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Lending Club Review – Is It Right For You?

Reading Time: 5 minutes

 

If you’ve heard about peer to peer lending then there is a high chance that you’ve also come across Lending Club somewhere in your quest for research and knowledge.

For those who may not be familiar with Lending Club, it is a peer to peer platform that allows individuals to lend money to borrowers and earn interest from it.

What makes Lending Club, and peer to peer lending for that matter such an attractive prospect for individual investors is that they can now take part in a field that was only available to banks and other financial institutions.

Account Types

There are many different account types offered by Lending Club. These include:

  • Individual account
  • Joint account
  • Traditional IRA account
  • Roth IRA account
  • Rollover IRA account
  • Simple IRA account
  • Corporate
  • Trust
  • Custodial Accounts

To make the user experience more enhanced, Lending Club offers both iOS and Android mobile apps. Users can check the status of their accounts easily and conveniently using their mobile phones.

The minimum amount that investors can put is $1,000 dollars. If you think this is a bit too much to risk then think again. It is actually a safety net allowing investors to diversify their investment.

Lending Club Investment Process

The investment process is short and simple. Simply sign up and deposit money in your account via bank transfer. You can also mail them a check. To invest in the Lending Club, the minimum initial deposit is $1,000.

This is the part where we stress the fact that not anyone will be allowed to invest on Lending Club’s platform. To be eligible as an investor you need to meet certain criteria as follows:

  • Location—Lending Club will allow people from all over the country to invest with the exception of Ohio, North Carolina, Pennsylvania, New Mexico, and Alaska.
  • Minimum deposit—investors will need to put up at least $1,000.
  • Net Worth—investors should have an income of not less than $70,000 per year and the same amount in net worth. In California, that figure goes up to an annual income of $85,000 and a net worth of $85,000.
  • Total net worth—in California, you will not need to provide details of your annual income if your net worth is above $200,000. In the approved states the same is true for investors with a net worth of above $250,000.

How Lending Club borrowing works

To borrow from Lending Club, you must have a FICO score of at least 660. The loan application process is done online through their website.

While we found the process to be fairly simple, but according to the company’s risk management policy, only a small percentage of the total number of applications are actually approved. This helps reduce the number of defaulters and protect investors.

The minimum amount that a borrower can ask for is $1,000 and the maximum is $40,000. The company acts as a bank and will determine the interest rate by considering the applicants credit score. Obviously, a lower credit rating means higher interest rate.

Loans can be paid within a period of 3 years or 5 years. During this time the interest rate will not change and will remain fixed.

The loans form Lending Club are unsecured and very much like credit card loans. In case a borrower defaults, this information will be sent to the credit rating agencies which include:

  • Equifax
  • Experian
  • Transunion

Borrowers are free to take out individual loans, but there are also business loans, auto refinancing loans and medical expenses loans.

Risks Involved in Investing with Lending Club

Any investment carries with it the potential for risk. The same is true with Lending Club. The risks involved include:

  • Default risk—this is the most obvious risk especially since they are not FDIC insured.
  • Management risk— there’s an annual 1% fee. The risk here is that this could rise in the future.
  • Inflation risk—in case of inflation this can decrease the value of your income.
  • Diversification Risk—While the minimum investment is $1,000, to best diversify your risks will require you to invest as much as $10,000. The less you invest the less you can diversify the risk.
  • Economy risk—if there is a recession during the repayment period, this will translate to more borrowers defaulting in payment.
  • Callable risk—in cases where the loans are paid early, your potential returns are less.
  • Marketplace risk— this is in case Lending Club goes bankrupt, it may seem unlikely but if it does investors could lose all their funds.
  • Liquidity risk—Since investing in Lending Club is a long-term commitment it can take some time to unload all the notes in the secondary market.

Even when the risks are many and varied, investors have the liberty of choosing which loans to invest in and which ones to avoid.

The Taxes

The US doesn’t consider investment in Lending Club among passive investments.  This is one of the main reasons why investors find it to be inefficient in a taxable account.

Simply put, the IRS will tax profits just like any income.

A way around this scenario is to go for a self-directed Lending Club IRA count. However, such an account will require a minimum deposit of $5000.

Lending Club Secondary Market

In case you find yourself with poorly performing loans you can unload it at FOLIOfn. This acts as the Lending Club’s secondary market. It also provides investors with an opportunity to get more loans.

Lending Club Pros

  • Investors can choose where to invest their money by making use of the filtering option.
  • Investing in peer to peer lending has more interest income potential than other traditional investment methods.
  • Investors can create a custom filter which allows them to invest their money automatically

Lending Club Cons

  • While the interest rates are fixed over the repayment period, the returns themselves are not fixed
  • It is not open for investment by just anyone with geographical and income level limits
  • While initially, investors could make as much as a 10% annual return, the revised returns now stand at 4-6%.

Alternatives to the Lending Club

Lending Club is just one of the available peer to peer lending platforms on the market. Others include:

1. Upstart

Started back in 2012, Upstart provides its borrowers with loans based on more than just the credit score. Education background is a big determinant and will consider the school you graduated from, the area of study, performance as well as the work history. Borrowers can get a loan anywhere between $1,000 and $50,000.

2. Prosper Marketplace

This was the earliest peer to peer lending platform in the US. It offers its borrowers with different loans to suit their needs from auto loans to military loans. The minimum borrowers can get is $2,000 and a maximum loan limit of $40,000. The APR ranges between 5.99% and 36%.

3. Peerform

This is a product of Wall Street executives and was created back in 2010. Loans range from $4,000 to $25,000 with a 3-year repayment period and an annual percentage rate of 5.99% to 29.99%. Peerform is one of the easiest platforms to secure a loan and borrowers with low credit scores of less than 600 can secure funding.

 

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