Have you heard of peer to peer lending, a new way to borrow and lend? Find out how to make money with Lending Club!
Borrowing $10 for lunch from a friend isn’t too complex, but what if you need a larger amount for a project? Well, there’s a new way to borrow and lend online by using what’s called a peer to peer lending network. Rather than applying for a loan at a high rate at your local bank, or running up your credit card bill, you can try a peer to peer lender like Lending Club. On the other hand, if you’d like to try investing through a lending platform, you can become a Lending Club investor.
What Is Lending Club?
One way that Lending Club differs from traditional banks is the way it brings together borrowers and investors. Instead of playing Scrabble with your Facebook friends, you could be connected via social lending. Let’s say Deanna’s looking to expand her knitting business. She could apply to Lending Club for a loan of $12,000. This loan is then made available to investors who are able to view Deanna’s application in the Browse Notes section of the Lending Club site. This loan is then funded by multiple investors who take out notes to signify their investment in the loan.
What kind of loans can you fund here? Besides small business loans, other types of loans include financing for debt consolidation, housing and home improvement, car purchases, education, weddings and big events and other personal loans. Note that these loans are not collateralized because they are considered unsecured loans.
What about the interest rates? Lending Club rates start at 7.89%. You can compare these rates to what you’ll find at banks. For example, if you wanted to get a personal loan in St. Louis, Bankrate.com lists rates of 13.75% at Commerce Bank and 13.23% at the Southwest Bank of St. Louis.
How To Become A Lending Club Borrower
As a borrower, you must be a U.S. citizen or permanent resident; at least 18 years old with a valid Social Security number and a bank account; have a FICO score of at least 660; have a debt-to-income ratio below 25%; and your credit history needs to reflect that you are responsible with credit. You might need to verify your income, credit, or identity, as well. Lending Club does a great job screening the borrowers who they accept in their network.
Approved borrowers can look forward to a three-year fixed rate loan of amounts that range from $1,000 to $25,000. Loans are graded on a scale from A to G. Grade A loans have the lowest risk and are made by prime borrowers. G loans are the riskiest loans in the network, where Lending Club charges borrowers with the highest rates in order to compensate lenders for the extra risk (e.g. the rate for a Grade G loan can reach up to 21%!).
The money for an approved loan should arrive within two weeks. Processing fees vary depending on the loan grade (A through G), ranging from 1.25% to 3.75% of the loan amount. Also, the processing fee is deducted from the loan amount before it’s deposited into your account.
It’s possible to have multiple loans, but you’ll need to make on-time payments on the first loan for six months before you can apply for a second loan.
You’ll need to set up your payments to come out of your bank account automatically; note that there’s a fifteen-day grace period for payments. Now if you miss any payments, be aware that Lending Club may use collection services.
How To Become A Lending Club Investor
If you’re interested in becoming a Lending Club investor, you can apply to open a free, no maintenance fee account. The average net annualized return since June 2007 has been reported as over 9% (the last year, it’s been 9.6% to be exact), a rate that seems more attractive than other investments at this time. Here’s something to chew on: the default rate for Grade A loans has been zero in recent months, although historical default rates look like this.
Who qualifies as a lender? An individual hoping to become a lender needs to have a Social Security number and has to be at least 18 years old. Your family trust, company, or other organization might be able to qualify as a lender as well.
In addition, only residents of certain states are eligible. My state isn’t one of them, but twenty-six states are listed. Income minimums also come into play here, and you have to agree not to invest in notes worth more than 10% of your net worth. While a potential investor’s identity is verified with a credit bureau, Lending Club doesn’t pull your credit file.
Once an investor is approved, they can transfer money in several ways: ACH, wire, check, or even through PayPal. To build their portfolios, investors can set the criteria they want or can check out the Browse Notes section. Once they receive their notes, they’ll be able to accept monthly payments of principal and interest. If an investor decides that they need to move on, they can attempt to sell their notes on the Note Trading Platform where there’s a 1% fee on each transaction.
While investors can check their accounts online at any time, they will also be receiving year end statements. Those with notes that earned taxable income will receive IRS Form 1099.
Overall, peer to peer lending is a promising new way to borrow and lend money at attractive rates. Since Lending Club offers a lending platform with lower costs to account holders, the benefits are passed on to them, with borrowers paying lower rates for their loans and lenders enjoying higher returns for the money they lend. As an investment, lending this way carries its own set of risks, but by choosing the right loans, it is possible to manage those risks, thereby minimizing your potential losses.