in your personal experience you only reference 2014 and 2015 data for the Lending Club. Did you start investing prior to those dates or only in the last 2 years? Do you plan to significantly increase the amount invested by influx of new funds or allow to grow through reinvestment of funds currently invested? What percentage of your total investment portfolio do you have invested in the Lending Club?
I’m curious about this.. I’m on retirement so I would need to invest only $25 per check.. I only get paid once a month.. what would you recommend (Bill Naquin)
Hi William – Once you’ve satisfied the minimum investment, you can set up a direct transfer of the $25 per month. I’m not aware of any minimum ongoing contribution.
In your article, you stated “…we put together an in-depth Prosper vs. Lending Club comparison.” However, I was unable to find a link to this comparison. Do you mind providing that link? I would be very interested in seeing the comparisons, and which you would recommend over the other. Thank you very much for your time.
Hi Rob – There is no link because we prepared the comparison.
I appreciate the information. However, since most people do not make 70k do you have any suggestions for investment the other 80% of people?
Hi John – If you make well below $70k, you might want to look at some safer investments, like bank CDs or online savings accounts – unless you have a large amount of money to invest.
I invested in a Lending Club IRA. It’s been a few years, and the return on the investment never topped 5%, so I’m currently trying to roll the money over into another retirement account. Lending Club, and Strata Trust, the company that manages the IRA, make this difficult and time consuming. It’s taken 5 phone calls and several emails. The transfer process will take at least three days. I’m only transferring about 25% of my money, because the rest will be tied up until the loans mature. So, I’ll have to go through this multiple times. From my perspective, Lending Club is a waste of time and money.
Thank you for the review. It sounds very interesting. Will you offer a bit more information on a paragraph that sounds scary: “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”?
18% of what? 30% of what – total lawyer fees? That could sink a person.
Thank you!
Vanessa E.
Hi Vanessa – It’s 18% or 30% of the note experiencing the delinquency or non-payment. So if your investment is $25 in that note, it will be 18% or 30% of that amount. So you’re liability is limited.
Question: You said an investor will pay an 18% collection fee for late payments and 30% of attorneys’ fees in the event of litigation. Is that 18% and 30% of my investment in the note (e.g. $25 investment)? If it is not proportionate, those charges could be really high, especially litigation costs. It could wipe out my entire account.
Hi Susan – I believe the percentages are based on the amount of the note still outstanding.
I want to know if a nigerian is entitled to this loan
Hi Abelebara – It may be available if you’re a US resident with a taxpayer ID number. But I don’t believe it’s available if you live in Nigeria. Please do a web search and see if Lending Club has a Nigerian branch, or if there are any other P2P lenders there.
Question:
Should I get a loan through Lending Club, is there a penalty for paying the loan off early??
Hi Lucie – That’s a decision you’ll have to make for yourself. You might try applying and see what they come back with. And no, there is no prepayment penalty.
As a non resident,living in the Caribbean to be exact St. Maarten can i open an account and start investing as well?
thanks
I don’t think so Zen. To my knowledge it’s only available in the US. But you can contact Lending Club and ask if you can, or what they might suggest.
As an investor – large amount of defaulted loans ans write downs. There is no path to get out of Lending club notes except to sell them on secondary market – takes a long time unless you are willing to discount them – once you start your notes the yield be comes negative “(Adjusted Net Annualized Return -4.46%)” quickly. In hind sight – probably was not worth it
Since this article is more than a year old, do you have any updates to it?
I do not recommend Lending Club at all. I have been an investor with them for a very long time. And yes I did make money with them when I was actually reinvesting my money.
However, a better opportunity came my way and I wanted to take my lending Club money out to use it. I knew this would take time to do which I was ok with.
Since I was no longer reinvesting my money on new loans my rate of returns just keep falling and falling and falling. The reason for this is new loans is where you are making your returns. Over time way to make loans go default.
I do not like this system and would never invest with them again.
Hi Justin – It’s true, you do have to reinvest to make P2P lending work efficiently. But have you calculated the actual return on the declining balances? It may have been positive, but as the balance drops, it seems like you aren’t making any money, even though you may be.
There’s other direct lending programs out there. From my experience with L.C. where borrowers can default and just walk away – and leave you hanging as a lender with no recourse. There are programs that loan for ie fund commercial & residential real estate with the loan – a tangible asset for the lending company to have a lien against.
The risk reward isn’t worth it on the L.C. program.
Hi Todd – Yes, PeerStreet is an example. They make only secured real estate loans. But the returns aren’t as high as Lending Club, and even they admit to less than 100% recovery on defaulted loans, especially in states with judicial foreclosure laws. No platform is 100% perfect, but that doesn’t mean they aren’t worth investing in.
Great Program but there a few issues for having a lending account:
1. Default rate is way too high
2. No clear exit strategy except try to sell notes on secondary market or at a discount if you need money sooner.
3. Try to transfer money back to your IRA from L.C. – took 2+ months
they were less than helpful and refused to help or give any info to company receiving funds- they just rejected with no reason.
I’ve been selling notes since last June and still am not out completely
Hi Jeff,
Great article but I do beg to differ on just a few of the borrowers criteria you have listed. I just paid in full my lending club loan as of today and it was a last resort for us and ended up saving us the past few months from bankruptcy or credit counseling. It basically saved our credit scores and saved us over $200 a month by consolidating. We were turned down by everyone for months because our debt to income was almost 90% and our scores were 600 and 675. Combined we only make $108K and our debt was pushing $35k which by today’s average I know is not that high but for us it was drowning. Anyway in our situation I took a one last shot before we called credit counseling and lending club actually approved us. We originally got approved for $25k plus their $1,500 fee, which took the bulk away and still saved us a ton even at the 28% interest rate they approved us for. We made 3 payments on it and between that and our tax return we got our utilization down to 5%, our scores jumped hugely and we were able to refinance the loan through our credit union at a 7% interest rate saving us even more money. I thank lending club for being the ones who saved us from ruining any chance of bouncing back from this and making it possible. It’s tough to do but sometimes places take a chance and it pays off.
Thanks for sharing a success story Nicolle!
Thanks for the article! This is great information, and I am certainly interested in investing when I am able to save up a bit more money. My question is, what is the fee for withdrawing money once you have started to earn, if you’d rather withdraw a specific amount than to reinvest?
Hi Kelly – There shouldn’t be a fee for withdrawing money, but there might be for closing out the account.
After watching your video and just reading the beginning of this blog, I went to lendingclub and open an account. However, upon reading the rest of your blog, I would like to request to have my account be credit to you. Would that be possible?
Also, thank you very much for this! I think it’s wonderful how you complete the blog as you go through the site.
Hi Kammie – Thank you so much. You can see if they have a referral program then give them my name. That might work.
how are investors profits income taxwise
Hi Ed – They’re taxed the way any investment income is. The interest is taxable.
I honestly don’t believe lending clubs loan standards are very thorough or up to what banks require. For example I invested in 134 loans and 18 are in default, late or charged off. That is a 13% default rate. Quite a few of the defaults paid 1 or 2 payments and stopped paying. I am slowly withdrawing my cash monthly to recoup cash as it comes back but once my balance says 0 I will leave the website. I would not invest a single dollar. You would be better off investing in some dividend stocks or ETF. Ally Bank pays 1.0% interest. All better than lending club.
I put $10,000 in to Lending Club and had it set up to reinvest accrued interest. I have had the money in for close to 9 months. I have made $450 so far, 4 loans have been charged off, 2 defaults, and currently 9 that are 36-120 days late. I stopped the auto reinvestment and will be pulling my money out as it is paid. I am very disappointed in this investment. They need to come up with a better way to collect when borrowers default on loans. Most of the deadbeats only paid 2-3 payments and then quit. I could have placed the $10,000 in stocks and made at least $1,000 on my money by now. If you have money don’t waste your time on this, go with the market instead.
You do realize your comparing Lending Club against one of the most bullish markets in history, right?
Thank you for your review of Lending Club. You mention that you have to reinvest your earnings. Why do you have to reinvest? Can you get money out of the account as it is accrued? Or do you have to wait until the end of the note, which means the cash will be sitting there for years?
Thanks.
Hi Stephen – All loan notes held with LC are self-amortizing. That means that payments you receive are both interest and principal. At the end of three or five years, the money will have been completely withdrawn if you took it as income and spent it. That’s why you have to reinvest, to keep your investment growing by investing loan payments into new loans.
I applied for a loan on 9/13/17. As of today, funding has a green check mark next to it and my application says its in final review. I got an email stating everything looks fine and they are just waiting for investors to back the loan. However, I looked on the manual investing website but I dont see my loan on there. Do you know anything about this or how it works? Im trying to find out how much of my loan is currently funded. Thanks
Hi Ashley – If it’s not showing on your loan, you’ll need to call them and find out what’s happening.
This company is full of air …. I am 690 beacon ..job over 125000 a year … but somehow how got turned down .. then they send you to another company to shop u around and hurt your credit …. don’t believe the hype…I went to my credit union got a loan fast …these people are waste of your time …don’t let them use your credit and your name to shop around …. do not trust
I prefer Prosper, but Lending Club is a great place and alternative. Can’t deny these solid returns for Peer to Peer lending/investing. Great post!
Is there a limit to how much you can invest with Lending Club?
@Alvin I’m not familiar with any limits. The minimum to invest with Lending Club is $1,000.
That’s good to know. I ask because I read on another site that you must have at least $70,000 income to invest, and they do not let you invest more than 10% of your income. I just hoped that wasn’t true.
Alvin,
That is what is stated; you must have an income of $70K or more and you cannot invest more than 10% of your income; $7K in your case.
I reside in Canada, does Lending club operate in Canada. can someone in Canada Invest in Lending club?
Hi Obiora – I wasn’t able to find any reference to Canada on the Lending Club website, but a couple of review sites indicated that it’s not available there. But my guess is that they’ll get there eventually. P2P investing is new, and is spreading out fast.
I’m coming into $10,000 in a couple of weeks. I read your article about Lending Club and I’m thinking about investing $5,000 for a short term gain.
Do I sign up on this site or where do I go to invest?
Hi Michael – You can just click on one of the links in the post and it’ll get you right where you want to go.
Boo Hoo, as a PA resident, I am unable to participate in Lending Club investing. I can find no direct reason, except PA stinks!! To protect us? Hmm.
I just had some unexpected extra cash that I wanted to invest.
Anyhoo, your YouTube video and article were very good. Thanks anyway.
Isn’t kind of misleading to say that LC “…takes the banker out of banking.” since actual loans to the borrowers are originated by WEBBANK of Utah. Further no investor directly “funds” the loan but acquires an unsecured debt against LC. LC is very honest that they have NO legal obligation to pay a linked loan debt if the debtor ceases to pay.
Hi Scott – Not necessarily. Webank acts more in the administrative role in creating the loans. They don’t actually fund them, otherwise all the investors would be getting no more than 1% or 2% on their money. The act more as a temporary warehouse.
Same in Texas but I buy notes off of the secondary market or their Folio Platform. I am not sure if it is the same for your state but Texas allows you to buy loans from people that have invested in a loan and are reselling it
Thanks for the heads-up Peter!
One of the downsides to Lending Club is the hefty fee for taking money out. I tried to take $1000 out to invest elsewhere and was told the fee would be $100. On an IRA.
Can someone from outside the US invest?
Hi Peter – Technically yes. But Lending Club requires that you have a Social Security number, a US bank account and that you reside in a US state where they can legally operate, which means that you’d virtually have to be a US resident or citizen. Sorry there isn’t a better answer.
Hello Jeff,
thanks for the comments. I am currently living in USA but will be gone in two months back to my country. Still I need to keep an account here for some months and instead of letting the money do nothing, this is a good option. I currently have SSN, bank account and reside here. But in two months I am gone. Can I still use this service with my current information, go away and keep my account even if gone out of USA? both as investor and eventually borrower?
Thanks!
Hi Juan – You’ll have to find that out from Lending Club directly. They have rules in regard to opening an account, but I don’t know if they extend to your continued residency status.
Thanks for another great article Jeff. I had not heard of Lending Club until listening to your podcast, after doing some research it appears to be a great product. I have heard you mention portfolio diversification a few times. I understand the concept of using this instead of other investments options (e.g. stocks), but I have been trying to decide if this diversification mitigates any risks. As we know, the financial markets can be shaken at any news. The most recent news of Brexit has hurt the markets before any losses have taken place. Stock markets tend to be preemptive and news based, while products like Lending Club aren’t impacted until actual results take place. Actual results in this tense would be job loss. I look at market trends as indicators for future results on other investment tools like Lending Club. This results in Lending Club not having an impact yet, but a good sign of increased risk in the future.The markets may crash first, but if we enter an economic downturn this type of investment will also receive negative implications.
Long story short, what are your thoughts on the correlation between these investment options? Would you advise investors to stay away from Lending Club in a time where we predict a near economic recession? Or does Lending Club have underwriting requirements in place that can serve as a great alternative in unfavorable market conditions?
I believe the correct option is targeting high-quality credits (over 740 FICO). Your return won’t be as good, but your risk will be less. This appears to be a great alternative, yet it does tie your money up in a low rate environment for 36-72 months.
Any thoughts on using this for mitigating risk in other investment areas while still receiving a great return?
Hi Sean – That’s a complicated question, since the answer involves a large dose of predicting the future, which no one can do. But I get where you’re coming from. The history on P2P lending isn’t deep, since the industry was very young during the last recession. But it might help if you go to Lending Club’s Statistics page and it will show you the performance of the different credit grades at different time periods. You can go to the interactive chart on the page and plug in the numbers. I did it for the timeframe between 1Q 2007 and 4Q 2009 – roughly the period of the financial meltdown. What I found is that while the lowest credit grades performed poorly, the highest grade loans – A – turned in a gain of greater than 5% per year for all three years. When you consider that stocks were down more than 50% at one point in that timeframe, 5% per year looks really good.
What are your thoughts on the Lending Club scandal?
Hi Rebecca – I’m certainly disappointed, but I want to wait and see how this plays out. It may look very different a year from now. One good thing that comes out of situations like this is that companies often improve their processes in response. In the end, it could make Lending Club a more secure platform. We’ll have to wait and see.
I’m interested in peer to peer lending but not sure how it works if I want to sell my notes. How liquid are they?
@melanie
I definitely wouldn’t compare peer to peer lending to CD’s or a money market account. I would view it more like a 3-5 year investment.
That being said, peer to peer lenders will use a third party to sell the notes for you in what is considered a third-party marketplace. You have to list your notes there and wait for buyers to pick up your notes. Buyers may pay full price or you may have to sell at a discount to sell your notes. This whole process can take anywhere from a few days to two weeks (also considering the time it takes to ACH the money from your P2P account to your personal bank account.
How does Lending Club compare to traditional bank or credit union loans? Could you provide an idea of the difference in rates?
You can get double digit returns on Lending Club, but it will be hard to get anything better than 1% on banks and credit unions. I wouldn’t recommend abandoning traditional savings, but you might mix in some Lending Club investments to improve the overall return on your interest bearing holdings.
There’s always been a debate on whether a personal loan is the right move to use it to consolidate your debts. Think the consensus is that a personal loan will typically save you money vs paying minimum payments on credit cards, why is that? Is it because interest is calculated differently on personal loans than credit cards?
Hi Jeremy – It’s partly because you can often get lower interest rates on personal loans (but not always), but also because personal loans are term loans. You pay them off in three or five years, which saves you a lot of interest. As revolving debts, credit cards are like perpetual debts. You pay a fortune for them over a lifetime.
Mr Rose I must say of all the hogwash opportunities I’ve looked this is the most honest and understandable one. I want to try this only have little money 100 . great article by the way. I have a very short attention span and I read it all. If I do this youve got my vote. Thank you.It sounds like something I could learn and get better at.
Thanks for the review. I’ve never really gotten into investing in debt, but I’ve thought about it a lot. I’ve been more into ownership investments up until this point. Perhaps I’ll give it a shot and see how it goes.
Hi Jeff, I was just looking at the stock trends for Lending Club and it looks like they have steadily gone down since December 2014. Would you still recommend investing your money in this platform based on this information?
Laura
Hi Mr.Rose, Peace and blessings to you and yours this day. I have watched your videos and read up on the lending club. Presently I am in the process if setting up my own account with them as an investor.
I do wish to ask. In your opinion, is this a good vehicle to generate residual Income? As that is my primary intent in investing.
Second, if the results from.investing are residual, can I have them directly deposited to my bank accounts ?
Thanks in advance,
Jon
@ Joh With Lending Club (or any other P2P lender) they can accomplish what you are seeking: passive residual income.
I’m not sure about having it automatically deposited into your account. You would have to check with them. I do know you can have a direct line into your checking account and it’s easy to move funds between the two accounts.