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
- 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
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
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?
