LendingClub Review: Is It Legit?

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It wasn't too long ago that consumers who needed money 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 gives consumers access to loans from willing investors (other consumers), all while doing business online.

How does it all work? Do borrowers get better rates than banks offer? Do investors make any 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 the borrower 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. 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 the driver's seat.

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 your application and comes up with a rate based on your credit rating, loan amount, and your other outstanding liabilities. The "grade" LendingClub comes up with for the borrower determines the offers that LendingClub will provide. The higher the loan's grade, the better the interest rate LendingClub offers. 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 mix. 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: You can also do the legwork yourself, investing in notes you think are a good risk. But you must handle all of the investing yourself.

LendingClub grades loans from A to G, with sub-grades within each grade of 1-5. A1 is the least risky loan and G5 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, good 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.

• Investors looking for something other than the stock market to invest in: The stock market can be volatile and overwhelming. Investors who want something less risky or that's easier to understand may do well with peer-to-peer lending.

• Investors with at least a $70,000 annual income and at least $70,000 in net worth: LendingClub is only available to investors who make at least $70,000 per year and who have at least $70,000 in net worth (not including any real estate).

• 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 and Cons of Borrowing from LendingClub

Pros:

• 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 supply you with your loan and interest rate options. 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:

• 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 exact fee will vary between 1% and 6%. The amount you pay is based on your loan grade. The fee comes right off the top of the loan amount before it's disbursed to you.

• You'll pay a check processing fee if you pay by check: LendingClub passes along their savings of not having overhead by limiting their fees and charging lower interest rates. As a part of this philosophy, they require borrowers to sign up for automatic withdrawal for their monthly payments. If you choose to pay by check, you'll pay a $7 processing fee each month you write a check.

Pros and Cons of Investing with LendingClub

Pros:

• Investors can avoid the stock market's volatility: LendingClub notes are not tied to the stock market in any way. Investors can have a better handle on the risk they are taking, helping them to understand the potential risk and return they face.

• You can set up automatic investing for your cash flow: Borrowers make monthly payments, which consist of principal and interest. LendingClub deposits your portion directly in your LendingClub account. You can choose to have this cash flow automatically invested in other notes to continually build your portfolio and keep your cash flow going.

• 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. This can help you invest in notes over many different grades, helping you balance out the risk and return.

Cons:

• LendingClub charges a fee, which takes away from your proceeds: LendingClub charges investors 1% of each payment they receive within 15 days of the due date. If a borrower defaults or doesn't pay within 15 days of the due date, investors don't pay LendingClub for that particular payment.

• The loans are unsecured: Borrowers don't have a lot of incentive to make their loan payments if they are having financial trouble. Without any collateral, LendingClub must take collection action against the borrower to try to get the funds. 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 higher risk loans for investors because their credit score requirements aren't as strict as LendingClub's requirements.

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. SoFi also has options for borrowers who lose their job and can't make their payments, including job placement services.

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 doesn't charge fees, but the lenders that fund the loans do have fees.

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.