Lending Club Review – Peer to Peer Lending, a Solid Investment and Borrowing Alternative
by Erik Folgate
Filed under Credit and Debt, Reviews
After the stock market crashed at the end of 2008, many people, including younger generations became very skeptical of the stock market and what it had to offer as a legitimate place to park your money. Some turned to “peer-to-peer lending,” which is a concept that has been around for a very long time, but the method as to how it was carried out was not always efficient at all. It went a little something like this:
Friend #1: Hey best friend, can I borrow $1,500 to get a new car?
Friend #2: Do you promise to pay me back?
Friend #1: Of course, you know that I’m good for it!
Friend #2: Ok fine, I’ll get the money to you by next week.
The truth is that these situations are very common. We enter into lending/borrowing agreements with friends and families all the time, and the lender enters into a situation with unlimited risk and no reward for their risk.
This is where a website like Lending Club comes into play. Lending Club is a peer-to-peer lending network that brings investors and borrowers together to satisfy both parties needs by offering a secure, legal, and efficient service. Those people who wish to take more control of their investments can lend money to borrowers, and borrowers who are tired of having limited options for choosing a personal loan product can try Lending Club.
How Lending Club Works
For Investors – sign up as a Lending Club investor (get a free $25 bonus for signing up here)
- Deposit funds (via ACH, wire, check or PayPal).
- Easily build a portfolio of loans based on your criteria.
- Receive monthly payments of principal and interest. There are no maintenance fees.
For Borrowers – sign up as a Lending Club borrower
- Get quick approval on a fixed-rate, 3-year loan from $1,000 to $25,000.
- Once approved, most loans fund in less than 2 weeks.
- Pay interest and principal monthly automatically from your bank account.
Advantages of Lending Club
Investors: If you’re looking for an alternative to the traditional stock market investments or you don’t have enough money to invest in real estate or don’t want to deal with it, Lending Club offers a real way to invest your money. Not only is it a solid alternative, but it allows you to take control of your money. You can choose a “guaranteed” interest rate based on your level of investing risk. Obviously, the higher interest rates will be paired with borrowers that are more of a risk to default on the loan, and vice versa. The interest rate is fixed though, whereas, some mutual funds that are based on risk levels do not actually perform the way they have in the past; this is one big positive in that you know exactly the interest rate you’ll be paid if the investment works out.
Borrowers: For borrowers, the advantages are that you have a virtually unlimited pool of loans to choose from with hundreds of interest rate choices. You’ll never find something like this at a credit union or traditional bank. Plus, most traditional banks make it extremely hard to get a personal loan. You need absolutely spotless credit to qualify for most personal loans with traditional banks. Lending Club will at least give you a chance to get that loan necessary to get you jump-started on whatever it is you’re trying to accomplish.
Disadvantages of Lending Club
Investors: For investors, the disadvantage of Lending Club is the risk involved when lending to a peer. Just like any investment, the more money you want to make, the more risk is involved. If you want to lend to someone at a high interest rate, you’re going to attract a less than desirable borrower who could easily default on the loan, which means you lose your money. Sure, you can go after them for the money, but it’s an unsecured loan, so depending on how much the loan was, it might not be worth it when you pay court filing fees. Thus, just as any wise investor would tell you, something like Lending Club should only make up a portion of your investment portfolio because you don’t want to put all your eggs into one basket…diversify! You can make great returns with Lending Club, but in the chance that the borrower defaults, you don’t want your life savings to go down the drain.
Borrowers: For borrowers, the disadvantages are borrowing from the unknown and an unregulated institution. You don’t get the stability of borrowing from a financial institution (though it’s fairly easy to argue that Lending Club and its investors are stable), and despite what Lending Club boasts, there is a possibility you will find higher interest rates on the loans than a local credit union personal loan. But again, perhaps you wouldn’t even have been able to get this loan without Lending Club in the first place.
Real World Application
So as a borrower, what might prompt you to seek out a personal loan from a peer-to-peer network? One great example is when you are upside down on a car loan. Many people want to know how to get out of a car loan when they are upside down on it, and my advice to them is to sell the car for what it’s worth and take out a personal loan to fill the gap between how much they owe on the original car loan and what they sold the car for. Using Lending Club to serve this purpose is a great way to utilize the benefits it offers.
Overall, peer-to-peer lending is an interesting concept with many benefits for both investors and borrowers. Be sure to share your experiences in the comments below or sign up now if you haven’t already done so and get a free $25 when you sign up through Money Crashers. The $25 is a great risk-free way to experiment when starting out.
Give Lending Club a try (free registration):
- Sign up as an investor – as a bonus, you’ll get $25 to invest free – just for signing up through this page
- Sign up as a borrower
What’s stopping any ill hearted greedy person to borrow your money and never return it. Nowadays no one uses a conscience. I don’t trust a random stranger to do the right thing, there are good ones out there but the bad out number the good. I’d say invest it in a bank (it’s FDIC insured) or a 401k.
It’s almost like you have to go into this lending group with the mindset that you’ll be ok if you never see the money again. Might as well donate it atleast it’s going to someone who’s not out to scam you.
I like the concept of these sites. It seems like, if nothing else, it would be a fun experiment if you had a bit of disposable cash. Sadly all of the sites like this I’ve seen aren’t setup to allow investors from Texas, so no love for me.
They’re not strict about where you’re from ;) wink wink!!
I thought about getting an account when they had their $64 bonus last month. Wish I had.
Interesting idea. I guess it is an alternative to traditional lending. I still think that it is better to save up for big purchases, and have a solid emergency fund available for true emergencies–that way you are never forced into a borrowing situation.
Its quite a concept, and it sounds interesting, but I think I’d have to think real hard before diving in–I would just be concerend about the risk.
Just trying to be honest.
This is interesting but sounds to risky for me.
I’d have a hard time justifying making money off people in need. Like someone else said, if I had the extra cash I’d rather donate. That being said, a conscientious alternative would be Kiva which connects you with small scale enterprenuers (i.e. self employed people) with the aim of alleviating poverty. It’s like helping someone help themselves.
thriftygal this is not about charity it’s about investing. The banks make money this way all the time. Why shouldn’t we?
I wouldn’t pump a lot of money into this due to the risks, but I did just open a lending club account with a little bit of cash just to play around with it.
Well, because any rate would be an added burden for someone already exhausted financially, physically, emotionally with medical expenses. It’s a personal choice I guess. Now for the ones who are trying to finance their wedding or kitchen remodel, I’d say go right ahead.
I went ahead and tried it out…lending $25 of someone else’s money to a borrower was safe enough for me. Not sure if I’ll start to put my own money into it anytime soon, but definitely an interesting concept and an average rate of return of 9%+ sure beats the market.
I would have appreciated a disclaimer in your post about the restrictions for investors. Living in Ohio means I’m out of luck to begin with, and the other investor requirements may come back to bite a lot of people later.
The risks at lendingclub are not as high as one might expect.
Lending Club divides your choices into A, B, C, D, or E rated borrowers. (“A” being the highest fico’s and lowest rate of return)
Their A, and B borrows have something like less than 1 percent default rate.
Compare this with the volatility of the stock market and in my opinion the risk is actually quite minimal on lending club. I am seeing a 10 percent return even though i am restricting my lending to only A and B class borrowers. This is a rate that compares favorable with the S & P 500 10 year average.
i have only invested a few hundred dollars into lending club so far, but im quite prepared to convert my account into an Roth IRA, where i will devote about 50% of my savings to LendingClub. I feel a LOT better investing in borrowers who would otherwise be pillaged at a much higher rate at our unethical big banks and credit card companies. Believe it or not Lending Club is actually a much more ethical model than either the stock market, or traditional banking for that matter. Big banks, along with the stock market, operate with utter disregard and apparent disdain for the welfare of the nation as a whole. Amen to lendingclub.
What an innovative way to invest and borrow money. I guess what we must have here is a clear conscience and an honest disposition if we are to borrow so that others would also benefit from this altenative loan facility. Let us help one another. Kudos to the people who thought and made this possible.
Lending club isn’t actually available in Canada- nor have I heard of any other peer-to-peer lending operations similar to that which are currently up and operational.
I read the rules for being an investor. They expect you to have a significant working capital and a large sum of assets to participate.
maybe when I am better off financially I will come back to the program. For now, I do not qualify.
I recommend everyone read the “fine print” before participating.
I love the idea of Lending Club and I’ve heard a lot of good things. It seems like a wonderful idea to me. Unfortunately I live in a state where I can neither participate in the direct market nor the note trading platform. Bummer.
I just glanced at the “current State and Financial Suitability conditions”, but they don’t check if you qualify…as long as you live in one of the required states, it seems that you can invest just fine.
I have about $500 invested with Lending Club. I started out with only $50 ($25 mine/ $25 their bonus) I’ve been upping it at $25 per month, just to experiment and see where it goes. So far it’s been great. I’m averaging at 9.66% rate of return, and there have been no late payments are defaults. One loan got paid off in full early. I’ve kept my loans to low risk A loans and a few B grade loans.
The one big downside I see is that this money is not liquid. You cannot cash out quickly, and it will take 3 years to get all your money and interest back. It’s a longterm commitment. I’m considering making mine a Roth IRA and letting Lending Club take up my bond portion of my portfolio.
Good point. It would take a long time to recover your investments as the borrowers have a commitment to pay back the loans, which could take some time. I don’t see this as a disadvantage however, as it forces the investor to be patient and avoids the desire to move money around too much (as I’ve done with my 401k in the past).
Oh, I almost have forgotten way back in the Philippines I’ve joined a lending club similar to this and the downside really is the period where your money is locked for a certain period i.e. 3 years. The advise i can give is to put only the real disposable money.
Hi, Erik:
Just following up on this article. I wanted to know if you’re currently (or did ever) use the Lending Club as an investor? If so, can you update and let us know how it fared for you.
I’m thinking of trying them as a micro investor with small loans, but am looking around for more feedback from other users.
Also it seems several things have changed since you last wrote this article, I read on the site one can now sell their notes for quicker liquidity.
Look forward to your reply.
Cheers,
Missy