Lending Club is an innovative platform that facilitates peer-to-peer loans. As the platform acts an intermediary between investors and borrowers, Lending Club is suitable for those that need to borrow money, as well as those that want to loan money out as an investment.
The Lending Club process of borrowing money is somewhat different from using a traditional lender, which offers both advantages and disadvantages. If you’re thinking about using Lending Club yourself, then be sure to read our comprehensive guide first.
We’ll discuss everything you need to know as both an investor and a borrow, such as how the platform works, what its fees are like, and how it compares to a traditional lender.
Let’s start by finding out what the Lending Club actually is.
What is Lending Club?
Launched in 2006 and based in San Francisco, Lending Club is a U.S. based platform that specializes in peer-to-peer lending. In fact, Lending Club was officially the first company in the world to register with the Securities and Exchange Commission (SEC) as a peer-to-peer lending platform.
Although we will discuss the fundamentals of peer-to-peer lending in more detail further down, in its most basic form, the process sees those in need of finance obtain loans directly from everyday investors.
This means that you as an investor can make money in the same way that a traditional bank would, insofar that you will receive interest on top of the amount that you financed.
Since its launch in 2006, Lending Club has grown significantly. The company engaged in its respective initial public offering (IPO) in 2014, subsequently raising in the region of $900 million. At the time of writing in April 2019, Lending Club has a total market capitalization of just under $1.4 billion.
Lending Club claims to have serviced more than 2.5 million customers since it was formed, resulting in more than $44 billion in loans.
In terms of how the process actually works, those looking to borrow money apply for a loan via the platform, and choose the best payment plan that meets their needs. From the perspective of the investor, they have the choice of how much they want to invest, as well as the specific risk category.
It is also important to note that generally, the Lending Club platform is best suited for borrowers with good credit. The minimum credit score that you can have as a borrower is 600, however, most borrow’s that use the platform have a credit score in excess of 700. Your credit score will ultimately determine how much interest you pay.
On top of offering loans to individuals, Lending Club also facilitates loans for businesses.
So now that you have a general idea as to what Lending Club actually is, let’s explore how the peer-to-peer system works.
What is Peer-to-Peer Lending?
The concept of peer-to-peer products and services is to reduce the reliance of third parties. The phenomenon grew in prominence back in the 1990s with the launch of peer-to-peer file sharing platforms such as Napster. In the world of peer-to-peer lending, the role of the bank is subsequently alleviated, as borrowers take out loans directly from those that want to lend it.
It is important to note that peer-to-peer loans are typically covered by multiple lenders, as opposed to a single investor. For example, if Joe Blogs wanted to borrow $10,000 through a peer-to-peer lending platform such as Lending Club, rarely would the loan be covered by a single investor.
On the contrary, the loan package might consist of 50 different investors, each contributing amounts proportionate to the amount they want to risk.
From the perspective of the peer-to-peer borrower, they would not know the identity of the individual in question, nor how many people have covered the loan. This is also the case for investors, insofar that they won’t know the true identity of the individual that they have loaned the money to.
Although the underlying concept of peer-to-peer lending is to remove the need for third parties, it is important to remember that technically, platforms such as Lending Club are in fact intermediaries. As such, they charge a fee for facilitating the matching of buyers and sellers.
Nevertheless, the fact that everyday investors can loan money in return for cumulative interest is in itself revolutionary.
So now that you have a firm understanding of what peer-to-peer lending is, let’s take a look at some of the key requirements that you need to consider as a borrower.
LendingClub: Minimum Requirements as a Borrower
Although the Lending Club platform aims to make personal finance more accessible to those that are unable to obtain loans from traditional sources, it is important to recognize that you will need to meet some minimum requirements to be eligible.
First and foremost, you will need to have a minimum credit score of 600. Anything less than this and you are unlikely to qualify for a loan. Moreover, those with lower credit scores will ultimately pay a higher rate of interest than those with a better credit profit.
On top of needing a minimum credit score of 600, Lending Club also takes into account your debt-to-income (DTI) ratio.
For those unaware, your DTI ratio is the percentage of your monthly income that is used to service outstanding debts. The income figure that is utilized in a DTI ratio is based on your gross earnings, meaning that it’s taken before any tax is paid.
For example, if you have a gross monthly income of $3,000, and your monthly debt contributions consist of $500 in mortgage payments and $200 for outstanding credit cards, then you would divide $700 into $3000. This would give you a DTI ratio of 23%.
To qualify for a loan with Lending Club, you’ll need to have a DTI ratio of no more than 40%, or if applying as a couple, 35%. Much like in the case of your credit score, your DTI ratio will also determine how much interest you pay. The lower your DTI, the better rates you are likely to get.
Finally, you’ll also need to have a credit history that dates back at least 3 years. However, if you’re currently in possession of a credit score that exceeds 600, then it’s likely that this will be the case anyway.
Now that we’ve covered the minimum requirements to obtain a loan with Lending Club, let’s take a look at the type of fees you’ll likely pay.
Lending Club Rates: How Much do Lending Club Loans Cost?
As with any financial agreement that involves borrowing money, there is a range of costs that you need to consider.
When you first go through the Lending Club loan application process, you won’t be charged any fees to apply. As such, if your application is unsuccessful, you won’t be charged any money. If you are successful, the first cost that you need to be made aware of is the origination fee.
Origination Fee
This is a standard fee charged by lenders to cover the costs of processing the loan agreement. Lending Club charges anywhere between 1% and 6% to cover the costs of the origination fee.
The amount that you pay will ultimately depend on your credit rating, DTI ratio, and any other material information that your credit profile yields. The origination fee is not required to be paid up front, as Lending Club include this within your APR.
However, the total amount will be deducted from the amount of finance you receive. For example, if you borrow $10,000, and your originator fee amounts to 2%, then this is deducted from the amount of money that is transferred to your bank account. As such, you’d receive $9,800, instead of the full $10,000.
APR Rates
If you are approved for a loan with Lending Club, the platform will offer you an APR of between 6.95% and 35.89%. It is Lending Club themselves that will determine what APR rate they can offer you.
This will be based on your credit history, and ultimately, how likely it is that you will pay the loan back in full. Those with a higher credit risk will pay a higher APR, and vice-versa for those that are perceived to be a low credit risk.
Once your APR rate has been offered, you won’t be able to negotiate it. This doesn’t mean that you need to accept the offer though, as you are under no obligation to proceed with the loan once the offer has been issued.
Lending Club claims that their APR rates are typically 30% lower in comparison to alternative funding methods. However, there is no way to clarify this claim with any certainty, as each loan application is unique.
Early Payment Fees
One of the best aspects of the Lending Club fee structure is that they do not charge anything if you want to pay off extra amounts each month.
This is something that traditional banks and financial institutions are notorious for, subsequently penalizing borrowers that want to pay off their debts early. In fact, you can pay your loan off in full at any time with Lending Club without incurring any fees.
Late Payment Fees
If you fail to cover your monthly loan payment within 15 days of the due date, then Lending Club will charge you a fee. This amounts to 5% of the amount that you should have paid, or $15, whichever is greater.
For example, if you missed a monthly payment of $500, you would pay a 5% fee, which would amount to $25.
So now that you have a good idea as to the type of fees you’re likely to pay, in the next part of our Lending Club review we are going to look at how the loan process works.
How Does a Lending Club Loan Work?
When you first access the Lending Club homepage, you’ll see a small box to the right-hand side of the page. To get the loan process started, simply enter the amount that you want to borrow, followed by the purpose of the loan.
You’ll then need to provide your:
- Full legal name
- Home address
- Date of birth
- Social security number
- Income
- Details of your employer
Once you’ve gone through the process of applying for a loan with Lending Club, and you’re happy with the APR rate that they offer, you might need to complete some additional steps.
Although Lending Club is often able to automatically verify the information that you provide, they might ask you to submit documentation if they aren’t able to validate this from the sources they have available. This will typically revolve around verifying your identity, employment, and income.
Here’s a list of some of the things that you might be asked to do, in order to complete the loan process.
Verifying Your Identity
If Lending Club is unable to verify your identity automatically, then you might be asked to upload a copy of your government issued ID. This will need to be either a passport or a driving license. Military ID will not be accepted.
Verifying Your Address
If you’ve lived in your current address for less than three years, then you might be asked to upload a document that verifies your residency. You can upload a recent bank or mortgage statement, utility bill, pay stub, vehicle or voter registration, insurance document, or lease agreement.
Confirming Your Employment
In some cases, the team at Lending Club might need to confirm your employment. The easiest way to do this is to provide Lending Platform with your work email address (generic addresses such as Gmail or Hotmail won’t be accepted).
Once you submit your work email address, Lending Club will send you an email. As soon as you click on the button displayed within the email, your employment will have been confirmed.
If you do not want to provide your work email address, or you simply don’t have one, then Lending Club will need to confirm your employment in another way.
Verifying Your Income
If Lending Club needs to verify the amount of income that you stated within your loan application, then you will need to upload some documents. This might include recent pay stubs, or bank account statements.
The end-to-end loan process typically takes around 1 week with Lending Club, however, in some cases, this can take longer. Once the funding process has been initiated by Lending Club, you’ll receive the funds directly into your bank account.
Lending Club: How do I Make Payments?
When you go through the loan application process, you’ll be asked to specify how you want to make your payments. The easiest way to do this is to link your personal bank account. This will allow your fixed monthly payment to be debited from your account automatically, and thus, you won’t miss a payment.
Alternatively, you can choose to pay your Lending Club payments by check. You’ll be charged a $7 fee every time you pay by check, so this should be factored into your repayment plan if you decide to pay in this manner.
What is the Maximum Loan I can get With Lending Club?
If you’re applying for a personal loan, then Lending Club offers between $1,000 and $40,000. However, you might be offered a lower amount to what you originally applied for.
This is based on your credit history, and what Lending Club believes you can afford.
If you’re instead applying for a business loan, then the maximum amount available is $300,000.
So now that we’ve covered the key points of borrowing funds from Lending Club, in the next section of our guide we are going to explore how it works from the perspective of an investor.
How does a LendingClub Investment Work?
The peer-to-peer nature of Lending Club means that you can essentially become the loaner. Before we unravel the fundamentals, it is important to remember that much in the same way as a traditional lender, you always face the risk of non-payment.
As such, there are never any guarantees that you will make money. However, and as we will discuss further down, there are certain safeguards in place to ensure that the risks associated with your investments are reduced.
Nevertheless, here’s a breakdown of what you need to consider if you are thinking about becoming a Lending Club investor.
Eligibility
Firstly, we should note that although the process of investing with Lending Club is straight-forward, the platform is not available to everyone. As such there are some minimum requirements that you need to consider.
- Income: In order to qualify as a Lending Club investor, you need to have a gross annual income of at least $70,000. Moreover, you also need to have a net worth of at least $70,000. Strangely, if you’re based in the state of California, then these thresholds both increase to $85,000.
- Location: You can become a Lending Club investor as long as you are based in a U.S. state other than Alaska, New Mexico, North Carolina, Ohio, and Pennsylvania.
- Minimum Investment: You will need to invest at least $1,000 if you want to become a Lending Club investor. This is a somewhat small limit when one considers the minimum income/net worth requirements. If you decide to open an IRA account, then this increases to $5,000.
- Maximum Investment: You can only invest an amount equal or less to 10% of your net worth.
- Age: You’ll need to be at least 18 years old, and have a social security number.
If you meet the above requirements, then you are eligible to become a Lending Club investor.
Choosing a Specific Investment
One of the best aspects from the perspective of an investor is that Lending Club allows you to choose an investment that best meets your appetite for risk.
In layman terms, this means that higher interest rates are on offer if you’re prepared to loan money to an individual or company that presents a higher level of credit risk. Alternatively, if you prefer to play things safe, then you can lend money to those that possess a better credit history, albeit for a lower interest yield.
Lending Club uses a loan grade system to identify the underlying risk of each loan. Firstly, the parent grade runs from A through to E.
A represents borrowers with the lowest credit risk profile, and E is the riskiest. Lending Club used to offer grades F and G, however, this is no longer available on the platform due to a high number of defaults.
Within each parent grade are five sub-grades, which run from 1 to 5.
1 represents a lower risk, and 5 the highest. As such, this means that there are a total of 25 risk grades at Lending Club. In the vast majority of cases, the lowest interest yields will be found within the A1 grade, and the highest within G5.
Essentially, Lending Club determines the borrower’s risk grade based on the verifiable information that was provided by the loanee during the application. This will cover key metrics such as the borrower’s credit score, income, and the amount being financed.
Automatic Investment Strategy
Although the vast majority of investors like to spend the time evaluating a particular investment opportunity individually, Lending Club also allows you to choose a pre-selected portfolio builder. This is ideal for those that know what sort of risk levels they want to implement within their investment strategy, but don’t have the time to manually choose borrowers.
The portfolio builder will give you three options to choose from, each of which has its own risk yield. Once you choose your risk yield, the portfolio builder will then automatically select investments on your behalf. Option 1 will take investments from grades A and B, will Option 3 will typically take higher risk investments from grades D and E.
Alternatively, if the three options that are presented to you don’t quite meet your appetite for risk, then you can select the ‘more options’ button. This will allow you to specify the interest yield that you want to invest in, and the portfolio builder will then do the rest.
How much can I Make With Lending Club?
In terms of how much you can make with Lending Club, this will of course depend on the specific risk category that you choose. Moreover, this will also depend on the length of the loan. Generally speaking, you should expect an annual yield of between 5.06% and 8.74%. Even at the lower end, this is significantly higher than keeping your money in a savings account.
You as an investor have the choice of funding a three-year or five-year loan term. The 5-year terms generally pay around 2% more than their 3-year counterparts, however, this will present a higher level of risk.
Can I get my Money out of a Loan Agreement Before it is Settled?
An additional feature now available on the Lending Club platform is its secondary marketplace. In a nutshell, this gives you the option of offering your outstanding loan agreement to other investors. Much like in the real-world secondary markets, the amount that you are able to get on your loan will be entirely dependent on market forces.
It is important to note that your ability to sell your outstanding loan agreement will also require sufficient levels of liquidity. If liquidity levels are low on the secondary market, then you might be forced to sell your loan at a loss.
This is why it is best to allow your loan to mature unless you really need the money.
What Fees Does Lending Club Charge to Investors?
If you’re looking to make an investment into the Lending Club platform, then you will be charged fees. The fee system is based on the gross payments that your subsequent loanees make. This is charged at a rate of 1% for each payment they make.
However, it is important to note that this doesn’t actually work out at an annual fee of 1%. On the contrary, it’s usually less. Lender Club state that the impact of fees in real-terms amounts to approximately 0.72% annually for three-year loans, and 0.41% on a five-year loan.
What Risks to Consider as a Lending Club Investor
As noted earlier, there are a number of risks that you need to be made aware of before becoming a Lending Club investor. The biggest threat to you getting your money back is the risk of default.
Default
Although Lending Club performs the necessary due diligence before approving a borrower’s loan application, this doesn’t act as a guarantee for payment. It is therefore highly advisable to consider diversifying your risk. The easiest way to do this is to ensure that you lend money to a larger number of borrower’s.
This way, if a specific borrower does default, then at least you won’t feel its effects in the same way that you would if you had invested in a single borrower.
If a borrower misses a single payment, and they don’t cover the payment within 15 days of its due date, then they will need to pay a fee. This amounts to the greater of 5% of the amount due, or $15. If the borrower does not cover the missed payment, then Lending Club will endeavor to make contact with the individual.
After several payments have been missed, and Lending Club has been unable to collect the funds, the loan will then go into a status of ‘charge-off’.
This typically occurs after a period of 120 days without payment. A status of charge-off means that Lending Club believes that there is no longer a reasonable expectation that the borrower will make further payments.
According to Lending Club themselves, the team might attempt to sell the loan off to a third party. If this is the case, and Lending Club is able to retrieve funds from a sold-off loan, then investors will receive a percentage of the recovered funds. This will be for an amount proportionate to the amount invested, less any fees.
On top of facing the risk of default, we’ve listed some additional risks that you need to consider before investing.
Other risks to consider
- Fees: Although Lending Club fees have remained constant at 1% of the amount repaid by borrowers, there is always the risk that this could be increased further down the line. If fees do increase and you’re holding loan agreements that are still in their early stages, then this could eat away at your potential profits.
- Liquidity: If the secondary market has low levels of liquidity, then you could struggle to sell your loan agreement. If you need to raise capital quickly, you might be forced to accept a lower price.
- Early Payment: If a borrower decides to repay a loan agreement early, they are not penalized financially. As such, this will affect your long-term returns.
- Diversification: If you don’t diversify your loans, you face the risk of losing your entire investment. This is why it is important to spread the risk across multiple loanees.
Lending Club Review: The Verdict?
In summary, the Lending Club has grown by leaps and bounds since its inception in 2006. Not only is the company publicly listed, but they’ve now facilitated more than $44 billion in loans, across 2.5 million customers. From the perspective of the borrower, the platform can be a great alternative to conventional financing sources. Lending Club even claims to facilitate loans at an average cost-saving of 30% in comparison to traditional lenders.
However, if you are thinking about obtaining a loan, you’ll need to make sure that you have a credit score of at least 600, and a debt-to-income ratio of no more than 40% (or 35% for joint applications)
At the other end of the spectrum, Lending Club is suitable for those looking to earn regular, passive income flows. You’ll have the option of choosing interest yields that best suits your risk appetite, and payments are made on a monthly basis. Moreover, if liquidity levels are sufficient, then you’ll also be able to sell your loan investments early on the secondary marketplace.
Just make sure that you have a firm grasp of the underlying risks – especially regarding what happens if the borrower defaults. Just like in the case of any other investment, there will always be the risk that you lose money.
Lending Club
Pros
- Good for Diversifying Investments
- Automatic Investing Returns
- Potential for Higher Returns
- Easy to Use Platform
Cons
- Loans are Unsecured
- 1% Service Fees
