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Lending Club Review – Peer to Peer (P2P) Lending Explained

By Erik Folgate

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

  1. Deposit funds (via ACH, wire, check or PayPal).
  2. Easily build a portfolio of loans based on your criteria.
  3. Receive monthly payments of principal and interest. There are no maintenance fees.

For Borrowers – sign up as a Lending Club borrower

  1. Get quick approval on a fixed-rate, 3-year loan from $1,000 to $25,000.
  2. Once approved, most loans fund in less than 2 weeks.
  3. Pay interest and principal monthly automatically from your bank account.

Advantages

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.

lending club investor lending club borrower

Disadvantages

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. 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.

Final Word – 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. What has your experience been like?

Sign up for Lending Club as an investor or borrower. (Official Site)

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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  • anita

    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.

    • Jason

      Anita,

      You are right. There are bad sorts out there and there may be some who only want to defraud you of your money. You’re forgetting one important thing though. Defaulting on this type of loan is not without penalty. If a borrower defaults, their credit rating will tank.

      So far, I’ve only had $97.00 dollars default over the 2 years I’ve used Lending Club, I’ve purchased about 170K in notes, and I’ve received thousands of dollars in interest as a return on my investment.

      Yes, I think there is risk involved with investing in Lending club, but I think that risk can be managed.

      • tj

        what do you mean by 170K in notes?

    • Twatkinsgroup

      Anita,you might want to study or do a little bit more research on this subject.There is a little risk in all investments and ask alot of the baby boomers what happen to their 401k’s in the past decade.If your interested you can check.Some of the videos on youtube or top documentaryfilms web site.They have some good documentaries on this subject.Just go the economics sections.I think if more people learn to mange their finances and how money and banks work.The risk can be managed better.

  • http://www.artificialrobot.com Sean

    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.

    • Phil

      They’re not strict about where you’re from ;) wink wink!!

  • Mike

    I thought about getting an account when they had their $64 bonus last month. Wish I had.

  • Gina

    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.

  • http://www.yourfinances101.com/blog David/Yourfinances101

    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.

  • Kendra

    This is interesting but sounds to risky for me.

  • http://www.chasingprosperity.com thriftygal

    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.

    • rdhin NY

      My husbans and I recently borrowed from LC and we are not poverty stricken nor down and out. CC debt got ahead of us. We are thankful for the loan and a finite payoff term at better rates than our bank could give us.

  • John

    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.

    • http://www.chasingprosperity.com thriftygal

      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.

      • Kyle

        @thriftygal,

        Your loan may give someone the break they need (in interest rate) if they are trying to consolidate to get rid of credit card debt.

  • Mac

    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.

  • Todd

    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.

  • http://www.vanpaul.com Greg G

    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.

  • Efren

    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.

  • Linda

    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.

  • Dale Wyrick

    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.

  • http://money-seeds.blogspot.com Joy

    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.

  • http://madsaver.com Mac

    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.

    • Name

      Just a pro tip, they don’t verify your address if you are an investor.

  • Dan

    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.

    • http://madsaver.com Mac

      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).

  • Efren

    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.

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  • Missy

    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

    • http://investorjunkie.com Investor Junkie

      Hi Missy,

      I’ve been a Lending Club investor for over 18 months now. I have over $5k invested and getting 12.40% NAR. If interested I review Lending Club on my site.

  • Tom

    Lending Club can be a great source. But it can take a while for bids to come in. Before going this direction I suggest trying for a regular loan first. If you are confused on where to start i would try. lifehousefunding.com they were able to get me a 25k loan at 9.25%. It only took about a week.

    • Tillmangirl72

      that sounds high..

  • Carter

    I REALLY like the P2P concept. The only issue is when borrowers don’t perform. I recently learned about www.money360.com, and I love this model because it blends the P2P model with secured real estate lending. Same rates as other P2P sites…but you actually get secured collateral! Smart idea.

  • http://guaranteedinvestmentcertificate.blogspot.com/ GIC

    I am newbie in blogging ( prefer crunching numbers :) ) but I really like the idea of p2p lending so I will definitely need to spend more time networking. So here is the story:

    Partner and me ( accountant and engineer ) are raising capital for a small RE investment fund ( up to $400K ). about 30% of the fund will be own by us and rest will be funded from outside. We both have excellent credit scores, experience with investing, both owning a rental properties.

    So if there are people interesting in investing let us know. Our estimate is about 10% return on investment. ( are plans are pretty conservative with this invest. fund )… it is planned to be a safe long term investment.

    Also it will be minimum amount that can be invested because no way that we can chat with every person willing to invest $25 in the fund.

    I am also thinking to open an account at Prosper and Lending Club ( I think that will increase trust with other folks…)

    Let me know.

    Thanks!

  • Anonymous

    Great review! I’ve been using Lending Club as an investor for a while now and I love it. No complaints whatsoever so far.

  • http://twitter.com/LLending Lucrative Lending

    Regarding:

    “For borrowers, the disadvantages are borrowing from the unknown and an unregulated institution.”

    I’m not sure if this is just an old article, but Prosper and Lending Club are indeed regulated institutions and post filings to the SEC.

  • Sxytigra

    I applied for a $2500 loan to catch up on overdue bills and it was 100% funded in the AM, but then “removed” completely in the PM. Apparently my debt to income wasn’t impressing the underwriters. Its stupid because this is the reason people take out personal loans. Fault me for having rent and car payments? Unreal. I called and the rep confirmed the reason. He couldn’t even tell me how much I could apply and get approved for.

    • Name

      It isn’t personal they are protecting the investors, using moddles they have determined people with your debt to income have an increased chance to default, any prudent bank will do this.

  • vano

    Lending club makes borrowing even harder than traditional banks. I just can’t get a loan from them with my 713 FICO score. They come up with all kinds of dumb reason like: you have so many credit requests in the last few months and so on…. damn!!!

    • Name

      This is common with unsecured loans, the charm in lending club is once your are done with the shitty part(which you will get anywhere) you can usually get more money and a lower interest rate, not to mention you are paying to smaller investors instead of banks.

  • http://orensmoneysaver.com/ Oren

    I just starting do lending club a few months ago and I have been getting a return of about 22% so far so I am pretty happy with those results. I am sure those numbers will go down, but hopefully they stay high

    • Name

      Most defiantly will go down as the defaults catch up to you, the loans that have earned the best interest over time are high C’s low D’s, you can check this in the lending club statistics

  • Mike A.

    I’ve been testing both Prosper and Lending Club with several hundred $$ since Jan 2012. I’ve read from several blogs and other reviews and found it to be a legit sites so I gave it a, “go”. So far, I’ve had 1 default for $75 and the borrower is under collections, loans are 36 months or longer. If your a small time investor, I’d recommend distributing $25 to start to borrowers with the following criteria: No delinquency, Employed, Income Verified, Gross Income $5k> and good reason for use of the loan . It’s really time consuming looking over all the loans manually but they have tools that can assign investment automatically but without doing your due diligence it will get you into trouble. I tried their auto investment option and that’s how I got into trouble with one of the late loans. Good luck!!!

    • Name

      Never loan more than 25$ unless you are running out of a loan pool.

  • carlosc1dbz

    I put $500 into lending club and I am going to be getting about 0.87-89 cents a month for 36 months on 20 notes. That comes out to $590 after 36 months. I just dont get how they say that it is 11% annual. It seems that it is 11% triannual or 3.75%ish annual. Can someone help me understand this?

    • Name

      You need to keep investing your money as the loans age and the loans pay off principle you have less and less principle earning interest. Example.. after 18 months if you have not recycled the money you will only be earning interest on 250$ at 11%

    • Name

      They don’t lock the money you get in interest and principle every months so you can reinvest and it comes back in, after 2 months you should have about 32$ enough to reinvest in another loan, now you have 21 loans earning interest and that figure you have of 590 will go up, it will steadly go up as you reinvest so at the end of 36 months your account will be aprox little bit more than 650(If no one defaults).

      This is a hard concept to grasp.

      I am good with the maths and investmenting trust me they aren’t screwing you :P

      Actually to get more complicated it will probably be less than 650. Your default rate is probably 2% so that takes it down to average 635ish. Then also you can’t reinvest till you hit exactly 25$ so that money will sit there. meaning at any given time on average you will have 12.50$ in money you can’t use that rounds out to about close to 5, so 630. And last but no least when you “fund” a loan you have to wait for it to fully fund(can take up to 10 something days(5 days on adverage )we can say that 25$ will be pended every time you want to reinvest something along the lines of 21 times over the course of 36 months. 105 days about 1/3 of a year that’s about 1$ anoyance, so lets say 629 but we will bump it back up to 635 because of the interest earned on interest in the 36 months.

      Once you have more than 500$ lets say a reasonable 20k these numbers become almost insignificant but at 500$ it makes enough of a difference to let you know.

      You will make more money with lending club than any other financial vehicle out there apart from hedge funds, which you can’t afford.

      The stock market right now is unwinnable game for sophisticated computer software and think tanks with people that have 150+ IQ, It’s always nice to have money in a S&P ETF encase the market explodes with some awesome new tech that changes everything but as of right now everything in the stock market is overvalued, Apart from banks…but they are probably on par value they aren’t a bargain.

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