Today marked an exciting day for crowd-sourcing and social finance with the Lending Club initial public offering (IPO) on the New York Stock Exchange.
I’ve been writing about peer-to-peer lending since 2006, when the trend was in its infancy. Back then, I took out a personal loan from Prosper, another peer-to-peer lending company, to consolidate high-interest credit card debt. Since then (I’m now long out of debt, thankfully!) I’ve become a Lending Club investor and have enjoyed earning about 7 percent a year by lending money to Lending Club borrowers.
Today, Lending Club has emerged as the largest peer-to-peer lending network. Founded in 2007, Lending Club has made over $6.2 billion in loans and paid investors over $595 million in interest.
How peer-to-peer lending works
Lending Club is a peer-to-peer lending network. Consumers wanting loans for any purpose — whether to consolidate debt, fund a wedding, or grow a business — create a loan application with Lending Club. Investors who want to put their money to work by lending money and collecting interest then choose to fund borrower’s loans.
In most cases, investors make very small (as little as $25) investments in each loan. That means that for a given borrower, he or she is actually borrowing money from hundreds of different investors. Meanwhile, investors enjoy lower risk by spreading their money across hundreds of loans.
Lending Club makes money from origination fees on each loan and taking a small percentage of investor profits.
With Lending Club you can:
- Borrow up to $35,000 at rates from 5.99 percent to 32.99 percent APR
- Invest in loans and earn average returns between 5 and 8 percent
Why get a loan from Lending Club?
Like most lenders, Lending Club requires borrowers to have fairly good credit. For example, the average Lending Club borrower has:
- 699 FICO score
- 16.9 percent debt-to-income ratio (excluding mortgage)
- 15.8 years of credit history
- $73,157 personal income
Borrowers with lower credit scores may be able to get a LendingClub loan but will likely pay higher interest rates (up to 32.99 percent — eek!) That’s a good example is just because you CAN doesn’t mean you SHOULD.
What’s attractive about Lending Club for well-qualified borrowers, however, is that you can get a loan fairly quickly and use it for any purpose. Some borrowers get their funds in as little as four days. Many banks don’t offer personal loans so easily.
Once investors fund your loan, the money is simply transferred to your bank account. You can choose a 3- or 5-year term and pay the loan off at any time with no pre-payment penalty.
Creating a loan application is free; you’ll only pay an origination fee if your loan is funded and you choose to proceed.
Why invest with Lending Club?
Lending Club provides an alternative to stocks, bonds and real estate for investors who don’t mind some risk for the chance to earn yearly returns between 5 and 8 percent.
Investing with Lending Club is easy. After creating an account, you can browse available loans and pick which ones to fund. Each loan listing provides details about what the loan is for as well as a profile of the borrower’s credit information and income. The return an investor could receive on any one loan depends on the borrower’s interest rate; the riskier the loan, the higher the potential return.
Alternately, investors can let LendingClub pick a portfolio of loans automatically. You simply select a risk/return bracket (conservative, moderate, or aggressive), and Lending Club will purchase a portfolio of loans on your behalf.
As a Lending Club lender, you can invest for cash flow (withdrawing proceeds as your borrowers make payments each month) or automatically reinvest your earnings to grow your money.
I’ve been a Lending Club investor for a little over three years and have earned an average of 6.4 percent on my money each year. Not shabby at all.