How does Lending Club work?

How much does Lending Club cost (2019)?

How does Lending Club work? Is Lending Club a good loan option?  

Lending Club, an online company that matches people wanting to borrow money with others willing to lend it, has been of popular option in peer-to-peer (P2P) lending. But, is it a good one? Lending Club was founded in 2007 in San Francisco and was an early mover in the market—the first P2P lender to register its offerings with the Securities and Exchange Commission (SEC). It experienced early success and, in just seven years’ time, has facilitated $4.4 billion USD in financing.

Lending Club has now grown to over 1.5 million customers 150,000 investors, and has lent over $26 billion USD.

But — recent scandals and speculation over its lending practices are sparking widespread concern. Will the stock continue to decline over concerns — or is it a viable lending option that small businesses should still consider?

Fintech pioneer or full of scandal? 

The company raised $1 billion USD in what became the largest U.S. technology IPO of 2014. Although it was once viewed as a pioneer in the fintech world and one of the largest fintech firms, it has since experienced problems, beginning in 2016. Some of these difficulties have included attracting investors, loan scandals, and concerns over CEO Renaud Laplanche’s disclosures, leading to a large drop in its share price and the CEO’s resignation. So, will 2017 be any different?

A Bloomberg Report was also released in 2016 calling the company a potential “Silicon Valley-tinged credit crisis waiting to happen.” The report detailed Bryan Sims, a previous share buyer and former Lending Club aficionado, who conducted his own inquiries in the lending platform after growing suspicious of “repeat borrowers.” Sims and Data Scientist, Allen Grimm, started their own investigations, called the Financial Genome Project, which included an algorithm to mine Lending Club’s online data and identify loans that seemed to have been taken out by the same person, but were assigned different rates. Among a hoist of 30 some loans totalling over $700,000 USD, only four borrowers actually took out these loans. They were repeat borrowers and were positioned in a way that made Lending Club look like it was gaining more market traction than it actually was, the Bloomberg Report argues.

Other reports featured in the New York Times and Wall Street Journal have stated that Lending Club only verified information about borrowers, like income and employment, a third of the time in recent years. With Sims’ own probe into the situation, this seems to indeed be the case on more than one occasion. Evidence of lingering issues can be found in the Lending Club’s database files with dozens of loans made to company insiders and lending practices designed to push the company’s growth—sometimes referred to as “growth hacking” in Silicon Valley.

With all the controversy, should borrowers and investors still use Lending Club?

How Lending Club works

Lending Club enables borrowers to create unsecured personal loans between $1,000 and $40,000 with a standard loan period of three years. It also offers small business loans and auto refinancing—initiatives launched after 2014.

Lending Club for Borrowers

First, not everyone is eligible to get a loan through the lending platform—borrowers need a FICO score of at least 660. Borrowers pay back in fixed monthly payment at low, fixed interest rates, from which they can do automatically from their bank account. Approved borrowers can get up to $40,000 in as little as seven days.

Lending Club for Investors

Loans of up to $40,000 at a time are divided into $25 securities that anybody can buy. Lending Club publishes detailed information about these loans in daily filings with the U.S. SEC and maintains publicly available spreadsheets.

Investors can search and browse the loans listings on the Lending Club website and select the loans they want to invest in based on the information supplied. This includes information about the borrower, the amount of the loan requested, the loan grade, and the loan purpose. As of this initial writing, investing with Lending Club is not available to residents of Kansas, Maryland, Ohio, Oregon, and the District of Columbia.

So, should you use Lending Club?

Lending Club’s main aim and argument for their platform is this:

Since the recession that began in 2008, many banks have stopped issuing small loans and this need for small-business financing has grown as the economy recovers. The Federal Reserve reports that only 33% of small businesses actually receive the loan they ask for through traditional means and 44% are denied altogether. Today, Lending Club is one of the most visible and successful financial disrupters looking to further reinvent the small-business financial world, making sure that 44% has some real options.

Yes, Lending Club provides quick access to cash—for individuals and now small businesses—a reasonable option for those who need cash quickly. The platform is less stringent than big banks, with approval for large loans (small businesses) determined on annual revenue and financial strength.

Pros: 
  • Quick access to cash
  • Competitive rates
  • No prepayment penalty

But, Lending Club doesn’t extend credit as far as one might think. In addition to recent scandals and shortcomings of its loaning practice, other pitfalls include a rather high rate if you have poor credit and business assets on the line for large-size loans.

Cons:
  • A history of sketchy lending
  • High rates if you have poor credit
  • Business assets on the line for large-size loans
Looking ahead: Funding Club’s future

It should be noted that amongst the controversy, Lending Club may experience a management turn around as it matures and its first quarters’ earnings reports seem positive for 2017. It’s also been recognized as a leader for its growth and innovation, being named one of Forbes’ America’s Most Promising Companies three years in a row, a CNBC Disruptor two years in a row, and a 2012 World Economic Forum (WEF) Technology Pioneer. It has also partnered with iconic tech giants like Google in pioneer programs that extend credit to small businesses.

For investors, they should know that rates and returns can look attractive, but there is more risk now with Lending Club investments than with brank certificates of deposit. There are certain requirements you need to meet as an investor and this kind of investing may not be right for everyone.

For borrowers, you can typically get lower interest rates than you can a traditional bank as long as your credit score is high. Everything is done virtually right from home and is pretty quick moving.

For both parties, the overall consensus is that Lending Club still fills a market need in connecting those that need funds with those that have it by leveraging technology and partnerships with firms like Google. Those who participate, however, are cautioned to read the fine print and hope that its management and lending woes are far behind.

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