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LendingClub Review: Another Peer to Peer Lending Marketplace

LendingClub [3] is another player in the growing peer to peer lending marketplace and one that I signed up with despite my reservations with the whole peer to peer lending craze [4]. I joined because online savings account [5] interest rates have fallen sharply in recent weeks because the Fed lowered the target funds rate so quickly. With the stock market in turmoil and other investment options less attractive, the idea of peer to peer lending has gotten more appealing.

The idea behind peer to peer lending is that you lend a little bit of money across numerous loans. By diversifying, you lower the risk. If one loan defaults, you lose only a small amount. As a relatively risk averse person, I don’t like any loans defaulting but you accept a higher rate of return for that risk. When some default, the rate of returns lowers and you get somewhere closer to market rates. It’s the same strategy banks use, except “little” for them is many hundred thousands of dollars!

LendingClub is pretty much the only game in town as Prosper just entered a quiet period. LendingClub just exited a quiet period because they had to register with the SEC since the loans are considered securities. Prosper may never leave the quiet period but LendingClub has, so you won’t have to worry about that in the future. One nice benefit of the loans being registered as securities is that you can sell your interest in the secondary market!

Account Signup

The signup process was easy and I had an account up and running within minutes. Setting up my account so I could begin lending was also trivial, a four step process of entering my personal information, bank information, and some association information (school I went to, employer, etc. but these were optional). The account process proceeds with the typical bank account verification process of small deposits.

Default Rates

It appears that LendingClub’s default rate and other lending stats are rosier than the likes of Prosper and others, but that could be because they are much newer to the game. Techcrunch did a brief writeup on LendingClub [6] and noted the same thing about the default rates, expecting them to rest close to what Prosper was seeing. Ultimately it appears that both should have similar statistics with regard to late payments, defaults, and other lending related statistics.

One thing that does give me a little faith in their system is the borrower requirements:

Lending Club only accepts borrower members who are U.S. residents and whose FICO score is at least 660. Borrower members must also meet additional credit criteria:

  • a debt-to-income ratio (excluding mortgage) below 25%, as calculated by Lending Club based on (i) the borrower member’s debt reported by a consumer reporting agency and (ii) the income reported by the borrower member, which is not verified unless we display an icon in the loan listing indicating otherwise;
  • a credit report without any current delinquencies, recent bankruptcy, collections or open tax liens;
  • at least four accounts in the credit report, of which at least three are currently open;
  • no more than 10 credit inquiries in the past six months;
  • utilization of credit limit not exceeding 100%; and
  • a minimum credit history of 12 months.

That already raises the bar.

Next Steps

The next step is to fund the account and start reading up on the loans!