LendingClub Review: Is It Good?
Need a loan or investment opportunity? LendingClub might be good for you. Read the benefits and drawbacks of this peer to peer lending platform below.
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It wasn't too long ago when consumers had to go to the bank to apply for a loan. At the same time, people looking to invest had to stick to the traditional stocks, bonds, or money market accounts.
Today, that's all changed. LendingClub allows consumers to obtain loans directly from regular people who have cash to invest. The platform offers this through peer-to-peer lending.
How does it all work? Do borrowers get better rates than banks offer? Do investors make more money?
We look at these answers and more below.
What Is LendingClub?
LendingClub is a peer-to-peer lending platform. Borrowers and investors do business with one another through the LendingClub platform.
Borrowers apply for loans online by specifying their desired loan amount and reason for the loan. LendingClub conducts a soft inquiry on their credit report and grades borrowers accordingly.
Investors decide who they want to invest in by using LendingClub's grading system. Once the transaction is complete, investors fund the loan and LendingClub distributes the funds accordingly.
In 2016, the company collaborated with two fellow peer-to-peer lending platforms, Prosper and Funding Circle, in creating the Marketplace Lending Association (MLA) to represent the industry.
Borrowers and investors do face some risk, as with any loan. Keep reading for more information.
Everything happens online. There are no face-to-face meetings. Borrowers upload their documents directly to LendingClub and investors transfer their funds from a linked checking account.
LendingClub puts a new spin on lending, which puts both borrowers and investors in control instead of the bank.
How LendingClub Works for Borrowers
Borrowers complete an online application that discloses their personal identifying information, including things like:
- Name
- Address
- Social Security number
- Birthdate
- Employer
- Monthly income
They also choose a loan amount between $1,000 and $40,000 and choose a reason for the loan, such as debt consolidation, home improvement, or a major purchase.
LendingClub then evaluates the application and comes up with a grade based on the individual's credit rating, loan amount, and your other outstanding liabilities. The grades go from A1 (least risky) to E5 (most risky).
After accepting the terms, however, most people will pay a 5% origination fee.
The "grade" LendingClub comes up with for the borrower determines the offers that the platform will provide. The better the loan's grade, the better the interest rate they offer.
They also provide higher loan amounts to borrowers with better loan grades.
LendingClub offers loans with two term choices—36 months or 60 months. All interest rates that they offer are fixed.
How LendingClub Works for Investors
Investors with at least $1,000 to open an account can choose from one of the following account types:
- Individual
- Joint
- Trust
- Corporate
- Custodial
- IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
Once you open an account, you are only required to invest a minimum of $25 per note.
For example, if you opened an account with $1,000, you could invest in as many as 40 notes at $25 each. This helps investors diversify the risk of default.
Investors can choose from two investment methods:
- Automated Investing: LendingClub handles the investments for you based on your desired level of risk and return.
You can accept LendingClub's "Platform Mix," which is a mix of loans from all grades, or create a "Custom Mix," with your own allocations based on your risk tolerance.
- Manual Investing: By doing research on the loans' grade, purpose, interest rate, and borrowers' information, you may be able to make more informed decisions on which loans would be good investments.
LendingClub grades loans from A to E, with sub-grades within each grade of 1-5. A1 is the least risky loan and E5 is the riskiest loan, with all other loans falling somewhere in between.
The grades are meant to help investors build a portfolio that matches their risk tolerance.
Who Benefits the Most from LendingClub?
- Borrowers who wish to consolidate debt: Borrowers with good credit, stable income, and a low debt ratio may qualify for a lower interest rate than what they pay on their credit cards.
The debt consolidation loan may help borrowers get out of debt faster.
- Borrowers who want to make home improvements: Home improvements can be costly, but tapping into home equity isn't always the wisest choice.
If the renovations are less than $40,000, a peer-to-peer loan may provide a good alternative.
- Borrowers who have a large amount of medical bills: Paying off medical bills can feel like a never-ending battle.
Rather than borrowing money from your home or using other collateral, you may be able to use the peer-to-peer unsecured loan to get the debt under control.
Do borrowers get better rates than banks offer?
Lending Club can generally offer a better interest rate than your local bank. Your interest rate will depend on your risk grade. The better your risk grade (A1 is best and E5 is worst), the lower your interest rate will be. Each risk grade has a pre-assigned interest rate. - Investors looking for something other than the stock market to invest in: Investors who have extra cash can help other families or businesses achieve their dreams while still netting a competitive return.
- Investor with net worth: LendingClub is only available to investors who make at least $70,000 per year ($85,000 for California) AND who have at least $70,000 ($85,000 for California) in net worth. This excludes primary home, home furnishes, and automobile.
- Investors with at least $1,000 to open an account: Investors can open an account with as little as $1,000, which is often much less than brokers require.
Pros of Borrowing from LendingClub
- You don't have to pay a prepayment penalty: You can prepay your loan with LendingClub at any point and not pay any fees.
This may help you save on interest costs if you are able to pay the loan off earlier than its original maturity date.
- You can see your options without a hard credit inquiry: LendingClub only performs a "soft inquiry" on your credit report when they when they provide you a loan quote.
A soft inquiry doesn't affect your credit score and no one else will even know you applied for the loan. If you accept the loan, though, a hard credit inquiry is conducted in order to let other lenders know that you did access credit.
- You won't find any hidden fees: LendingClub is fairly transparent with their fees right on their website before you even become a customer. You'll know exactly how much of an origination fee you will pay when you access your rates.
You'll also have detailed information on the terms of the loan before you commit to anything.
Cons of Borrowing from LendingClub
- You'll pay an origination fee for the loan that's deducted right from the loan: Each LendingClub loan comes with an origination fee.
The fee will be approximately 5% for most people. But it can vary based on your loan grade. LendingClub will display the fee when you apply. You will need to approve it before the loan is disbursed to you.
- You'll pay a check processing fee if you pay by check: LendingClub requires borrowers to sign up for automatic withdrawal for their monthly payments. The platform charges $15 for withdrawals by check.
Pros of Investing with LendingClub
- Investors can obtain a hedge against stock market's volatility: A bad market can inevitably affect people's willingness to borrow or lend. But the performance of LendingClub loans are not directly correlated to the stock market.
By diversifying your investment in peer-to-peer lending, you can obtain some protection against the stock market's hiccups.
- Automatic investing for your cash flow: LendingClub reinvests your returns directly if you chose the auto-invest option. You can reinvest into other notes and continue to build your portfolio.
- You can diversify your risk by investing in many loans: As long as you invest a minimum of $25 in each note, you can invest in as many notes as you wish.
You can allocate your investment across notes that vary in grades to achieve your ideal balance of risk and return.
This depends on what you're comparing against. The average net annual return can provide a better return than today's savings & CD rates. But the average long-term stock market return is higher. Of course with any investment (outside of guaranteed bank account rates), there will be risk that you lose money too.
Cons of Investing with LendingClub
- LendingClub charges a fee, which takes away from your proceeds: LendingClub charges investors 1% of each payment they receive.
This fee covers the maintenance of investor accounts, the collection and processing of payments from borrowers, and the distribution of payments net of fees to investors.
- The loans are unsecured: Since the loans are not secured, LendingClub cannot sell borrowers' assets to pay back the investors. Without any collateral, LendingClub must take collection action against the borrower in case of a default.
If LendingClub uses collection actions, it costs investors up to 35% of the amount LendingClub was able to recover.
How It Compares
LendingClub vs Prosper: LendingClub and Prosper have a similar business model, as they are both peer-to-peer lenders.
LendingClub's fees tend to be a little higher for borrowers, but they also have more loan options. Prosper tends to have lower risk loans for investors. LendingClub only requires borrowers to have a 600+ credit score, whereas Prosper requires a 640+ credit score.
LendingClub vs SoFi: Unlike LendingClub, SoFi funds their own loans. They do offer larger loan amounts than LendingClub (up to $100,000) and they don't charge origination fees.
If borrowers lose their jobs, SoFi will get involved immediately and offer to help with job placement.
LendingClub vs LendingTree: Their names may sound similar, but the similarities end there. LendingTree doesn't fund loans. Instead, they match borrowers with lenders who would be a good fit for their situation.
LendingTree does not charge any kind of fee for the service of matching borrowers with lenders. Legitimate lenders may ask for and charge an interest rate lock fee, application fee or appraisal fee once you begin working with a loan officer.
Bottom Line
If you are looking to borrow money and you have decent credit and a low debt ratio, you may be able to bypass the bank and secure money from individual investors.
If you have a decent net worth and are looking for something other than stocks and bonds, you may make a decent return on your investments at LendingClub.
As with any loan or investment, make sure you read the fine print and understand the risks you take. LendingClub is one of the older peer-to-peer lenders with a solid platform in place, but weighing the pros and cons of your situation will help you make a wise choice.
Disclaimer: Opinions expressed here are author's alone. Please support CreditDonkey on our mission to help you make savvy decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.
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