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 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!
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.
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.
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!
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?