What follows is our review of Lending Club, a leading peer to peer lending and borrowing social network. They offer an interesting way to lend, borrow and invest.
These days, many people are finding it harder to qualify for a credit card or a personal loan. I know a few people who have found it harder to secure loans despite being credit-worthy, and who have now turned to their own circle of friends and family for financial help. I’ve recommended that they check out peer to peer lending through Lending Club instead, as one way to secure loans. This interesting paradigm has been discussed a lot in financial communities and the media lately, where it’s also been termed as “social lending” or P2P lending.
What’s So Great About Peer To Peer (P2P) Lending?
This method for allowing people to borrow and lend directly to each other has been considered a win-win scenario for several reasons:
1. The middle man (banks, conventional lenders) is taken out, simplifying transactions.
2. Borrowers get access to loans they need. They can get lower rates than what is offered through traditional channels.
3. Lenders can make money. They are able to get higher rates from lending their money via peer to peer lending, as an alternative investment. Some reports have it that you can earn up to 9% average returns per year.
Peer-to-peer lending isn’t a new concept, it’s one that has been inspired by practices such as micro-lending or group lending, where family, friends and neighbors pool together their money to help out those who need loans, particularly for business purposes.
To be part of a direct lending network either as a borrower or lender, you can check out Lending Club, a leading company in this field. Here’s how to sign up:
|Apply for a Lending Club loan. Open an account as a borrower.|
|Apply for an investor account. Become a lender at Lending Club.|
Lending Club Review: A Leading Peer To Peer Lending Network
Lending Club is one of the top companies in the P2P lending space. Following are some details for those of you who are interested in participating in this process.
Borrower Requirements and Details
With liquidity sources drying up and tighter credit restrictions affecting consumers, P2P lending has become a great option for borrowers to try out. But what are some of the requirements to become a borrower?
- Your FICO score should be at least 660. Lending Club borrowers have an average credit score of 713.
- Your debt to income ratio (minus your mortgage) should be under 25%.
- Your credit history should show no current delinquencies, recent bankruptcies (in the past 7 years), outstanding tax liens, collections over the past year.
- Your credit report should show a maximum of 10 inquiries in the last 6 months.
- Your credit information must show certain limits on number of accounts and utilization.
While here are some details of the borrowing process:
- The application process is free and takes only a few minutes, but watch out for missed or late payments! You’ll be paying a fee for such events.
- Your loan will be graded based on risk (determined from your credit score, report and other factors). There’s a processing fee of 0.75% to 3.00% of the loan amount based on that grade, which will be deducted from loan proceeds you receive.
- You may be assessed additional fees if you incur any delinquencies or collection activities on your loan.
Lender Requirements and Details
It’s easy to lend. Here are some particulars:
- You only need $25 to start lending. You can do electronic transfers between your bank and Lending Club accounts once you link them. Start small and learn the ropes!
- Existing account holders receive occasional cash incentives throughout the year. You can apply for a Lending Club account through this link.
- Interest rates for the 3 year installment loans (with fixed interest rates and equal installments) range from 7.37% to 20.11% as of this time. Of course, rates are higher for those loans with the highest risk.
- You pay a service charge equal to 1% of amounts paid by borrowers, but this affects your annual returns by less than 1% because it’s not an annual charge.
- You must be a resident of certain states to be a lender.
- You need to make at least $70,000 in gross income (with a net worth of $70,000) or have a net worth of $250,000. California residents like myself have slightly higher income and net worth requirements.
- You can trade your loans — buy and sell them through Lending Club’s Note Trading Platform for a 1% trading fee.
Lending As An Investment
As an investor, I find that lending through Lending Club can be an interesting alternative to stocks, bonds and other traditional investments. The fact is, Lending Club has yielded its lenders an average annual return of 9.05% over the last 18 months (with past average returns lingering in the double digits). Not bad, in our harsh investment climate! But before you rush in, be aware that there are risks involved in this process. Some things to consider:
- A diversification strategy for your money is always a wise move. I think there’s room in a diversified investment portfolio for direct loans (P2P notes).
- Take the time to learn how P2P works. Start small and build up your loan portfolio to minimize risk and loss. Be prepared for some trial and error.
- Lending Club has a low default rate with less than 3% defaulting after 18 months.
- Lending involves risk, but you’re able to spread it around in a community of multiple lenders and borrowers.
All in all, Lending Club, as a leading network for social lending seems like a highly relevant platform in today’s tough credit and investment climate. It’s one place you may want to check out if you’re looking to invest and diversify into alternative investments or need to get a loan at lower rates with less hassle.
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