Lending Club is a Peer-to-Peer Lending site, meaning it allows borrows to borrow money directly from lenders without a banking intermediary. Lending Club facilitates the entire transaction – but they only take a small fee and the borrow and lender both realize cost advantages.
- The borrower gets a lower interest rate than going to a bank. Banks typically make an interest rate return: they pay depositors a very low (or no) interest rate in their checking and savings account, and then charge high rates of interest to borrowers.
- The lender gets a great return. It’s better than buying a bank stock because you get the full return of the loan without the overhead of bank branches, management, etc.
When you invest in a bank stock – you are buying a part of their branches (including the slick-hair of their branch managers), as well as their terrible call centers, slow websites, and extra fees. You do get a portion of exposure to consumer debt. But the overhead is costly. Plus, depending on the bank, you’re likely getting much less exposure to consumers and are instead investing in commercial real estate.
Investing in a Lending Club Loan is much different. You’re getting direct exposure to a consumer who is looking to refinance bank debt. There’s no middle man other than Lending Club. You get returns of 8-25%*, all while helping the borrower, who is getting a lower interest rate than from the bank. It’s a win-win.
For some loans – the borrower is very likely to pay their bill off in full. Others, however, are risky, and the borrower is unlikely to pay back their debt. How are you to distinguish the two?
Some people get lucky. They come up with a system, and it may yield good short-term results. But often, their returns regress to the mean, and they do not maximize their returns.
That’s where Peer Lending Advisors comes in picking the loans for you – saving you the time of reviewing each loan and deciding which ones to invest in.
For typical investors, the investment is broken into bite-size chunks, investing in 400 loans or more, which helps diversify risk. If there aren’t good loans to invest in, Peer Lending Advisors is happy to sit on the sidelines and wait for the right opportunities.
All loans are issued to Prime borrowers – meaning the borrowers have high credit scores – these are not sub-Prime loans.
Google recently invested $125 million in Lending Club, seeing the potential of the platform.
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*Source: Lending Club March 2013