Peer to Peer Lending Through Lending Club

A note from Slug:  This is another guest post from Noreen.  This week she's written a nice review of Lending Club.  I personally have no experience with Lending Club, but I spent several years bidding on loans at their rival Prosper.  Anecdotally, I have heard that Lending Club lenders tend to be more satisfied than Prosper lenders due to more accurate risk assessments of borrowers.  I'd love to hear comments on your experience at either Lending Club or Prosper.

Peer-to-Peer Lending Scene of the Lending Club

Social or peer-to-peer lending is one example of society reversing traditional roles to fill gaps where tight bank lending has left many people without loan options. Individuals, rather than institutions, are in the position to decide whether to approve a loan and at what interest rate. Anyone interested in investing but leery of the stock market, real estate or other banking options might want to consider this option. This is a solid alternative that allows you to control your money.  Lending Club is one such social lending service that helps fund someone’s dream or consolidate debt at a reasonable rate while providing an investment opportunity for others. The agreement is much like lending to a family member or friend, but the arrangements are made through a secure, legal and efficient lending network.

For Lenders

Start by signing up as a Lending Club investor to see if you qualify; restrictions apply, so be sure to read the fine print. After being approved, you’ll need to deposit funds into an approved account. Select the criteria and desired interest rate for borrowers you’re interested in lending to or accept a diverse group of accounts that the Lending Match tool automatically chooses based on your criteria. Lending Club divides your choices into A, B, C, D, or E rated borrowers – the A’s having the highest FICO scores.

You will know exactly the interest rate you’ll be paid, if the investment works. Payments of principal and interest are distributed every month with no charge for maintenance.  By using the Lending Match tool, you can also review potential client profiles, including their credit score, income and a description of need from the borrower. Higher risk loans would be charged a higher interest rate; while responsible borrowers will enjoy a lower rate. Invest in a single loan or spread it across a number of individual loans to minimize the risk. Scrutinize the account activity on a regular basis.

For Borrowers

For consumers who find it extremely hard to get approved for a loan, peer-to-peer lending offers an unlimited pool of opportunities. Sign up as a Lending Club borrower for a fixed-rate, 3-year loan for up to $25,000.  Once you’re approved, most loans are funded in less than two weeks. Loan payments are made automatically from your bank account.
As with all investments, there are risks with peer-to-peer lending. Only invest money that you can afford to lose, and keep in mind this is a highly speculative investment as these loans are unsecured. If an account goes into default, the loan is sent to collections, but there is no guarantee that you’ll be able to recoup your money. Gains are taxed as regular income, just as if you had invested in the stock market.

My Personal Opinion

While it may be true that lower rates may be found at your local credit union, many people simply won’t qualify for one. And it’s not too often in today’s world to have a personal business relationship instead of a faceless corporate one. In addition, the idea that you may be helping someone at the same time makes peer-to-peer lending a win-win situation in my book. The downside for the lender is that the commitment is long-term with the investment not easily liquidated. But most serious investors are patient and know not to move their money around too much. So while there are risks involved with investing in Lending Club, I think it’s worth considering as part of a diversified investment portfolio.

About The Author: Noreen Ruth is a popular writer for financial blogs and websites. Hoping to educate consumers, she uses government and other reputable sources to provide up-to-date, relevant news on low APR credit cards, debt relief, money management and other finance topics. She stays current on the latest legislative actions that may affect a consumer’s ability to manage debt, apply for credit cards, settle debt problems, utilize debt reduction services and more.

Posted in Loans Tagged with:
  • I invest through both Lending Club and Prosper and have blogged about them extensively.  I think P2P Lending is an overlooked alternative investment class.  I expect long-term returns in the 6-12% range, and so far (not very long) am above that. 

    There are two types of people in this world, those that pay interest and those that collect it.  There are two types of people who pay interest- those who can do math and those who can't.  Which type do you prefer to lend to?  Guess where you can find them?

    • Welcome WCI,

      I think that P2P lending offers another nice way to diversify one’s overall portfolio. My results from Prosper’s early days were less than stellar largely due to my greed and Prosper’s horrible ability to vet borrowers. Since then I’ve moved to a state that doesn’t allow participation. Were it available to me, I would certainly be investing in a conservative portfolio of loans. I’m not sure if either site has improved their tax information though, and I previously found that process pretty arduous.

  • Currently I'm a borrower with Prosper and an investor with Lending Club.  I applied for the loan about a month ago through Lending Club and Prosper, but Prosper offered me a more competitive interest rate.  The process of getting the loan was pretty easy, but it did take some time for them to process  my paperwork.
    My investments with Lending Club have performed well so far.  I have a personal account with them that I have invested $8k into and just applied to open an IRA account with them.  The latest performance on my investments was 14.23% net annualized return.  But, I have only had the account open for a few months now, so look forward to seeing how these play out over a longer time span.  So far so good.

    • Brady,

      Congratulations on what sounds like a great start in peer to peer lending and borrowing. I have to ask though why are you lending $8k when you need to borrow on Prosper? Are you trying to arbitrage by borrowing at a low rate and then lending at a higher rate? If so, that’s a dangerous game that has gone wrong for many when the loans they invested in either went late or defaulted.

  • Oren @ Oren’s Money Saver

    I just opened an account with lending club with a very small amount of money.  I'm curious to see how it goes so that I can think about investing more in the future.

    • Oren,

      I hope it works out for you. I think it can be a nice piece of portfolio diversification if one wants to go beyond typical bonds.