Investing AND Borrowing Through Lending Club

Lending Club has been sweeping the investment world – and the borrowing universe – at the same time.

And why not?

Who wouldn’t be interested in a financial facility that enables investors to earn more than the going rate on their money, while borrowers pay less?

Lending Club is an online peer-to-peer (P2P) lending platform that takes the banker out of banking. Investors lend money directly to borrowers through the site, enabling both to benefit from the rate of interest that’s established for each loan.

And just as important, the entire transaction happens online, eliminating the need for sometimes embarrassing face-to-face meetings that are common with bank loans. It’s a win-win as both investor and borrower benefit from the Lending Club process.

As of March 31, 2015, Lending Club has issued loans totaling well in excess of $9 billion. This includes more than $1.6 billion issued in just the last quarter.

Let’s take a look at how Lending Club works for both an investor and a borrower.

Investing Through Lending Club

With interest rates on safe, fixed income investments sitting generally at below 1{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e}, Lending Club offers a real opportunity to get returns that are dramatically higher. In fact, you can get average returns of between 5.06{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} and 8.74{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} (do I have your attention now?).

Those are attractive rates, but just so we’re clear, there are more risks with Lending Club investments than there are with bank certificates of deposit, and there are certain requirements that you have to meet as an investor.

Investor Requirements

Notes are not available in all states. As of this writing, they are not available to residents of Kansas, Maryland, Ohio, Oregon and the District of Columbia.

Depending on which state you live in, there are income requirements to invest in Lending Club. In most states it’s a minimum of $70,000 per year, though it may be higher in some states. Generally, the income requirement does not apply if you have a minimum net worth of $250,000. The platform also requires you invest no more than 10{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} of your net worth in Lending Club notes.

The minimum opening account with Lending Club is $25, which is also the minimum requirement to invest in any single note.

Lending Club IRA

You can also hold Lending Club investments as part of an individual retirement account (IRA). You can do this through a Lending Club Self-directed IRA. Lending Club will pay the annual IRA fee if you open the account with a minimum of $5,000, and keep that balance level for a minimum of 12 months.

After the first year, they will continue to pay the fee as long as you maintain a minimum invested balance of $10,000 in Lending Club notes.

Choosing Notes to Invest In

There are two ways to invest with Lending Club. Manual investing is where you browse available loans and choose which ones you’ll invest in one at a time. But you can also use automated investing in which you set investment criteria, and notes are selected automatically based on that criteria.

While you can invest in individual loans, it’s generally best to buy them in fractions, which are referred to as notes. You can purchase notes in increments of $25. At the very least, you can purchase a fractional interest in 200 loans with a total investment of $5,000. This will enable you to minimize the risk involved in investing in any single loan.

Collecting Investment Returns

It’s important to understand the notes you’re investing in are not like certificates of deposit. Each note represents a loan, which will be repaid to you over the term of the loan, in payments that will include both interest and principal. That means at the end of the loan term, the loan will be completely extinguished, including 100{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} of your original principal invested. For this reason, you will need to reinvest payments received on a continuous basis, as the payments come in.

Loan Types and Loan Grading

Loan terms are currently either 36 months or 60 months, and are fixed rate. More than 80{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} of the loans are taken to refinance existing loans and credit card balances. Borrowers are evaluated – and loans are priced – based on credit and credit scores, debt to income ratio (DTI), the length of your credit history, and your recent credit activity.

Each loan is assigned a loan grade, ranging from “A” (the highest), to “G” (the lowest). The higher the grade, the lower the rate. For example, as of March 31st, an A grade loan has an average rate of 7.51{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e}, while for G grade loans it’s 25.13{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e}.

Within each letter grade, Lending Club also assigns a numerical rank of between 1 and 5 (A1, A2, A3, A4, A5). These numeric sub-grades adjust for other factors, such as loan size and loan term. For example, a loan amount of $5,000 would be seen as low risk, and actually result in an improvement in the sub-grade. By contrast, the maximum loan of $35,000 is a higher risk, and could turn a B1 grade into a B4 or B5 grade, resulting in a slightly higher interest rate.

Buying and Selling Notes Before they Mature

Lending Club offers a Note Trading Platform through Folio Investing where you can sell the remaining portion of a note under certain circumstances. This is a marketplace where investors can buy and sell Lending Club notes to one another. In order to participate in this marketplace, you must also open a Folio Investing trading account through Lending Club. There are no fees if you buy notes on the trading platform, but there is a1{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} fee charged if you sell a note.

Risks

It’s important to realize investments held through Lending Club are not bank assets, and as such they are not FDIC insured. Individual loans can go into default, and if they do, you will lose that portion of your investment.

In addition, a missed payment by a borrower means you will not get the payment on that loan in that particular month. Lending Club does use “best practices” to collect payments from delinquent borrowers, but some will default nonetheless.

When a payment is past due, you as an investor will pay a collection fee of 18{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} 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{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} of an attorney’s hourly fees, plus attorney costs.

If collection efforts fail, and it is apparent the borrower cannot repay the loan, the loan will be charged off once it is 150 days past due. When that happens, the remaining principal balance of the note will be deducted from the investors account balance. Any funds subsequently recovered on the defaulted loans will be returned to the investors on a pro rata basis.

Minimizing Investment Risks

Just as is the case when you’re investing in a portfolio of stocks and bonds, there are ways you can invest in Lending Club that will reduce your overall risk. The most obvious strategy of course is to spread your investment over many different loans – hundreds if you’re in a position to do so.

You can minimize your risk by setting certain loan requirements. For example, you may decide to set a credit score that is some number higher than what is required by Lending Club (currently 660). You can also emphasize loans in which borrowers are refinancing existing debt, rather than taking on new debt. Employment stability is also a factor. A person who has been employed in their field for a number of years is likely to be more employable than one who is just starting out.

A low DTI is also a positive factor. For example, you can make sure the borrowers whose loans you invest in have a DTI of less than, say 30{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e}. This means their fixed monthly expenses, including their housing expense, the new loan payment, and any other fixed payments do not exceed 30{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} of their total gross monthly income.

Investor Fees

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{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} service fee collected on each payment received.

Investing through Lending Club can be an excellent high income diversification in a fixed income portfolio comprised entirely of certificates of deposit and Treasury securities. Just by investing a portion of your fixed income allocation in Lending Club notes can increase the overall yield on your fixed income investments.

Open an Investment Account with Lending Club

Borrowing Through Lending Club

In addition, you can typically get lower interest rates on loans through Lending Club than you can at a bank, there is also the comfort factor. You can apply for a loan without ever leaving your home. Everything is done online through the website, virtually eliminating the need for an uncomfortable face-to-face meeting at the bank offices. And if your loan is approved, your funds will arrive within a few days.

How the Loan Process Works

This is a simple multi-step process, that looks something like this:

Complete an application on LendingClub.com.
Your application is evaluated and your credit score is pulled (this is a “soft inquiry” that will not have a negative impact on your credit score).
As described in the preceding section, you are assigned a risk grade of somewhere between A1 (highest grade, lowest rate) and G5 (lowest grade, highest rate). Once again, this grade is based on a combination of your credit score and credit history, employment, income, and debt to income ratio (DTI).
Your loan is given an interest rate based on your risk grade.
You are presented with a variety of loan offers.
Investors will review your criteria and loan grade, and decide if they want to invest in it.
Once all parties agree to the transaction, the loan goes through and your funds are available within a few short days.

If you’re concerned about privacy during the application process, you don’t need to be. Lending Club investors will never know your identity so you‘ll be able to borrow on a completely anonymous basis. The site also promises it will never sell, rent, or distribute your information to third party sites for marketing purposes.

Loan Terms and Rates

You can borrow any amount up to $35,000, and while the loans are typically used for debt refinance or consolidation, you can also borrow for other purposes, such as unsecured home improvement loans. Current terms are fixed rate loans of either 36 months or 60 months.

Interest rates on personal loans range from between 5.49{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} for A1 risk grades, to a high of 28.69{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} for G5 risk grades. Origination fees range between 1{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} and 5{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} of the initial loan amount. There are no application fees involved in the process.

Lending Club also offers business loans in amounts as high as $300,000, and for fixed rate loan terms ranging from one to five years. There are specific requirements based on the size and nature of your business, and they are currently advertising rates as low as 5.90{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e}, and origination fees of between 0.99{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} and 5.99{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} of the initial loan balance.

In order to keep interest rates as low as possible, Lending Club sets up your loan with automatic draft payments from your bank account. In the event you need to pay by check, they will charge a $15 check processing fee per check.

Best of all, there are no prepayment penalties should you decide to payoff your loan early.

Lending Club Personal Solutions – Medical Loans

This is a loan type who’s time has truly come! Given that health insurance deductibles and co-insurance provisions are increasing, Lending Club Personal Solutions gives you an option to finance uncovered medical expenses. And here’s something even more interesting, the loan can even be used for procedures such as hair restoration, weight loss surgery, fertility, and dental – procedures that are typically excluded under most health insurance plans.

Lending Club offers two types of loans for this purpose:

Extended Plans – You can get a loan for between $2,000 and $50,000, at rates that range between 3.99{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} and 19.99{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} per year, depending on the size of the loan and your credit history. The terms can be 24-, 36-, 48-, 60-, 72-, or 84-months. This loan can be used to pay for fertility, dental, hair restoration, and weight loss surgical procedures.
True No-Interest Plans – This loan program offers 0{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} 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{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} APR applies on the remaining balance (this arrangement is similar to the one offered by Care Credit, but at a lower rate of interest after the initial 0{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} interest period). And if you can pay off the loan within the 0{6fac3e6a3582a964f494389deded51e5db8d7156c3a7415ff659d1ae7a1be33e} interest term, you can get funds for medical procedures without having to add interest to the cost of an already expensive operation.

There are other P2P lending platforms popping up all over the web. But Lending Club has become the gold standard for the entire industry. Whether you are an investor looking for an above average rate of return, or a borrower looking for more affordable loan programs, you’ll find what you’re looking for at Lending Club.

This company has continued to grow and prosper over the years. We can expect even better things from Lending Club going forward. And it’s probably not an exaggeration to say that Lending Club just might be the banking platform of the future.

Open an Borrower Account or Business Borrower Account with Lending Club

Alternatives

While you can always invest in a more traditional investment platform or borrow money through a bank or credit card there are only a few other options in the Peer to Peer lending world. The most prominent competitor to Lending Club is Prosper.

These two are the heavyweights in the Peer to Peer lending marketplace. So much so that we put together an in depth Prosper vs. Lending Club comparison. You can learn more about all the features on Prosper with our Prosper review.

Check out everything Lending Club has to offer, and see if you can’t get a better investment – or a better loan – than what your bank is offering you.