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Now that LendingClub has finished their SEC filing and is one of the only P2P lenders currently operating (everyone else either shut down or is in an SEC quiet period), let’s take a look at some of the changes. You are now officially “investing” in notes offered by LendingClub, as opposed to directly “lending” to private individuals. The bad news is that this also means some new restrictions that have been added. The good news that now these notes can be traded on a secondary market, offering liquidity for loans that used to be a 3-year commitment.

Borrowers

I have always found borrowing from LendingClub to be very straightforward to borrowers. You get a 3-year, unsecured loan at a fixed rate. If you qualify (see below), you simply submit an free application and they tell you what rate you get. Then you can simply compare this rate with your other options – credit cards, home equity loans, whatever – before deciding if you want to attempt a listing. However, which the current credit conditions, remember that credit cards can only guarantee 6-12 months of a low rate, and home equity loans have gotten a lot more strict (and also put your house at risk).

Eligibility. However, be aware LC is only seeking “prime” borrowers. Borrowers must be a US citizen or permanent resident, and at least 18 years old with a valid bank account and a valid Social Security number. You can’t be from the following 8 States: Idaho, Indiana, Iowa, Maine, Nebraska, North Carolina, North Dakota, and Tennessee. You have to have good-to-excellent credit in addition to satisfying additional requirements. From their FAQ:

In order to qualify for listing a loan request, you will need a FICO score of at least 660 with a debt-to-income ratio (excluding mortgage) below 25%. In addition, your credit history must show that you are a responsible borrower:

* at least 1 year of credit history, showing no current delinquencies, recent bankruptcies (7 years), open tax liens, charge-offs or collections account in the past 12 months,
* no more than 10 inquiries on your credit report in the last 6 months,
* a revolving credit utilization of less than 100%, and
* more than 3 accounts in your credit report, of which more than 2 are currently open.

Put together, these minimums are actually relatively strict. However, as a lender I would say that crafting a convincing loan listing showing your income, expenses, and exactly how you plan to pay off the loan is still very critical to get your loan funded.

Fees. Borrowers pay an upfront fee that is a percentage of the loan amount. The fee ranges from 0.75% to 3.50% based on the credit grade given.

Lenders

The interest rates charged by LendingClub currently vary from 7.37% to 20.11% (6.69 to 19.37% after fees) based on the credit grade assigned by LC after reviewing the borrower’s overall profile. There is no eBay-like bidding here. You see the rate, you read the listing and credit grade, and you decide either to fund it or not. Remember the minimum requirements above. The rates are higher than before, probably to counter potentially higher future defaults and to match increasing rates in the overall market.

Default Rates. You can see all the stats on existing LendingClub loans here. Up to this point, I have only investing in top-grade “A” loans. Out of 332 A loans, only 2 have been late since they started in June 2007. That’s a 0.6% late rate, with no defaults yet. Across all their loans, they have had a default rate of less than 3%. This includes a few loans that were of slightly lower quality than their current minimum requirements.

Looking at the overall late and default rates as compared to credit grades, it would appear the “sweet spot” is currently B and C grade loans. However, I personally still like minimal risk and plan on sticking mainly to A grade loans.

Finally, it is interesting to note that out of the $23 million of issued loans, there was also $199 million of “declined” loans. I’m not sure if this is due to rejection by LendingClub, or simply prospective lenders deciding that the loans were unsatisfactory. It also could be due to a lack of funds by lenders, so only the “best” loans were funded.

Eligibility. After the SEC filing, you must now meet certain minimum income and net worth requirements. You must also be a resident of on these 25 states (new states are added as they are approved):

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.

Liquidity. All loans you take on can now be sold on a secondary market at FOLIOfn, so if you need your money back it is possible. As an existing lender, I had to fill out some additional information, but my application was approved in a day and I can now view a listing of loans that people want to sell. FOLIOfn charges the seller a 1% trading fee.

Fees. Lenders pay a 1% service charge on all interest payments. Due to reasons that I haven’t worked out, this reduces the APR by less than 1%.

My Experience

In general, my use of LendingClub has been limited to some experimental investing. I like the idea and I like trying out new financial services, but as I mentioned, I’m also very risk-averse. My loans have to have an A-grade (I choose them myself and don’t use LendingMatch). Also, they have to outline a clear plan for repayment. My main problem so far is a lack of such high quality loans. I’ve only funded about 8 loans so far, but the volume seems to be picking up. I’ve been earning about 7% (8% minus fees) with no lates or defaults. The movement of money back and forth between my bank is smooth, just like with an online bank. I only wish there was an “instant funding” feature, as I don’t like to keep idle cash sitting there, but I like the ability to fund attractive loans quickly before they fill up.

In fact, although I usually don’t care about this sort of thing, yesterday I used their loan map mashup and actually found a loan by a local store that I have shopped at before. After reading it over, I am now moving some funds in to help fund that loan. Should be interesting.

How are your experiences with Lending Club?

Wow, here’s an interesting promotion from person-to-person lender Lending Club. They are currently offering a 5% cash bonus if you lend $5,000 or more by February 3, 2008 for both new and existing lenders on top of their $25/$50 sign-up bonus. Here are the details from their announcement:

You will qualify for the bonus by lending $5,000 or more to borrowers between December 14th, 2007 and February 3rd, 2008 (at 11:59PM Pacific time). Your bonus will be 5% of the amount you lend.

For example, if you lend $7,500 Lending Club will credit your Lending Club account with $7,500 * 5% or $375. Funds count as lent once a portfolio (or portfolios) is submitted during the aforementioned eligibility period. The loans do not have to be issued by February 3rd to qualify.

We will notify you of the amount of your bonus by the end of day, Friday, February 8th, 2008, and your account will be credited with your lending bonus by Friday, February 15th, 2008. No special sign-up or tracking is required ? we will run reports on the system to determine bonuses. Feel free to email us at lender.offer@lendingclub.com to ask about your bonus.

[…] Lenders can each earn a maximum payout of $20,000 (if they lend $400,000).

A 5% bonus definitely grabbed my interest again after making a few initial test loans. If you haven’t already, check out my LendingClub review to learn more about their setup for person-to-person lending.

At first I got all excited since banks are only paying 5% interest themselves, but then I remembered that LendingClub loans are spread out over 3 years, so it’s not like you are getting a 5% interest bonus each year (that would be sweet!). Instead, 5% spread out over 3 years is like adding roughly an additional 1.65% annual interest to the existing rate set by LendingClub. (Actually, since the 5% is given upfront, it would actually boost your returns even more.) But remember, these are unsecured loans similar to credit cards, and there is a risk of principal loss. Is that cushion worth putting in $5,000 in?

So far all of my existing loans with LendingClub are rated a safe A3-A4 (7.75 to 8.07%). Given that their minimum allowable credit score is 640, and their credit grades run all the way from A1, A2, A3 to G3, G4, G5, I would estimate that such people have credit scores well over 700 as well as other positive criteria like a reasonable debt-to-income ratio. Therefore, I would love so see my return increase to a 9.4 to 10.72% return on high-quality loans. With $5,000 available to spread across 200 loans ($25 each), that would also smooth out the default risk from a few bad loans.

Lending $5,000 for 3 years is a lot of money, but this is the best person-to-person lending deal I’ve found. Hmm… very tempting!

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:
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