Lending Club bills itself as the world’s most popular peer-to-peer (P2P) lending network. As a classic example of the emerging sharing economy, the platform connects thousands of individual and business borrowers with regular people willing to fund their loans. In doing so, it eliminates the need for borrowers to approach traditional banks and credit unions – whose lending standards may be much more stringent than Lending Club’s – to obtain financing.
For investors, Lending Club offers the opportunity to create diversified portfolios that aren’t directly tied to bond markets. Its investments offer better yields than CDs, money market accounts, and savings accounts, though it’s critical to note that the investments are not FDIC-insured.
Lending Club competes with other P2P lending platforms, including Prosper and Peerform, as well as online direct lenders like Avant (which doesn’t follow the P2P model) and alternative business lenders (also not P2P) such as OnDeck and Kabbage.
Like Prosper, its largest rival, Lending Club uses funds from its lenders to make unsecured personal loans to individual borrowers. These loans range from $1,000 to $40,000 in size and have terms of 36 or 60 months. Borrower interest rates range from 5.99% to 35.89%, depending on credit score, credit history, and past borrowing record with Lending Club. Lending Club doesn’t tie its rates to an index such as Libor, but it advises that rates may rise or fall depending on “market conditions” – in other words, prevailing interest rates.
Unlike Prosper, Lending Club also uses its lenders’ funds to make unsecured business loans with terms of 12, 24, 36, 48, or 60 months and principals of $5,000 to $300,000. For business loans, interest rates range from 5.9% to 25.9%.
How It Works for Investors
As a Lending Club investor, you can view Notes, or shares of unfunded loans that can be reserved for possible investment. You can reserve Notes in increments as low as $25. It’s important to note that Notes represent shares in first-issue loans that haven’t yet been funded, not already-funded instruments on a secondary market. Some Lending Club loans don’t receive enough funding to originate. If you reserve Notes in a loan that doesn’t originate, you don’t lose anything – you just get your money back to allocate to Notes in other loans.
The $25-per-loan investment threshold makes it easier to create a diversified loan portfolio with a relatively modest investment. According to Lending Club’s historical data, investors with diversified loan portfolios (exposure to 100 or more loans and a mix of business and individual loans) can expect to earn annual returns between 5% and 8%.
Annual default rates range from less than 1% for the highest-quality loan grade (A1) to about 15% for the lowest-quality loan grade (G5), with average annual loss rates on a diversified portfolio ranging from about 2.5% (in 2014) to 7.5% (in 2009). It’s important to note that loans with higher yields come with a greater risk of default compared to loans with lower yields. Fortunately, when you look at an individual loan’s listing, you’ll see its estimated default risk, making your risk calculation that much easier. While Lending Club stresses that 99.9% of diversified loan portfolios produce positive annual returns on a consistent basis, you do risk loss of principal when investing here due to lack of deposit or investment insurance.
Manually Selecting Loans and Investing
If you want to evaluate each loan you ultimately invest in, you can manually browse through loan listings. To narrow your choices, filter by such criteria as loan purpose, loan grade, borrower credit score, loan size, time left, rate, and term. When you view an individual loan’s listing, you see detailed information about the loan, including all of the filtering criteria, as well as the monthly payment, funding percentage, and number of investors currently funding.
Listings also contain information about the borrower, including his or her credit score, Lending Club grade, credit history, income, employment status, and homeowner status. And if the borrower chooses, he or she can write a detailed personal statement and loan description. You can’t change settings so that you only view personal or business loan listings at any given time, but each loan’s heading (“Personal” or “Business”) makes it easy to distinguish between the two types.
If a particular loan’s listing meets your investment criteria, you can select how many $25 Notes you want to buy and transfer funds from your Lending Club account. If your loan isn’t funded, you’ll find out within 14 days (or before, depending on when the listing expires). Funds earmarked for loans that don’t originate are returned to your account, where they become available for new investments.
Automated Screening and Investing
If you don’t have the time or patience to manually screen loans, Lending Club has an automatic screening and investing tool that allows you to quickly invest in dozens of loans without approving each one. The process is simple: You set a lower limit on the loan grades you’re willing to accept, and Lending Club uses the cash in your account to make equal-sized investments in each new loan that’s above that limit. For instance, you can choose to only invest in loans graded A and B, or expand to include loans down to F or G, the lowest rating. If you want more control over the process, you can manually set your desired interest rate range, such as 10% to 15%.
Lending Club’s automatic investing tool isn’t instantaneous. The speed at which it invests your account’s cash depends on the availability of loans that meet your criteria and the relative amount of cash in your account. Lending Club prioritizes investments for accounts with more cash, so if you have a small balance, you may find yourself at the end of the line. Likewise, if you have narrow criteria – such as only accepting loans graded A or B – you may have to wait days or even weeks to be fully invested due to a lack of supply of suitable loans.
Lending Club investors receive payments at any time of the month, usually within three business days of debiting from the borrower’s bank account. Your payment is proportional to your total stake in the loan, less a 1% annual service charge. In other words, if you invest $500 in a loan with a 10% interest rate, you receive 9%, which is $45 annually or $3.75 per month. Prosper and Peerform also take a 1% service charge for each loan issued. You also receive a proportional amount of any late fees charged to a borrower’s account, if they’re ever paid.
To invest with Lending Club, you need to be at least 18 years old, have a valid Social Security number, and meet other financial criteria depending on your state of residence.
Lending Club accepts investments from residents of 48 states – all except Idaho and West Virginia. The only lenders who don’t need to meet income or net worth criteria are California residents who limit their total Lending Club investment to less than $2,500 or 10% of their net worth, whichever is lower.
All others must meet strict financial criteria: Either gross annual income of at least $70,000 and a total net worth (not including real estate, home furnishings, and automobiles) of at least $70,000, or a total net worth (with the same restrictions) of at least $250,000. California residents must have gross annual incomes of at least $85,000 and total net worth of at least $85,000, or a total net worth of at least $200,000. Kentucky residents must be accredited investors.
To be considered an accredited investor by the U.S. Securities and Exchange Commission (SEC) , you must meet at least one of the following criteria:
- Consistent annual income of at least $200,000 ($300,000 for a household) in the past two years
- Net worth of $1 million or more, either on your own or including your spouse’s assets, and excluding the value of your primary residence
- Control of a trust with at least $5 million in assets
- Control of an entity, such as an LLC or S-corp, in which all stakeholders are accredited investors
And regardless of where you live, you can’t invest more than 10% of your net worth at Lending Club.
To apply for a Lending Club investor account, you need to provide your current contact information, Social Security number, and bank account information (for making deposits and withdrawals into and out of your Lending Club account). Lending Club uses the information you provide to verify your identity and bank account, a process that typically takes one to three business days.
Once approved, there’s no minimum deposit to fund your account, but you need at least $25 to buy a Note. Lending Club doesn’t let you buy Notes unless you have sufficient funds in your Lending Club account. To ensure that there’s always funding for your account, you can set up automatic deposits from your tied bank account in the amount and frequency of your choosing.
How It Works for Borrowers
Loan Characteristics and Restrictions
If Lending Club chooses to approve your application, it assigns a loan grade – measuring the likelihood that you’ll default on the loan – and interest rate to your loan. Loan grades include a letter (A – G) and number (1 – 5).
Individual borrowers rated A1, the highest-quality grade, can expect interest rates of around 5.99% on the 36-month loan. Those rated G5 – the lowest rating – can expect rates of 35.89% on the 36-month loan. Generally, borrowers with good or excellent credit can expect rates below 15%, while borrowers with mediocre credit can expect rates between 15% and the upper rate limit. Grading and interest rates are similar for business borrowers.
Once your loan has been approved and assigned an interest rate, it appears in Lending Club’s listings and can begin attracting investment. Your listing expires exactly 14 days after approval. If it hasn’t attracted at least 60% of your requested funding amount within that time, you have two choices: You can accept whatever funding your loan did attract and immediately re-list a smaller loan for the difference, or cancel the loan altogether and reapply.
If you do receive at least 60% of the requested amount, your loan automatically originates in the amount you received. (For example, a loan with a requested principal of $10,000 will originate with a principal of $7,000 if it receives 70% funding.) You’ll receive funding for the funded amount in your bank account within one to four business days, depending on your bank.
On personal loans, an origination fee between 1% and 6%, depending on your loan grade and loan term, will be added to your principal amount and begin accruing interest. For instance, a $10,000, 36-month loan for a B-rated borrower would carry an origination fee of 4% or $400. Origination fees on business loans range from 1% to 6%, depending on your grade (term doesn’t matter). These fees are deducted from the total amount of your loan, so the actual amount you receive may be up to 6% lower than your requested amount.
Lending Club requires monthly repayments of a fixed amount. It automatically debits your bank account on the same day of the month, emailing a reminder a few days before to ensure sufficient funds in the account. If you’re more than 15 days late due to insufficient funds, you’ll be charged the greater of $15 or 5% of the total loan payment as a late payment fee, which doesn’t reduce your principal balance.
Loans more than 30 days past due may be reported to a collection agency. You can manually make additional payments or pay off your loan in full at any time with no prepayment penalties.
Though Lending Club doesn’t release all the details of its proprietary application and screening process, borrowers with credit scores below 640 generally aren’t eligible. Additionally, borrowers must be at least 18 years old, have U.S. citizenship or long-term residency, reside in one of the states where Lending Club operates, and have a verified bank account. To verify your bank account, Lending Club makes two small trial deposits and asks you to confirm their amounts in your Lending Club account.
When evaluating an application, Lending Club looks at factors like credit score, credit history (length and activity), debt-to-income ratio, employment status, income, and homeownership status. Having a higher credit score, lower debt to income ratio, steady employment, and solid income increases your chances of approval and reduces your loan’s interest rate.
Business borrowers are subject to the same geographical, age, and citizenship requirements as individual borrowers. Additionally, business loan applicants must own at least 20% of a business with $75,000 or more in annual sales, have been a 20%-plus owner for at least two years, and be authorized to borrow on behalf of the business.
When evaluating an application, Lending Club considers factors such as the business’s credit utilization, past payment history, credit history (length and activity), and cash flow. Businesses with longer credit histories, more robust cash flows, and timely past payment histories are more likely to be approved and enjoy a lower rate.
Application and Approval
To apply for a Lending Club loan, you need to provide basic contact information, bank account information, and your Social Security number. You also need to specify the desired amount, term (36 or 60 months), and purpose (such as debt consolidation, home improvement, and medical expenses) of your loan.
Lending Club verifies your bank account by making trial deposits, which can take one to three business days. It then conducts a thorough credit check, including a thorough evaluation of your personal or business credit history, using one or more credit scores and reports from the major credit reporting bureaus.
If you’re an individual borrower, Lending Club also verifies your employment status and income by requesting pay stubs or income tax statements and contacting your employer. This process can take up to 14 business days, though Lending Club says most applications are either approved or denied within seven business days. If you’re self-employed, Lending Club may request more documentation around your income and finances, lengthening the process.
Lending Club’s additional features include:
- Retirement Accounts. You can set up a Lending Club account as a traditional or Roth IRA. Having a retirement account with Lending Club doesn’t affect your ability to have a regular account, meaning you can set up multiple Lending Club accounts if desired.
- Custodial Accounts. If you’re the parent or legal guardian of a minor child, you can also set up a custodial Lending Club account and control it until the child reaches age 21.
- Note Trading. Lending Club has a partnership with Folio Investing that allows investors to buy and sell existing Notes on a secondary market. Depending on the borrower’s Lending Club rating, general credit history, and repayment history with Lending Club, Notes may trade at a premium or discount to regular face value ($25). To execute Note trades, you need to sign up for a Folio Investing account, which you can do through Lending Club’s website. All transactions incur a 1% commission, payable to Folio.
- Multiple Outstanding Loans for Borrowers. Lending Club borrowers can have up to two outstanding loans at once. Individual loans are capped at $35,000, but you can have up to $50,000 in outstanding balances between two loans. Before applying for a second loan, you must make at least six consecutive on-time payments on your first loan. For first loans with terms of 60 months or principal balances greater than $20,000, you must make at least 12 consecutive on-time payments before applying for a second.
1. Lower Interest Rates for Borrowers
Though many factors influence Lending Club’s interest rates, its rates tend to be lower for borrowers with similar risk profiles. And Lending Club’s overall rate range is more favorable for borrowers than Prosper’s. Avant’s loans are much more expensive across the board, with effective annual rates ranging from about 30% to 90% (though shorter terms may reduce borrowers’ total interest payments on that platform). In fairness, Avant caters to borrowers with poorer credit.
2. Minimum Personal Loan Is $1,000
As an individual borrower, Lending Club lets you take out loans as small as $1,000. This can be useful if you need extra cash to pay down a credit card or medical bill, but don’t want to be saddled with the high monthly repayment that a larger loan would bring. With Prosper, you can’t get a loan smaller than $2,000.
3. Business Loans Available Up to $300,000
Lending Club offers loans of up to $100,000 to entrepreneurs and established business owners. Business loans aren’t available on consumer-focused platforms such as Peerform, Prosper, and Avant.
4. Lower Origination Fees Than Some Competitors
For some borrowers, Lending Club’s origination fees offer a better deal than other online lenders. For instance, Lending Club borrowers with an A rating pay origination fees between 1% and 3% on 36-month loans, depending on their sub-rating. At Prosper, A-rated borrowers pay origination fees of 4% for loans of the same term length.
For 60-month loans, A-rated Lending Club borrowers pay a 3% origination fee, while similarly rated Prosper borrowers pay 5%. For investors, Lending Club’s 1% service fee is identical to the 1% service fees charged by Peerform and Prosper.
5. Personal Loan Balances Can Be Higher Than the Personal Loan Limit
Though Lending Club caps each personal loan at $40,000, you can have outstanding loan balances higher than that amount if you’re approved for a second loan. This sets Lending Club apart from Prosper, which also lets you have two loans but limits your total outstanding balance to $35,000 at any given time. And Avant only lets you have $20,000 outstanding at once.
6. Lower Default Rates
Among competing P2P platforms, Lending Club historically offers the lowest rates of borrower default. Since 2010, its default rate has been anywhere from 0.5% to 4% lower than Prosper’s. This means that you may see fewer losses as an investor.
1. Notes Only Available in $25 Increments
Lending Club requires you to buy Notes in increments of $25, with a minimum investment of $25 in each loan. In other words, you can invest $100 in a particular loan, but not $95 or $105. This limits your flexibility relative to other P2P lending platforms such as Prosper, which lets you invest in any amount above $25.
2. Financial Restrictions for Investors
Lending Club’s financial restrictions for investors – limiting total investments to 10% or less of net worth and requiring minimum net worth or income thresholds – excludes some potential lenders from participating. While Prosper investors face similar restrictions if they live in states that impose them by law, it doesn’t impose them across the board like Lending Club. For investors with modest incomes or net worths, this means that Prosper may be the only option.
3. It’s Difficult Not to Accept Partial Funding
If your loan attracts investments of at least 60% of your requested amount within the 14-day listing period, it automatically originates in that amount. Loans that attract less than 100% of requested funding are said to be partially funded. During the application process, there’s no option not to accept partial funding above the 60% threshold. To get around this, you have to directly contact Lending Club’s customer service team at least one day before your listing expires. This contrasts with Prosper, which lets you specify your desired funding threshold – from 70% up to 100% of the requested amount – during application.
Like other ambassadors for the sharing economy, peer-to-peer lending platforms such as Lending Club increase efficiency and transparency by cutting out the middle man – in this case, banks and other traditional lending institutions. Like the ridesharing companies forcing the taxi industry to rethink its business model, P2P lenders could force positive change in a financial industry that’s had trouble making new friends since the financial crisis.
And that’s not the only potential benefit. By directly connecting regular people willing to invest or borrow from their neighbors, P2P lending establishes personal connections that can’t exist between traditional financial institutions – even community banks and credit unions – and their borrowers. Stronger, more constructive communities could be the real legacy of Lending Club and its peers.
Lending Club is the most popular P2P lending platform around, connecting thousands of individual and business borrowers with willing lenders. Borrowers enjoy somewhat lower interest rates and higher borrowing limits than competitors such as Prosper and Avant, but an inflexible partial funding requirement are unattractive. For investors, lower default rates are offset by financial restrictions that limit participation.
4.3 out of 5 stars: Lending Club’s higher borrowing limits and business loan availability enhance its attractiveness for borrowers, while lower default rates are good for investors. Negatives include financial thresholds for participating investors and partial funding issues for borrowers.