Have You Checked out Lending Club?
If only Lending Club had existed back when we loaned money to my brother-in-law for a car. He had a new job and needed a car to get to work. After a lengthy discussion we loaned him the money. In general, I don’t like to loan family or friends money, but I do like to help people out on a smaller scale. I’m guessing that situation isn’t unique.
Lending Club
Lending Club is one of the players in peer-to-peer lending. The idea behind P2P is to connect borrowers and lenders and cut out the middle man (the banks) to offer lower loan rates and higher returns for investors. Next time a friend or family member asks, I have somewhere to send them: Lending Club!
I originally opened an account last year, but they went into a quiet period for SEC filings. Now that Lending Club is open again, it’s time to check them out and make some loans!
Lender Details
Minimum Investment. $25. You can link your account to your bank account to transfer money back and forth using ACH.
Interest Rates. The interest rates on the notes currently range from 6.69% to 19.37%.
Fees for Lenders. There is a 1.00% service charge.
Personal Touch. Borrowers can share details and a personal touch and lenders can ask questions. This would have been helpful in my brother-in-law’s situation. He could explain his situation on a more personal basis and explain the new job.
Spread the Risk. The loans are funded by multiple borrowers. We could have loaned my brother-in-law $25 along with 99 or so other people to spread out the risk. I would be happy to loan him $25 for the car, but $2,500 is a lot of risk to take on for any one loan.
States. The loans are available to lenders in California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Minnesota, Mississippi, Montana, New Hampshire, Nevada, New York, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin, West Virginia, and Wyoming.
Lender Requirements. Lending Club states you must have an annual gross income of at least $70,000 and a net worth of at least $70,000; or have a net worth of at least $250,000. (California lenders have different rules.)
Liquidity. Lending Club offers a nice new feature. If you want to sell your loans, you can trade your notes on the Note Trading Platform using an account at FOLIOfn. There is a 1% trading fee.
Borrower Details
The borrowers must meet the following criteria:
- FICO score minimum: 660.
- Debt-to-income ratio (excluding mortgage): Below 25%.
- A credit report without any current delinquencies, recent bankruptcy, collections or open tax liens.
- Credit history with limits on utilization, inquiries, minimum number of accounts, and minimum credit length.
Each loan is assessed a grade, A through G, and the interest rates correspond to the grade.
Borrower Fees. The borrowers pay a processing fee from 0.75%- 3.5% based on credit grade. In addition, they will have to pay fees if their payment bounces or if they pay late.
Lending Club Taxes
Once you are a Lending Club investor, see our guide on how to handle Lending Club Taxes for more information.
Defaults
Stats. I looked at the statistics for loans issued in 2008; 2.82% were late and 2.20% were in default.
Collections. If a loan goes into default, Lending Club will work to collect it from their own internal collections department first. If that fails, they will send it on to external collections.
Collection Fees. Here is the schedule for collection fees:
- 30% if the member loan is less than 60 days past due and no more than 90 days from the date of origination.
- 35% in all other cases, except litigation.
- 30% or hourly attorneys’ fees in the event of litigation, plus costs.
Searching For My Loans
I funded my Lending Club account and began searching for loans.
Connections. In addition to asking the borrower questions about their profile and credit history, you can check out their connections to see where they went to school, where they work, and where they live. I had fun searching for loans of local people or people that went to school where I did. I just searched on the keyword for my home state.
Financial Status. You can also limit your search by credit grade, credit score, debt-to-income ratio, delinquencies, or funding status. At this point I’m planning to limit my loans to A or B grades to get started.
Intriguing Stories. It’s pretty addicting to browse through the loans to read about what people are doing with their lives. Whether it’s a car, debt consolidation, a new business, a kitchen remodel, or a new baby it’s fun reading!
Final Thoughts
It’s all about risk versus return. Sure, you can take on some of the riskier loans for a higher interest rate, but the chance for default goes up. For now, I’ll just be funding the loans with some fun money and sticking to relatively higher grades.
This isn’t your traditional investment, but it does add an element of diversification. I looked for some correlation studies, but haven’t seen any done yet, so it must still be too new.
In addition, I thought it would be fun to share my portfolio of loans with you in the future. I talked to Lending Club and they haven’t added that feature yet; they hope to add it later this year.
Have you checked out Lending Club?
Interesting, Jeff over in a Comment at Free Money Finance ( http://www.freemoneyfinance.co.....nding.html ) found the following:
I just ran a test using LendingClub’s data to test DK’s claims that their results are better than Prosper’s. I looked at all loans originating from June 1, 2007 through Dec 31, 2007 and looked at at their status 1 year after they originated. This is a total of 580 loans valued at just over $3.4 million. Here are the results:
88% of loans were current or prepaid (513 loans)
1.2% of loans were 15-30 days late (7 loans)
5.5% of loans were 30+ days late (32 loans)
4.8% of loans were in default (28 loans)
So using a similar comparison to the study looking at Prosper loans 1-year out which found 20% of loans to be 30+ days late or in default, LendingClub is somewhat better with only 10.3% of loans 30+ days late or in default. If you look at the amount of these bad loans, it is even worse encompassing 11.5% of the total amount lent.
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From the details above keep in mind that though possible, it’s difficult to make any good money in P2P lending.
How do they verify the lender’s financial status, do they require you to submit pay stubs, tax returns and investment details? Or is it an honor system? I meet the salary requirements, but the net worth is a work in progress!
I live in TN so Lending Club isn’t available to me but you were talking about lending to family. My wife’s brother had a car accident a while back, and needed a new car. He didn’t have insurance so he had very little money. We were looking to sell my wife’s car, so my wife and I discussed it, and we sold the car to him at a very good price. He didn’t have the money to pay us up front so its kinda just whenever he gets extra cash. In 3 months we’ve got $100 out of the $1200 he owes us. A large part of me thinks we may never get the rest.
One big caveat: If LendingClub goes under, you have to get in line behind the creditors to re-coup your money because Investors don’t actually own the loans. Investors own “Notes”.
From the prospectus (https://www.lendingclub.com/info/prospectus.action):
“The Notes are unsecured and holders of the Notes do not have a security interest in the corresponding member loans or the proceeds of those corresponding member loans. The recovery, if any, of a holder on a Note may be substantially delayed and substantially less than the principal and interest due and to become due on the Note. Even funds held by Lending Club in trust for the holders of Notes may potentially be at risk.”
Prosper probably has the same risk. Just be sure to read their prospectus _after_ the SEC gets through with them.
Also, if you’re thinking of making a large loan to friends or family, check out http://www.VirginMoney.com. The fees seem a little too steep to me, though.
Lastly, if you’re interested in lending small amounts to entrepreneurs in the developing world, check out http://www.kiva.org/ or google for “microlending”. Most of these sites are charitable lending (0% interest). Some allow you to specify a nominal interest rate.
I have some concerns about this micro-lending style:
1) There is no FDIC promise that you will get paid in the event of default.
2) Risk-adjusted rates of return are lower with these micro-lending loans than with a conventional bank.
3) I would prefer the backdrop of collateral over someone’s credit history when making a loan.
I can give you my own experience. I’ve been a lender at Prosper (1.5 yrs) and Lending Club (1 yr) and I have to say you learn a lot about consumer debt and human nature using these sites.
On Prosper, I went higher risk (greed) and was burned right away. I’ve lost about 12% of my investment, but I’m still making about 2-3% after losses.
On Lending Club, I had no choice but to go lower risk because they only let better quality borrowers in (no subprime <640 FICO people). Not surprisingly, my performance is better: about 3% of my portfolio is defaulted, but at a 13% average interest rate, I’m still making around 8-9% after fees and losses.
In summary, receommended as a way to diversify your investments, but be willing to learn and lose a few here and there. Go super safe first (best credit grades)
We are in the midst of a global recession. Unemployment continues to climb.
So lets say that my company announced job lay-offs at the end of the month (2 weeks away), and uugh, the axe fell to me. I have been working at this job for 15 years making a 6-digit income. My fist thought is how will I pay the bills? I can’t tap the equity in my home (banks have discontinued HELOC’s), my credit card just lowered their credit limit (so I’m maxed out there too), and I don’t have a rich uncle.
I consider micro-lending (e.g. Lending Club) and immediately I qualify since I have a FICO score of 650 and am currently employed. I may even make my first loan payment through Lending Club with some $$$’s from my last paycheck. But then…DEFAULT!
I wonder how often this scenario is played out as more and more people lose their jobs. A lender is betting that the borrower will have the means to make their loan payment and … that they will keep their job.
These micro loans are far too risky for most conservative investors. But I will concede that their are some with a preference for high risk. Not me!