Next up in the person-to-person lending showcase is Lending Club. I recently joined up because they were offering the carrot of $25 sign-on bonus, and I was curious to see how they differentiate themselves from Prosper Lending (review, $25 bonus). As usual, this overview will primarily be from the perspective of a potential lender/investor in these unsecured consumer loans.
Lending Standards
LendingClub only allows borrowers with a minimum credit score of 640. Prosper initially had no bottom, but later raised it’s floor to a 520 credit score, which by itself eliminated 45% of their loan listings! So lots of subprime action over at Prosper, but very little over at LendingClub. Some people may disagree on whether this a plus or a minus.
Setting Interest Rates For Loans
With Prosper, prospective lenders bid on loans in an eBay format. Essentially, all the lenders as a whole set their own market rate. But with LendingClub, they do all of it for you.
The mechanism for setting a fair interest rate is complex: it involves a proper assessment of the risk associated with each loan (based on the borrower’s credit history, current situation, income, debt and other factors), an understanding of the volatility associated with each level of risk, and a proper reward for that volatility. We have access to large amounts of information and historical data from the credit bureaus, which puts us in a unique situation to set attractive, fair and equitable interest rates. Rates also depend on the amount of the loan (with larger loans bearing higher rates).
Each loan request made by a borrower is attributed a Lending Club grade ranging from A1 to G5. Here are some sample corresponding loan rates:
Actual Lending Process
You can either use their LendingMatch? service to automatically create a portfolio of loans with your risk criteria (minimum $500), or you can pick out your own specific loans (minimum $25). The loan rates are already set, but you can browse the descriptions to see which ones you “like” for that given rate. All loans are for 3 years with early repayment allowed, just like Prosper. But the $25 per loan minimum is half that of Prosper’s $50.
Lender Fees
Once you have invested in a loan, they take 1% of all your monthly payments from the borrower. So if you loan is at 10% annual interest, as I understand it you essentially only keep 9%. (Update: According to their ROI formula, this ends up eating about 0.70% of the return.) If the loan goes into default, there are also collection agency fees which are a percentage of the amount recovered.
Account Opening Process, $25 Free Startup Money
Signing up is relatively straightforward. You pick a screenname (mine is ‘mymoneyblog’), you answer some identity verification questions (no hard credit check), and then you add your bank information for funding (takes a few days). Their bank verification process is a bit backwards in that they actually take a small amount out of your account that you have to verify, as opposed to the usual deposits. I’m guessing they’ll replace it if it’s not verified.
Update: Please see my updated review as well as new lender bonus info here: New Lending Club Review + $25 Bonus
Conclusion
LendingClub is very similar to Prosper in most ways, but it will be interesting to see if it is better to “bid on your own rate” at Prosper or simply go with the pre-calculated rate from LendingClub. In the past, I haven’t been too impressed with the rates that resulted on Prosper. Part of the issue, I believe, is due to rates being lower from people either using Prosper as a way of giving charity with low rates or otherwise being swayed by nice stories. Although here you can still vary your lending decisions based on a borrower’s loan reason, the rate is already predetermined with no emotional bias. In addition, I also like that you can diversify with as little as $25 per loan.
With the better diversification and more uniform lending standards, maybe getting some decent ~10% annual returns will be an easier task with Lending Club. More research will have to be done… Cut me in on some of that credit card issuer action!
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Mymoneyblog:
Thanks for the article. I enjoyed reading it this morning.
A couple of comments:
1. Currently, our site is yielding an average return of 12%+. So if you diversify your loan portfolio sufficiently, the 10% return you hope to get should not be hard to achieve.
2. The 1% service fee you mention is not a straight subtraction from your return as you mentioned. Because it is 1% of any payments you get back, when you express in an annual interest rate, as a percentage of lenders estimated ROI, it becomes less than 1%. You can see these numbers on our statistics page here:
http://www.lendingclub.com/info/statistics.action
Would love to hear more about your experience with Lending Club and any ideas to improve the product.
Better Rates. Together.
Rob Garcia
Director, Web Production
Lending Club
Well, I signed up…looks like I have to verify my bank account before I can fund it, but hopefully once that is done we will both get a bonus.
I was just checking this out the other day…I like the idea of Prosper but I don’t have the time to play the bidding game. Hopefully this will give some good returns.
Signed up using your link. Now I’m wasting time browsing the listings… These sites are probably too new for anybody to have much experience but besides the letter grade ratings what are some things to look out for in potential borrowers?
I’ve tried to dabble in Prosper and the other clones, but I just find it difficult to see them as a workable part of my investment portfolio. The significant background research and risk security involved doesn’t really justify the uneasy returns.
I think people should view it as more of a hobby and as a goodwill gesture for those in need of a temporary loan than anything else.
-Raymond
just signed up using your link
Rob – Thanks for dropping by. I’m definitely impressed by your current low default rates, although you guys are pretty new. If you can keep up 12% returns after defaults and fees, I’m sure LendingClub will be very successful 🙂
I figured the 1% would be a little different after all the ROI/IRR math was done.
Alan – I agree about not wanting spend too much time browsing and more time investing. I have two Prosper loans right now, and it took a while to find them!
Jon – Yep you need to verify the account first before the bonus or funding additional amounts.
Looks interesting but I am sticking with my employers stock purchase plan right now. One can’t beat a guaranteed 15 percent return on investment with the possibility for much more.
If I ever have more to play with I will check this out though…
I agree with Money Blue Book about these loans. I’d rather give some money to charity and spend a couple of bucks on lottery tickets. Possibly making 10% on say 2000 bucks (which is the most I would invest in this kind of stuff) doesn’t seem to be worth the headaches and worry. That kind of stuff could turn into a full-time job. Just managing my own finances takes me several hours a week (I worry and check up on everything constantly and still mess up!). I definitely wouldn’t want another headache!
Thanks for the coverage, and we now have you linked in our “In The News” section on the blog and to be coming soon to the main www site.
Rex Dixon
Director of Social Media Content
Lending Club
Does the money in your account get any interest when it has not yet funded a loan? I see this complaint fairly often about Prosper.
Raymond, mimi – I personally think there is potential in cutting out the middleman and p2p stuff like eBay. I agree that the time spent can be high, which why the portfolio matching stuff is intriguing to me.
I also like my charity separate from my investments, unless I’m donating appreciated stock 🙂
Brad – I don’t think it does. I also wish it earned some interest in some sort of sweep account, but it might take a large amount in combined idle balances for them to set something like that up like the PayPal money market fund.
I think that is the biggest negative for me that when my money isn’t funded, my money is not accruing interest. I feel that if a competitor to Prosper or Lending Club that incorporates that “sweeps account.” I think that would intice more potential lendes.
Is anyone besides me reluctant to give out your bank info for “verification”?
Or do you just use an account with a small balance such as the ones opened for the $100 citi or $25 etrade promos?
Another alternative to Prosper is http://www.kiva.org. The only “negative” is that you do not earn any sort of interest on the money you lend. Majority of the businesses in need are businesses in 3rd world countries
That’s true, I do participate in Kiva, but to me that’s 100% charity. Which reminds me, I should check in on my Kiva loans…
Jonathan,
Does lendingclub show the extended credit details like Prosper does? (# of current delinquent accounts, $amount delinquent, # delinquent in the last 7 yrs, # of public records, # of inquiries, etc)
I find this info invaluable in picking loans (hobby) on Prosper.
Also, FYI, Prosper has Portfolio Plans now, where you pick a level of risk and the plan will select loans for you. (I still prefer to pick my own though.)
I am also worried about the interest lost while your money is doing nothing. They should really set up a MM account.
What is the average time to fund a loan and start lending? If its just a couple days, I guess it wouldn’t matter but reading from the site suggest it could take up to 2 weeks for borrowers to accept.
Well, my account finally verified. I’m going to fund it and see if the bonus shows up or not. Anyone have any luck yet?
signed up and verified the but I don’t see $25 bonus
I used Jonathan’s link, verified the bank account, balance is 0.00!
I signed up as well using your link, I didn’t get my $25 bonus either after verifying my bank account
Hi everyone
$25 bonus will be hitting your accounts tonight. Check again tomorrow morning.
Happy lending
Rob
Lending Club
Still no bonus for me.
I am also reluctant to give out my social security number and bank account for verification.
no bonus here either
Do you know if we have to keep the bonus money in the account or can we just take it out?
No bonus. The funds I added are now credited to the account after a sizable delay. The funds left my bank account on Tuesday and they were finally credited on LC today…so whats the deal with that, are they collecting 2 days of interest on my money?
So far, I’m not impressed.
Got my bonus $25 posted today. Thanks!
LendingClub rocks! I get a $2K loan over there and the application process was quick and funding was easy (took just a couple of days). I think they will be some real competition for Prosper.
Account verified 2 days ago but no bonus.
“The Processing Fee for lenders is one percent (1%) of all amounts paid by the borrowers to the lenders.”
Hmm.. with a 1% fee for every payment isn’t the rate of return less than rate – 1%?
I lend $100 at a rate of 10%, the borrower pays back $110. LC takes back 1% of $110 = $1.1, so I net $108.9. My return is now 8.9%
Am I missing something?
@Mel:
Mel, it is actually trickier than that because of amortization. If you want to figure it out yourself, you can use the RATE function in excel. Basically, the 1% on every cash flow comes out to a .6-.8% impact on the interest rate. Here is how to calculate it:
=RATE(36,monthly_payment*0.99,amount_loaned)*12-quoted rate
So, for someone lending $100 at 10%, you get a monthly payment of $3.23 (another formula – Excel is fun!), so this comes to
=RATE(36,-3.23*0.99,100)*12-0.1, which equals
-0.6198%, meaning you would be getting a net of 0.62% less after fees due to the 1% of every payment. Your net interest rate would then be 9.38%.
Easy, right? 🙂
Thanks for participating!
All those who signed up through this article should have their $25 signing bonus in their accounts by now.
I also see most of you have already gone ahead and lent the money out and will soon start to earn interest.
Feel free to ping me or provide any feedback on your lending (or borrowing) experience through feedback@lendingclub.com
Better Rates. Together.
Rob
Lending Club
I just signed up yesterday, but no bonus.
@MK
Bonus does not automatically appear on your account.
We run the bonus deposits weekly. You’ll see it on your account within the next 4-5 business days.
Rob
from Lending Club
Patrick, thanks for your explanation. Makes sense now 🙂
Hi mymoneyblog,
I love reading your daily posts and have found it extremely informative. Thanks a lot for your great work.
I used your referral link to created a lending club account on Monday (12/24/2007) and loaded $25 into the account today/Thursday (12/27/2007). I am waiting for my $25 bonus and I think you should receive the $25 bonus very soon.
One question: if I load $1000 into my lending club account but don’t lend the whole amount (e.g., only lend $25), am I going to get a $50 bonus?
Thanks,
Andy
I used your link to sign up 🙂 interesting to see what prosper will do now that competition is kicking it up a notch. hopefully lower fees back to 0.5 percent or lower – they already lowered AA lending fees to zero.
I signed up on 2/5, and my account has already been funded, but no bonus. My account has been verified since 2/7 too.
Matt,
They were a little bit slow to post bonus into your account. Mine was delayed for almost a week in late Dec/early Jan. But I am sure they will deliver their offers. You can send them an email to inquire.
Ever since I signed into lendingclub, I spent a great deal amount of time to read all postings, watch daily requests, filter candidates and so far make two successful bids only (one bid already got paid in 1st pmt date and 2nd waiting). I could no longer afford that amount of time just to manage my $200 portfolios here.
Therefore, I am wondering whether there are people here watching lendingclub.com closely, who are willing to share info with me privately or publicly here on good candidates so that we, as lenders, can save time to bid together.
Thanks,
andy
@Matt:
Bonuses are deposited in user’s lending accounts on Fridays or Mondays. Please check again. You should have yours by now.
Feel free to post feedback on your lending experience or send it to me via feedback@lendingclub.com
@Andy:
Thanks for your feedback. Lending Club is all about simplification of your lending experience. Stay tuned. I have a few new features coming that will make it so much easier and less time consuming to lend your money out.
Cheers
Rob from Lending Club
Director, Web Production
Hi – Appreciate your research and happy to split the $50 with you. Just signing up wtih LC now, I like their pre-screen process. Hell, I’m loaning or giving away money to my family at $0 interest now … might as well make a little money at it. Figure I can sell a few bottom-feeding stocks and put that money to work for a change each year after the maximum capital gains deduction.
Question – if I’m already signed up as a borrower (signed up previously to take advantage of the free “credit score”), and I sign up via the SAME ACCOUNT to lend, do I still get the $25 bonus, or do I have to create a new account?
Hi, I signed up for lending club. I like the fact you can fund your money with Paypal, which means I can take up a 0% APR credit card to borrow money for free, while lending it out to LC for profit.
Thanks,
Justin
Justin,
Did Paypal charge you the 4.95% to withdraw money from your credit card? If not, how can you achieve that? If so, FYI, obopay.com only charges 2.5%.
Rob,
I funded two A1 loans in Jan and they are current so far. I believe A loans, at least A1 loans, are pretty safe.
I began to try B loan. However, during the past weeks, three bids (2 B loans and 1 A loan) were cancelled. LC’s notification emails gave 3 possible reasons but they are not helpful.
I hope LC could specify clearly one or more of the three reasons that caused cancellation. It would help me to decide whether I could bid for a relisted loan. Currently, I have to avoid all relisted loans.
Thanks,
Andy
Andy,
Glad to hear your 2 loans are current.
We only have 20 late loans out of 1446 issued, and we are actively working on those to get them back on track.
Great feedback!
The reason why you are getting some loans canceled vary, but remember that borrowers cannot cancel their loan app and relist. The only reason why a loan is removed from the site is because Lending Club’s credit team deemed the loan request riskier than stated or the borrower failed to comply with verification of information we requested (income, tax forms, pay stubs, etc).
We do this to protect our Lenders, and we never let a loan go too long if the loan application is not in good standing. These loans cannot relist unless they provide the information we asked for.
The other case for a relisted loan is the borrower not getting fully funded the first time around, and s/he rather give it another go than take the partial amount.
We will be adding the primary reason a loan was removed by Lending Club to the site, so when you log in, you can see the details.
Hope this clarifies the process,
Rob from Lending Club
Rob,
Thanks for quick reply and clear clarification.
First, I always appreciate that LC does the due diligence to review and, if needed, cancel a loan. I totally agree it helps and protects us. Going forward, if/after you can state the primary reason for a loan cancellation, I would be confident in funding a relisted loan. That means, I can make my judgement on a relisted loan based on the reason you provided.
On the other hand, I am also glad to read and conclude that a relisted loan is as risky/safe as an original loan from LC’s perspective. I meant, LC applies the same criteria (if not more strict) to a relisted loan. If LC determines it’s risky (for whatever reasons), it can’t be relisted. That means, I can treat equally both original and relisted loans.
Thanks,
Andy
i signed up with lending club but i haven’t seen the $25 bonus.
jasmine – Did you link up your bank account?
Yes. that’s how I verified my account.
Cool, just making sure. As Rob from LendingClub stated above, you may need to wait as they have a new bonus posting schedule.
“Bonuses are deposited in user’s lending accounts on Fridays or Mondays.”
@jasmine:
Please check again, as bonuses were paid already for people signing up until 04-01.
If it is not in your account, send me an email directly: rob (at) lendingclub.com
Happy Lending!
Rob from Lending Club
It looks like they don’t accept new lender registration anymore!
does anyone knowwhat the deal is with lending club not accepting new pple or commitments?
Scott,
LC’s websit mentioned it planned to issue promissory notes. You/We have to wait … I have been withdrawing the cash from LC …
Andy
They are registering with the SEC for some new securities licenses. All I can say is that they aren’t shutting down, but if you have idle cash as a lender you might withdraw it to earn some interest.
This looks really interesting, but I’m wary of these types of things. It’ll take lots of research, and maybe a very small initial investment if it checks out, and really is as good as it sounds.
Any information on how much of the interest earned is taxable?
Thanks RW
I asked the same question when I joined LC last year and I kinda remembered their website or somewhere states that LC will file taxable income form for the interest earned. It is one of my major concerns, too.
I guess we will see whether LC does issue it by early Feb.
Why are the notes only offerd in certain states?? This is the message I got when I tried to invest.
Feedback Investment Qualification
Before you Invest
Before you start investing, please verify that you satisfy the State condition below. If you do not satisfy the State condition, you may not buy Notes from Lending Club. You may, however, buy Notes directly from other members on the Note Trading Platform.
State Condition
The Notes are presently being offered and sold solely to residents of the states of California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Minnesota, Mississippi, Montana, New Hampshire, Nevada, New York, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin, West Virginia, and Wyoming, and are not presently being offered or sold to residents of any other state, the District of Columbia, any other territory or possession of the United States, or any foreign country.