Quick Overview of Lending Club

Lending Club is a peer to peer lending platform that enables groups of investors to loan money to individual borrowers. Lending Club offers loans to individuals. They review the documentation submitted by the borrower and assign an interest rate. If the borrower accepts, the loan is offered to investors. Investors can review data about the proposed loan and offer to buy part of the loan note ($25 minimum). When enough investors agree to fund the note, the loan is issued. Lending Club collects the monthly payments and credits the investor’s account with the appropriate amount (after removing a small service fee).

This works for the borrower by giving them access to money in a single place. It works for investors because they can invest small amounts of money in individuals and spread out their risk. The interest rates currently range from 5.32% to 30.99%. The higher interest rates are what attracts investors. Following is a description from Lending Club’s web site.

“Based on each loan application and credit report, every loan is assigned a grade ranging from A1 to G5 with a corresponding interest rate. Each loan grade and its corresponding interest rate is displayed below.”

There are 7 grades (from A to G) with 5 sub-grades each. The 5.32% is assigned to A1 loans and the 30.99% to G5 loans.

While the rates appear attractive to investors, the risk lies in the number of loans charged off because the borrower defaults on the payments.  Lending Club provides a wealth of statistics about previous loans. These include default rates by loan grade and the resulting effective interest rates observed by investors. For example, Grade A loans currently have a default rate of 7.34% lowering their effective return rate to 4.95%. Grade G loans have a much higher interest rate and default rate. Currently the default rate is 24.03% and the effective interest rate is 5.23%.

I opened an IRA account utilizing Lending Club in 2015. I’ll begin documenting my experiences in the next post. Follow me on Twitter, @billlanke, to be notified when the post is available.