It might be one of the big boys on the peer-to-peer scene, but how does LendingClub work? Is it safe? Is it a good investment? It’s always good to ask these questions before diving into an investment opportunity. There’s also one other very important area to consider when evaluating P2P companies like Lending Club: risk. Today we’re going to deliver you the answers you’re looking for and we’ll find out whether Lending Club is legit for investors or not.
LendingClub is one of the first peer-to-peer lending platforms to materialize in the US. Since then, it has become symbolic of the industry. But is LendingClub the best choice for you? Let’s dive in on our LendingClub review for investors.
How much money can I make as an investor on LendingClub?
Let’s cut right to the chase. The average return of investment across all grades of loans you can invest in on LendingClub is just under 6%.
The best interest rates tend to be found in category C and D loans, which average almost 6.5%. You can get higher interest from riskier loans to people with low credit ratings. The average interest rate charged for these is around 26%. However, due to losses incurred by defaults, investors tend to average out with a little over 3.5% interest through these.
This right here is the figure that makes many investors ask if LendingClub is truly a good idea for investors.
Some background on LendingClub
LendingClub is a peer-to-peer (p2p) loan company based in San Francisco operating since 2007. Its platform allows investors to finance unsecured loans to individuals and businesses looking for a line of credit, for a period of either 36 to 60 months.
How does LendingClub work?
LendingClub lets you lend money to borrowers in the form of loans. They use the FICO system and require a minimum credit score of 660 to qualify for a loan. Borrowers are given one of fifteen grades, ranging from A1 to C5, which reflects their credit profile and the terms of their loan. As an investor, you use these grades to decide which grade of risk on LendingClub you’re comfortable lending to. A1 grades are the safest bet but only return 6.46%, whereas C5 is the riskiest and comes in at 17.74%.
How does LendingClub work for investors?
To start investing, you’ll need to create an account. All users of LendingClub must:
- be at least 18
- have a valid social security number
- have their identity verified.
You’ll also have to deposit a minimum of $1,000 to start investing in a normal account, or $5,500 for one of their IRA accounts. Long lock-in periods and the high entry price can make it difficult for new investors to test the water and see if LendingClub is safe.
To qualify as a LendingClub investor you must also live in a state that permits you to invest. This means that if you live in Ohio, you’re out, and if you live in Florida, New York, Pennsylvania, Alaska, or North Carolina, you can only invest through the secondary market.
You may read elsewhere that there are income and net worth requirements for LendingClub, but that isn’t the case anymore.
How does LendingClub work on the borrower end?
LendingClub provides loans for both individuals and businesses, but we’ll be focusing on the former here. For personal loans, borrowers can choose either a three or 5-year option for loans between $1,000 and $40,000.
As previously mentioned, LendingClub uses the FICO system to determine a borrower’s credit score. Loan rates are between 10.68%–35.89% APR.
One downside for borrowers here is the loan origination fee, which comes in at 2–6%. LendingClub takes that out of the sum they give borrowers, so if they were approved for a $40,000 loan, they’d only receive $39,200 at best (and still be on the hook for the full amount).
On the bright side, there are no prepayment penalties, so if borrowers want to pay their loan early and save themselves the interest payments, they can. LendingClub also only offers fixed-rate loans, so borrower payback is consistent.
So is LendingClub a good investment?
What makes an investment good is somewhat subjective, but it’s always going to be tied to how you view risk versus reward.
As I mentioned in the beginning, investing in LendingClub, like all investments, comes with a degree of risk. Your investments (called ‘Notes’ on their platform) are neither FDIC insured, nor guaranteed — meaning that if the borrower defaults on the loan, there is a high chance you just lose your money.
LendingClub’s annual rate of default is between 6 and 7%, across all the different borrowing grades. The lower the grade, the worse the credit score, and the higher the risk.
A further risk at LendingClub is that they charge you even if they recover some of your defaulted money. They charge their investors for any efforts made by the platform to recover their principal.
This is not cheap. If there is litigation involved, you may be charged up to 40% of the amount recovered. If they manage to get your money back through a non-litigious route, it’ll still be up to 30%. Beyond that, LendingClub states that there may be other fees involved in the recovery, but don’t name a number
The final point to consider before you invest in LendingClub is that more than two-thirds of borrowers are using the company to either refinance their existing loans or pay off credit cards. This might be a smart move, where the borrower is restructuring their debt to make it more manageable, or a desperate attempt to pursue a new line of credit.
Should I invest in LendingClub?
As you can see, LendingClub has its pluses and minuses. The platform is well-established and has a long history of providing loans for many different people and businesses. If all goes well with your investment, you can expect an average return just shy of 6%. That’s a lot higher than a CD (certificate of deposit) account at the moment.
However, ‘is LendingClub safe?’. Well, at the moment, the average delinquency rate on all loans from commercial banks in the US is around 1.5%. This is a lot lower than the 6–7% figure coming from LendingClub. When you combine this with other factors like that your investment isn’t guaranteed and if they do have to recover the funds, they’ll take up to a 30–40% slice for the trouble, you’d be pushed to say that it’s the most attractive option out there.
What alternatives are there to LendingClub?
Frankly speaking, Lending Club is just one company and there are masses of different investment opportunities to be had out there. If you’re interested in peer-to-peer loans specifically, then you should be looking at companies that will have your back if things don’t go to plan.
It always pays to do your research, but we would recommend looking at our peer to peer lending platform. At Constant, we offer a very similar service to Lending Club except our borrowers are completely backed by collateral. If they default, we don’t charge you for your loss. Their collateral is sold immediately to pay you back and we offer investors rates of up to 7.5% APR over just 6 months. So if P2P lending has piqued your interest but you’re scared by the defaults.
Come check us out and thanks for reading our LendingClub investor review.