Next up in the person-to-person lending showcase is Lending Club. I recently joined up because they were offering the carrot of $25 sign-on bonus, and I was curious to see how they differentiate themselves from Prosper Lending (review, $25 bonus). As usual, this overview will primarily be from the perspective of a potential lender/investor in these unsecured consumer loans.
LendingClub only allows borrowers with a minimum credit score of 640. Prosper initially had no bottom, but later raised it’s floor to a 520 credit score, which by itself eliminated 45% of their loan listings! So lots of subprime action over at Prosper, but very little over at LendingClub. Some people may disagree on whether this a plus or a minus.
Setting Interest Rates For Loans
With Prosper, prospective lenders bid on loans in an eBay format. Essentially, all the lenders as a whole set their own market rate. But with LendingClub, they do all of it for you.
The mechanism for setting a fair interest rate is complex: it involves a proper assessment of the risk associated with each loan (based on the borrower’s credit history, current situation, income, debt and other factors), an understanding of the volatility associated with each level of risk, and a proper reward for that volatility. We have access to large amounts of information and historical data from the credit bureaus, which puts us in a unique situation to set attractive, fair and equitable interest rates. Rates also depend on the amount of the loan (with larger loans bearing higher rates).
Each loan request made by a borrower is attributed a Lending Club grade ranging from A1 to G5. Here are some sample corresponding loan rates:
Actual Lending Process
You can either use their LendingMatch? service to automatically create a portfolio of loans with your risk criteria (minimum $500), or you can pick out your own specific loans (minimum $25). The loan rates are already set, but you can browse the descriptions to see which ones you “like” for that given rate. All loans are for 3 years with early repayment allowed, just like Prosper. But the $25 per loan minimum is half that of Prosper’s $50.
Once you have invested in a loan, they take 1% of all your monthly payments from the borrower. So if you loan is at 10% annual interest, as I understand it you essentially only keep 9%. (Update: According to their ROI formula, this ends up eating about 0.70% of the return.) If the loan goes into default, there are also collection agency fees which are a percentage of the amount recovered.
Account Opening Process, $25 Free Startup Money
Signing up is relatively straightforward. You pick a screenname (mine is ‘mymoneyblog’), you answer some identity verification questions (no hard credit check), and then you add your bank information for funding (takes a few days). Their bank verification process is a bit backwards in that they actually take a small amount out of your account that you have to verify, as opposed to the usual deposits. I’m guessing they’ll replace it if it’s not verified.
Update: Please see my updated review as well as new lender bonus info here: New Lending Club Review + $25 Bonus
LendingClub is very similar to Prosper in most ways, but it will be interesting to see if it is better to “bid on your own rate” at Prosper or simply go with the pre-calculated rate from LendingClub. In the past, I haven’t been too impressed with the rates that resulted on Prosper. Part of the issue, I believe, is due to rates being lower from people either using Prosper as a way of giving charity with low rates or otherwise being swayed by nice stories. Although here you can still vary your lending decisions based on a borrower’s loan reason, the rate is already predetermined with no emotional bias. In addition, I also like that you can diversify with as little as $25 per loan.
With the better diversification and more uniform lending standards, maybe getting some decent ~10% annual returns will be an easier task with Lending Club. More research will have to be done… Cut me in on some of that credit card issuer action!