An Interview with LendingClub

As you likely know, LendingClub has been a regular sponsor here at Free Money Finance. We've already discussed whether or not peer-to-peer lending was worth the effort/risk, but there were still some questions I had about it after the last post. As such, I asked the guys at LendingClub a few questions about their service and this type of lending. Here's my interview with Rob Garcia, Director of Product Strategy at Lending Club.

Tell us about LendingClub.  What's the purpose of the company?

Lending Club is a social lending community made up of borrower and lender members.  Borrowers are good credit folks who need unsecured personal loans while Lenders fund these loans and in return receive payments (principal and interest) from the borrowers.  In essence, we facilitate lending among our members, creating a situation where both parties benefit: Borrowers pay lower interest rate than they would on their credit cards or similar unsecure loans, while Lenders receive the interest the borrowers pay at higher rates than other investment opportunities of comparable risk (stated interest rates of 6.69%-19.37% after service charge)
 
How many loans have you done (and for what amount)?

We have issued more than $25,000,000 in more than 3,000 loans to our borrower members.    Our loans range from $1,000 to $25,000, with the average loan amount oscillating around $8,500 in any given month.

I noticed that the value of your declined loans is a lot higher than the amount of your issued loans. Why is that? Is it a reflection on how careful you are to screen borrowers or is it more of a reflection on the conservative nature of lenders?

The former.  Only about 15% of the borrowers who come to our site pass our initial credit qualification requirements (minimum of 660 FICO score, maximum 25% Debt-to-Income ratio, among others).  Then other borrowers who initially pre-qualified may be removed based on a detailed manual review conducted by our credit team.  
 
How do people get loans from LendingClub?

It’s quite simple.  First the prospective borrower opens a free membership account with Lending Club, and then proceeds to fill out a loan application.  Within a few steps, after we have verified the user’s identity and pulled the credit information, the site lets the user know whether he or she qualifies and what interest rate.    Most borrowers who get to this point take the offered interest rate as it is typically better than those offered by traditional lending institutions. After submitting the loan request, it is listed for a period of 14 days for lenders to fund.  Typically more than 85% of our loans listed get fully funded before the end of that period.  We offer borrowers the ability to relist the loan or take partial amount at the end of the 14-day listing period.

 What are the advantages of using LendingClub to borrow money?
 
Attractive interest rates without the hassle of a conventional loan application.    The added bonus is that our borrowers pay interest to those who lent them the money instead of to a financial institution.

How do people lend money to others using LendingClub?
 
First, our lenders open a membership and deposit an initial amount they intend to invest.  They then browse the loans available and fund as little as $25.   Alternatively, lenders can automatically create a diversified portfolio targeting a specified average interest rate using LendingMatch.

What sort of return rates are your lenders averaging?
 
The stated interest rates range from 6.69% to 19.37% after service charge.  Returns vary depending on the lender’s portfolio composition, risk and level of diversification which could translate into different default rates.    

How big of an issue are loan defaults for lenders?

For most lenders, defaults are an expected part of this concept.  Our current default rate is around 2.7% which is representative of our stringent credit policy and effective collections procedures. Our A rated loans has shown no defaults to date.

What else would you like to tell Free Money Finance readers about LendingClub?
 
Currently, Lending Club is available to Lenders in the following states: California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Minnesota, Mississippi, Montana, New Hampshire, Nevada, New York, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin, West Virginia, and Wyoming.  We have filed for registration with the appropriate State securities authorities in all other States and expect to be adding more states over time.

Comments

[Ryan]

Just wanted to point out to the readers that while the interest rate ranges from 6.69% to 19.37%, the return on your investment is much lower. For an interest rate of 11.58% only averages out to about 6.28% over the three years before their fees.

I only mention this because I was seriously considering investing but after I calculated the actual return it wasn't worth the risk.

[Lauren]

It looks like they avoided the question about returns by giving you the straight interest rate. I'm sure it has to do with SEC regulation, now that they are registered and approved, they have to follow strict rules.

But I also saw an independent study done by Javelin Research and posted right on LC's home page that calculated the return to be an avg of 9.05% after losses and fees, while the median is a big higher (10 point something percent).

[kitty]

Given that we are still in the credit crisis, individual municipal and corporate bonds seems to be a more attractive investment to me at this time. Sure the rate looks lower, but with municipal and corporate bonds it is simple interest paid in fixed payments until maturity or until you sell the bond. I can get almost 5% tax free on a long term AAA municipal bond of my state. This seems safer to me 6.69% with the lending club. Not to mention that given that interest on municipal bonds a) tax free b) simple - so it is an equivalent of an interest only loan, it seems a better return than 6.69% rate on a loan where principal decreases with every payment. Assuming 19.37% is for their high risk clients, it seems comparable with junk bonds -- too risky for my taste.

Sure, you need to have money to invest in individual bonds as the minimum is usually $5000 (but you can pay less if you buy below par), but you must have it for Lending Club too or you will not afford to lose the money.