Ben Todd | Jun 2, 2017 | 1
The Lending Club Review: Is This Peer to Peer Lending Service Legit?
There are actually very few peer-to-peer lending and investing groups in the US that allow ordinary citizens to invest their money. Most of them are for accredited investors and not citizens. The peer-to-peer lending and investing groups listed here do not require you to undergo credit or portfolio checking, you do not need qualifications, and the starting deposits are incredibly reasonable, which means you do not have to be wealthy to start participating.
The two main Peer to Peer lending / investing companies are The Lending Club and Prosper Marketplace (see our Prosper Review). Both have advantages and disadvantages. In this review we investigate how The Lending Club works and how it directly compares to Prosper — the other major Peer to Peer player in the marketplace.
The Lending Club – A Review for Borrowers
This is the first publicly traded online lender in history as of when the company went public on the New York Stock Exchange. They are the largest 3rd-party investor ecosystem in the US, and remember that they are up against a lot of competition for that 3rd spot. As of 2015, they have issued over $9 billion in loans.
How Does The Lending Club Work?
You put your money onto your account and choose an investment. The company uses its own funds to give people loans, and they then put the loans on their website. You are able to choose which loans to put your money into. For example, if somebody has a loan of $1000, you may invest $100. That means as the person pays off the debt, you eventually get your $100 back, plus the interest the loan recipient has paid for the $100.
The company only lends to people with a credit rating of 550+. The lower their credit rating, then the higher the risk that the money will not be repaid, but the interest you get is also higher, so you have to decide how much risk you want to take.
You get to decide how you invest your money. For example, if you put in $100 per month, you may like to invest it into different loans every month so you have a very diverse portfolio. You may also like to invest for different term periods from a month to five years. Or, you may choose to save your $100 per month in a savings account for a year and then put your accumulated $1200 into a single long-term loan with a good interest rate.
As A Borrower You Can Borrow Up To $35,000
The APR is not as good as you may expect with some banks, but it is also far better than what you may get with independent creditors. People who approach the Lending Club are often people that have maybe tried a bank and failed, or that are unwilling to try a bank because their credit rating is around the 500 mark.
The Lending Club found the 80% of the people who borrow from them are consolidating their debt with a lower interest rate, which is also good news for investors because it means they are helping people and they are lending to people who are experienced with debt and are actively trying to make their situation better.
During the global economic downturn, they would only lend to people with a credit rating of 660, but nowadays they will consider people with a 550 credit rating as the risk of none-repayment has gone down on the whole due to the recovering global economy. It is still incredibly difficult to get a loan with them if your credit rating is below 660, it is not just as impossible as it once was.
As A Lender You Can Earn Up To 9%
You pick how long you would like to invest and choose an investment with whatever interest rate you decide. The higher interest rates are for longer-term investments and/or for slightly riskier investments. You may put your money in for just a month, for which you will get around 2% APR. This means if you put $100 in for just a month, you will get back your $100 after a month, along with 16 cents interest.
As an investor, when your money is repaid with interest, you can draw it out or re-invest it. Like many European peer-to-peer lending companies, you may set up your account to automatically re-invest your money.
For example, you may set it up so that after the month has passed and your money is returned to your lending account, you may have your account re-invest automatically and send you an email to confirm. You have to pick a desired interest rate and term, and when your money is returned it is re-invested for the term and will not be invested into anything that has an interest rate less than what you decided.
You May Not Be Able To Invest
If you are not a US citizen, and if you are not living in the US, then you are unlikely able to invest. Also, the Lending Club investments are legally classified as securities. This means the Lending Club company has had to approach regulators state by state. Some are not on board yet, some are trading only, some allow investing and trading, and some only allow accredited people to sign up.
Why You May Choose The Lending Club
They offer a better return than the banks do, even with their default rate and the 1% fees they charge for arranging the investment. They do not have the same security that bonds do, but their interest rate is higher and they are more flexible with regards to investment terms and amounts.
You may also use it as a consistent investment even if there is a depression. All peer-to-peer lending companies are tied to borrowers and not the stock market. Your investments will not flop if the stock market does badly, they will only flop if people decide on mass not to repay their loans.
The fact you may choose your own risk in return for a higher interest rate is something that few European peer-to-peer companies offer, and taking on a higher risk investment adds a level of excitement too.
Are There Any Risks?
All forms of investment come with some sort of risk. The five risks with the Lending Club are defaulting loans, rising interest rates, underwriting degradation, Lending Club bankruptcy and unforeseen risks.
1 – Defaulting loans
The loans are unsecured, so if borrowers do not repay their loans then you lose your money. The current default rate is around 2% at the moment.
2 – Rising interest rates
If the banks where giving better rates than the peer-to-peer companies, then people would invest with the banks instead of peer-to-peer companies.
3 – Poor underwriting
It is in the Lending Club’s interest to only lend to creditworthy people, and at the moment it is very difficult to get a loan with them with a credit rating less than 660.
4 – Bankruptcy
Nobody knows what would happen if the company went bankrupt, but at the moment they are doing well and are very large, which adds a fair amount of security that they are not going to go bankrupt.
5 – Unforeseen risk
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Peer-to-peer lending has been around for around ten years, so there may still be risks we do not know about. We know that bonds are safe because they have a 100-year history we can check, but people investing in peer-to-peer do not have that privilege.