I know I've made comments about Lending Club before, but I thought I write a blog post about it to pass along some more details because I think it's a totally awesome service that everyone should take a look at, whether as a lender or as a borrower.
I first heard about Lending Club about 6 months back from Kevin Rose on his Google+ page. He made a comment about how he thought it was an amazing company and was asking if any of his followers had used the service. I had never heard of the company but was intrigued by the idea of peer-to-peer lending.
I signed up for an account pretty quickly and started poking around the site, seeing how it worked and in general what it was all about. Within a day or two of setting up an account, a representative from the company gave me a call to see if I needed any help or had any questions that he could answer. I told him I was just curious and would probably start using it in a few weeks. He left me his office number and email and said I could contact him whenever I needed if I had questions.
One of the biggest things I was worried about with peer-to-peer lending was what is the default rate, and what can I do as a lender to ensure I get my money. Luckily, Lending Club has a fantastic page that shows all of the data, for every loan they've given. They have a bunch of pre-built screens where you can analyze the data based off loan purpose, credit score, interest rate, and determine the default rate and average return for each category. In addition, they allow you to download all of the data in an excel file so you can slice and dice anyway that you want. I think it is amazing how open they are with their data and I wish more companies were as transparent as they are. It really give you more confidence in the company when they are that open with you.
After I had convinced myself that it was a good company, I made an initial deposit and starting investing some of our retirement money.
The way the website works is this. A person needing a loan signs up on the Lending Club site and applies for a loan. The loan can be used for anything, but the most common ones you see on the site are debt consolidation, auto purchase, home improvement, small business loans, and wedding expenses. The borrower enters a loan description, talking about what they plan to use the funding for, with as little or as much detail as possible (more on this later...) Their loan then gets posted to the Lending Club site on the investor side for folks like me to see. When I log into the site, it is all anonymous. No names or addresses or anything like that, just city, states, and client numbers. I can then read the stated loan purpose, monthly income, employer, years of employment, credit score, # of delinquencies in the last 2 years, debt to income ratio, and a handful of other items. The site also gives a great search feature where you can filter the list of loans by any of those items as well, so you can tailor the type of person you loan to.
Once you find a loan you are interested in, it give you the ability to ask additional questions, such as "why do you carry such a high credit card balance," or "what are your monthly expenses?" The person then has a chance to reply for everyone to see. For someone doing a credit card consolidation for instance, they will often list all of their credit cards with the current balance, monthly payment, and interest rate. For small business loans people will put there financial information up there, cash flow, projected income, forecasts for the coming quarter/year and lots of other data that helps you make an investment decision.
One thing to be aware of is that you can't actually verify any of this additional information. While Lending Club will verify their income, credit score and all that stuff, the additional information is entered by the borrower and you have to trust them that they are telling the truth.
Once you feel that you're comfortable lending to this individual, you select their loan and say how much money you want to invest, in $25 dollar increments. You can invest as little as $25 or up to $30,000 if you want. Once that individuals loan is fully funded, they receive the money, minus the Lending Club fees and can use the money as they intended. The "notes," as they're called, are added to your portfolio and you can then track them, when the next payment is, what day they paid, if it's late, and so on. You can also track their credit score and each month it will tell you if their score has decreased or increased.
Based off the individuals credit situation, loan amount and purpose, the interest rate being charged varies from as low as 6% up to the mid 20's. As an investor, the strategy is to mix the low interest stuff along with some high interest rate notes in order to spread your risk. By only investing $25 in each note, you spread your risk across more notes and decrease the effect of default by one or more borrowers.
My strategy for investing is fairly conservative. In order to get my money, you have to meet the following requirements: Zero delinquencies in the last 2 years, no more than $15000 in revolving credit outstanding, and a credit score of greater than 720. I then look at each loan and how much money the person makes per month, and how long they've been employed. If you make only $1500 per month and are asking for $30000 for a car, I'm probably going to pass, but if you make $6k, we may have a deal. Now if you make $2500 per month and are asking for $10000 to consolidate credit cards after college, I'm more likely to invest.
It's actually kind of funny reading some of the loan descriptions. Some people have incomplete sentences, lots of misspelled words, and just sound ignorant in general. If you're trying to get people to lend you money, try using spell check and make it sound like you have more than an 5th grade education.
In today's anti-bank culture, Lending Club enables peer to peer lending, cutting out the middle man of great big banks and passing on the profits to other investors while keeping lending rates low for the borrower. Overall I think it's a very cool product that folks should look into as a way of diversifying their investment portfolio.
I first heard about Lending Club about 6 months back from Kevin Rose on his Google+ page. He made a comment about how he thought it was an amazing company and was asking if any of his followers had used the service. I had never heard of the company but was intrigued by the idea of peer-to-peer lending.
I signed up for an account pretty quickly and started poking around the site, seeing how it worked and in general what it was all about. Within a day or two of setting up an account, a representative from the company gave me a call to see if I needed any help or had any questions that he could answer. I told him I was just curious and would probably start using it in a few weeks. He left me his office number and email and said I could contact him whenever I needed if I had questions.
One of the biggest things I was worried about with peer-to-peer lending was what is the default rate, and what can I do as a lender to ensure I get my money. Luckily, Lending Club has a fantastic page that shows all of the data, for every loan they've given. They have a bunch of pre-built screens where you can analyze the data based off loan purpose, credit score, interest rate, and determine the default rate and average return for each category. In addition, they allow you to download all of the data in an excel file so you can slice and dice anyway that you want. I think it is amazing how open they are with their data and I wish more companies were as transparent as they are. It really give you more confidence in the company when they are that open with you.
After I had convinced myself that it was a good company, I made an initial deposit and starting investing some of our retirement money.
The way the website works is this. A person needing a loan signs up on the Lending Club site and applies for a loan. The loan can be used for anything, but the most common ones you see on the site are debt consolidation, auto purchase, home improvement, small business loans, and wedding expenses. The borrower enters a loan description, talking about what they plan to use the funding for, with as little or as much detail as possible (more on this later...) Their loan then gets posted to the Lending Club site on the investor side for folks like me to see. When I log into the site, it is all anonymous. No names or addresses or anything like that, just city, states, and client numbers. I can then read the stated loan purpose, monthly income, employer, years of employment, credit score, # of delinquencies in the last 2 years, debt to income ratio, and a handful of other items. The site also gives a great search feature where you can filter the list of loans by any of those items as well, so you can tailor the type of person you loan to.
Once you find a loan you are interested in, it give you the ability to ask additional questions, such as "why do you carry such a high credit card balance," or "what are your monthly expenses?" The person then has a chance to reply for everyone to see. For someone doing a credit card consolidation for instance, they will often list all of their credit cards with the current balance, monthly payment, and interest rate. For small business loans people will put there financial information up there, cash flow, projected income, forecasts for the coming quarter/year and lots of other data that helps you make an investment decision.
One thing to be aware of is that you can't actually verify any of this additional information. While Lending Club will verify their income, credit score and all that stuff, the additional information is entered by the borrower and you have to trust them that they are telling the truth.
Once you feel that you're comfortable lending to this individual, you select their loan and say how much money you want to invest, in $25 dollar increments. You can invest as little as $25 or up to $30,000 if you want. Once that individuals loan is fully funded, they receive the money, minus the Lending Club fees and can use the money as they intended. The "notes," as they're called, are added to your portfolio and you can then track them, when the next payment is, what day they paid, if it's late, and so on. You can also track their credit score and each month it will tell you if their score has decreased or increased.
Based off the individuals credit situation, loan amount and purpose, the interest rate being charged varies from as low as 6% up to the mid 20's. As an investor, the strategy is to mix the low interest stuff along with some high interest rate notes in order to spread your risk. By only investing $25 in each note, you spread your risk across more notes and decrease the effect of default by one or more borrowers.
My strategy for investing is fairly conservative. In order to get my money, you have to meet the following requirements: Zero delinquencies in the last 2 years, no more than $15000 in revolving credit outstanding, and a credit score of greater than 720. I then look at each loan and how much money the person makes per month, and how long they've been employed. If you make only $1500 per month and are asking for $30000 for a car, I'm probably going to pass, but if you make $6k, we may have a deal. Now if you make $2500 per month and are asking for $10000 to consolidate credit cards after college, I'm more likely to invest.
It's actually kind of funny reading some of the loan descriptions. Some people have incomplete sentences, lots of misspelled words, and just sound ignorant in general. If you're trying to get people to lend you money, try using spell check and make it sound like you have more than an 5th grade education.
In today's anti-bank culture, Lending Club enables peer to peer lending, cutting out the middle man of great big banks and passing on the profits to other investors while keeping lending rates low for the borrower. Overall I think it's a very cool product that folks should look into as a way of diversifying their investment portfolio.
