Lending Club is a network of borrowers and investors that seeks to – thanks to lower administrative and infrastructure costs than the traditional banking industry – offer both a high rate of return to those to invest and lower rates to those to borrow. I always find non-traditional banking to be an interesting topic, so I couldn’t pass up the chance to write a bit of a Lending Club review as I explored this peer-to-peer lending option.
How does something like this work? As a lender, you can sign up for a regular investment account or any of the typical IRA options (regular or Roth IRA), but build a diversified portfolio of loans. Just like you would with stocks and bonds, you can manage your risk and return. Since you can diversify across many, many loans – holding as little as $25 of each loan – the risk that any loan default could cause to your portfolio is minimal.
As a borrower, you apply online and receive a rate quote within a few days based on your credit-worthiness (Lending Club assigns your credit a “grade”). Once your loan has been funded by investors, the money is sent to your bank account, and then automatic repayments begin.
Pros for borrowers:
- The rates can be lower than traditional banking.
- Automatic repayments simplify the repayment process, and if you can’t make a payment on time, there’s a 15-day grace period.
- There’s no pre-payment penalty if you decide to pay your loan off early.
- Bad credit doesn’t impact your ability to get a loan as much as with traditional banking.
Cons for borrowers:
- You may have to submit proof of income or employment.
- If you have poor credit, you may still have a high rate (but then you may not qualify for traditional banking loans anyway – this might be a great option for those looking to consolidate high-interest debt into a lower rate private loan). Bad credit loans are an option with Lending Club.
I don’t see many cons for investors at all, except that Lending Club tax reporting is a bit different from the typical banking process. After a bit of research, that seems like it used to be a problem, but is now a simple process: Lending Club issues you a 1099-OID for your profits from your portfolio of notes, which is very similar to the 1099-INT you would receive from a traditional bank, and you treat your profits the same as any other investment in your tax return.
I was also pleased to see that Lending Club has great reviews, including from the BBB, which gives it an A+ rating. There’s always the fear that something like Lending Club will be a scam, but that definitely doesn’t seem to be the case – it’s just an innovative way to invest and borrow at a micro level.
Lending Club sign-up bonuses for investors are pretty great; when you invest $2500, you can get a $100 sign-up bonus. There are also typically promotions for referring friends who join the program, with no minimum investment.
Given that properly diversified Lending Club investment accounts seem pretty safe as well as offering solid returns, I’d definitely consider investing here. And for those who need loans, whether they have a strong credit report or no, peer-to-peer lending may well offer the most competitive rates.
If you’re an investor and you’re interested in learning more about Lending Club or investing please click here.