LendingClub Review: Is It Good?

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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 can get a loan directly on the site, typically with interest rates lower than a bank. Investors can invest in their peers and earn returns as the loan is paid back.

• Borrowers can apply for personal, business, auto refinancing, or medical loans. You can get a rate online within minutes from a soft credit check. If you accept, the loan will be sent to your bank account within days.

  Borrowers are assigned a risk grade to indicate the likelihood of them paying back the lower. Lower risk grades will get a better interest rate.

• Investors can either manually choose which loans to invest in by reading borrower profiles, or let LendingClub automatically choose for them. You'll receive payments each month as the borrowers pay back their loan.

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.

Who LendingClub is For

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• Borrowers wanting quick loans with a better rate. 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. Loans are generally received in 7 days.

  Some common reasons people need loans are for debt consolidation, home improvements, medical bills, and business costs.

  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 alternative investments. It's good to diversify your investments and not purely rely on the performance of the stock market. LendingClub offers investors a competitive return while helping other families achieve their dreams.

• 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.

How LendingClub Works for Investors

1. Open an account. The minimum investment amount is $1,000 to open an account. You can choose from one of the following account types:
   • Individual
     
   • Joint
     
   • Trust
     
   • Corporate
     
   • Custodial
     
   • IRA (Traditional, Roth, SEP, & SIMPLE)

   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.

2. Choose a strategy. Investors can choose from two investment methods:
   • Automated Investing: LendingClub selects 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 your own "Custom Mix".

   • 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.
   You Should Know
   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.
   

3. Fund account and earn returns. Link a bank account and transfer at least $1,000. You'll automatically get monthly deposits (of principal and interest) back into your linked account as borrowers pay back the loan.

Investing with LendingClub Pros & Cons

Pros:

• Obtain a hedge against stock market's volatility: A bad market can 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 returns: LendingClub reinvests your returns directly if you chose the auto-invest option. You can reinvest into other notes and continue to build your portfolio.

• Diversify 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.

• Folio Investing: This is a trading platform that allows investors to buy and sell notes from each other. This provides some liquidity. There's a way out if you no longer want to be invested.

Cons:

• 1% service fee: 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.

Investing Strategy: How to Minimize Risk

There is risk with any investments. Borrowers may default on their loans. Here are some tips to minimize the risk.

• Diversify across many notes. Don't put all your investments into 1 or 2 loans. It's smarter to put a little bit of money into a lot of different notes. LendingClub claims that 99% of portfolios with over 100 notes see positive returns.

• Pick borrowers from high grades. Borrowers from A, B, C grades are less risky and more likely to pay back their loans.

• Look at reason for the loan. Generally, it's a safer bet to look for borrowers refinancing existing high-interest debt, instead of borrowers taking out new debt.

• Filter borrowers. You can set filters to look for certain qualifications. Look for borrowers with better credit scores, stable employment, verified income, and lowers with lower debt to income ratio (ideally no more than 30%).

How LendingClub Works for Borrowers

Borrowing from LendingClub is fast and done completely online.

1. Complete online application. Fill out an application with some personal details, such as:
   • Name
     
   • Address
     
   • Social Security number
     
   • Birthdate
     
   • Monthly income

   Enter a loan amount (between $1,000 and $40,000 for personal loans) and choose a reason, such as debt consolidation, home improvement, or a major purchase.

2. Get rate offers. LendingClub will then conduct a soft credit check. This does not affect your credit. You'll get your loan offer, including the loan amount, interest rate, APR, fixed monthly payment, and loan term.
   LendingClub comes up with a risk grade for each borrower, based on your's credit rating, loan amount, and other liabilities. The grades go from A1 (least risky) to E5 (most risky).

   The "grade" LendingClub comes up with for the borrower determines your offer. The better the loan's grade, the better the interest rate you'll get.

   They also provide higher loan amounts to borrowers with better loan grades.
   

3. Accept or decline. If you accept the offer, you will agree to the terms and conditions. At this point, LendingClub will run a hard inquiry on your credit (which will impact your score a little and show up on your report).

4. Link bank account and other docs. You'll be asked to link your bank account and upload any supporting documentations (if needed). For example, they may need a copy of your government ID, pay stubs, or tax documents. LendingClub will use these to review your application.

5. Get funds. Once your loan is approved and backed by investors, the money will be deposited into your bank account. The whole process usually takes 7 days (sometimes less and sometimes more).
   What if you want to cancel it? If your loan has already been approved and funded, you have five (5) days to cancel it. Call LendingClub to cancel ASAP. Keep the money in your bank account, and they'll withdraw it within business 5-7 days.
   

6. Making payments. Every month (starting from 30 days after the loan is disbursed), LendingClub will automatically withdraw the monthly payment amount from your linked bank account.

   You can also make an additional payment at any time, or pay off the loan entirely.

Types of Loans Available

LendingClub offers these types of loans:

Personal loans:

• Loan amounts of $1,000 - $40,000
  
• Terms of 36 or 60 months
  
• Can be used for any purpose, such as debt consolidation, home improvement, upcoming wedding, etc.

Business loans:

• Loan amounts of $5,000 - $300,000
  
• Terms of 1 - 5 years
  
• You must have owned the business for at least 1 year
  
• You must have made at least $50,000 in sales last year
  
• You must have at least 20% ownership

Auto refinancing:

• Loan amounts of $5,000 - $55,000
  
• Your current loan must have at least 24 months left
  
• Your car must be less than 10 years old
  
• It must have under 120,000 miles

Medical loans:

• Loan amounts up to $50,000
  
• Terms up to 84 months
  
• Works with thousands of medical providers
  
• 3 payment options: fixed rate, promotional no-interest plan, and promotional rate plan
  Medical loans can be used to fund things like:
  

  • medical and dental procedures
    
  • weight loss surgery
    
  • fertility treatments
    
  • hair loss treatments

  
  This is great because some of these are not covered by regular insurance.
  

Borrowing from LendingClub Pros & Cons

Pros:

• No 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.

• Get rates without a hard credit inquiry: LendingClub only performs a soft inquiry on your credit report 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.
  

• No obligation: If you don't like your rate, there is no obligation to follow through. Just don't accept it and walk away.

• Fixed rate: The interest rate is fixed for the entire loan term, even if you miss payments. (But of course if you do, it'll affect your credit.)

• No hidden fees: LendingClub is fairly transparent with their fees. There is no application fee. And you'll know exactly how much of an origination fee you'll pay when you access your rates.

  You'll also have detailed information on the terms of the loan before you commit to anything.

Cons:

• Origination fee: 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. This fee is deducted right from the loan.

• Check processing fee if paying by check: LendingClub requires borrowers to sign up for automatic withdrawal for their monthly payments. The platform charges $15 for withdrawals by check.

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.