Peer-to-peer lending has become increasingly popular in recent years. In fact, the Harvard Business Review named it as one of their “breakout ideas” of 2009. While I’ve long been a skeptic of this sort of thing, I ultimately gave in and decided to find out what all the hype was about. Earlier this spring, I opened an account with Lending Club, and I’ve since started lending out money. Today, I’m going to give a brief overview of Lending Club and provide a walkthrough of the signup process. In a forthcoming article, I’ll actually walk you through the lending process.
What is Lending Club?
Lending Club is a social lending network that helps match people who need to borrow money with those that have money to lend. Borrowers with good credit can get loans at better rates than are available from “conventional” funding sources, and lenders enjoy rates that have averaged 9.05% annually over the past 18 months. This beats the heck out of any so-called “high yield” savings account. Keep in mind, however, that your investments are not FDIC insured, so you have to be comfortable with some level of risk.
While there are two sides to all peer-to-peer lending transactions, I’m writing from the perspective of a lender, because that’s how I’ve been using Lending Club. Nonetheless, I think it’s worth talking about the requirements for borrowers, as it’s important for prospective lenders to know what they’re getting into.
Borrowers must have a credit score of at least 660 based on a credit history spanning at least one year and with at least three accounts listed, two of which must still be open. They can’t have any current delinquencies, recent bankruptcies (past seven years), open tax liens, charge-offs, or collections within the past twelve months. If you’re curious how you stack up, you can take a free peek at your credit score using either FreeCreditReport.com or MyFICO.
Beyond the above, borrowers must have debt-to-income a ratio (excluding their mortgage) has to be less than 25% and their credit utilization has to be less than 100%. In other words, they have to fit the profile of a reasonably responsible borrower. Loans are unsecured, and range in size from $1, 000-$35, 000 with a three year term.
Lenders invest in “notes” that represent small portions of an individual loan. The minimum investment is $25 per note, so you can really spread your risk around if you wish. You can either select loans yourself or rely on LendingMatch, which creates a portfolio for you based on your desired investment amount(s), interest rates, and risk profile.
Each month, as the payments are received from borrowers, Lending Club deposits the principal and interest back into your account (after deducting a small fee). You can either withdraw these funds or reinvest them in additional notes. While the loans themselves are not insured, your uninvested cash balance is covered by FDIC insurance.
Note that there are some state residency and income requirements for investors. As of right now, individuals in 25 states can invest in notes, though Lending Club has applied for approval in all remaining states, and is adding them in on an ongoing basis. As for the income requirements, I’ve heard through the grapevine that these aren’t really enforced, so you shouldn’t run into any problems.
Opening an account
Opening a Lending Club account is a very easy, three-step process.
Step 1: Set up your login credentials.
Simply visit Lending Club, enter your e-mail address and desired username, and click the “signup” button. From there, you’ll set up your password, security question, etc.
Step 2: Enter your name and contact information.
On the next page, you’ll enter your name, social security number, birthday, address, and other contact information.
Step 3: Enter your bank account information (optional).
This step is only necessary if you want to be able to transfer funds directly between you bank and Lending Club. I want to be able to do this, so I went through the process.
After that, keep an eye on your bank account. Lending Club will initiate a small debit (less than $1). Once you verify this amount, your bank account will be linked up and ready for transfers.
That’s it. Like I said, very easy. If you’re curious about investing through Lending Club, keep an eye out. I’ll be publishing a followup detailing the loan selection and funding process sometime soon. In the meantime…