If You Want To Invest
- Steel yourself for some level of risk. Remember, you’re making an unsecured loan to unknown borrowers. According to Lend Academy, a website that focuses on the peer-to-peer lending industry, 1 percent to 10 percent of three-year loans issued from 2009 through 2012 across all credit risks weren’t paid back. That means that investing in higher-yielding, higher-risk loans could put a dent in your returns. In an economic downturn, it’s likely that more loans will default, resulting in lower returns.
- Diversify. Both Lending Club and Prosper encourage you to diversify your investments. By lending, say, $50 to 40 borrowers with the same rating, instead of $2,000 to one, you reduce the risk that comes with a borrower who defaults on a loan.
- Use the community. An online network has grown alongside peer-to-peer lending platforms, creating databases and other resources to share wisdom about investing in such loans.
- Remember that your competition is Wall Street. Hedge funds have been taking increasingly bigger bites out of the peer-to- peer marketplace, essentially employing their algorithms to cherry-pick the juiciest loans, leaving the regular Joe and Jane investors with fewer choice loans.
Chris Horymski
Lending Club Loan Types And Loan Grading
Loan terms are either 36 months or 60 months and are fixed-rate. More than 80% of the Lending Club loans are taken to refinance existing loans and credit card balances. Similar to other peer-to-peer loans, borrowers are evaluated and loans are priced based on credit and credit scores, debt-to-income ratios , the length of your credit history, and your recent credit activity.
Each loan is assigned a loan grade, ranging from A to G . The higher the grade, the lower the rate.
Within each letter grade, Lending Club also assigns a numerical rank of between 1 and 5 . These numeric sub-grades adjust for other factors, such as loan size and loan term. For example, a loan amount of $5,000 would be seen as low risk, and actually result in an improvement in the sub-grade. By contrast, the maximum loan of $35,000 is a higher risk, and could turn a B1 grade into a B4 or B5 grade, resulting in a slightly higher interest rate.
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Why Should You Use A Peer
Peer-to-peer lenders are best for borrowers that may struggle to qualify for loans from traditional banks and lenders. P2P lenders have more relaxed borrower requirements, making it more likely that youll qualify for a loan.
They can also be a good fit for borrowers that need to borrow money and who are ineligible for other types of financing. For example, entrepreneurs that are launching small businesses are unlikely to qualify for traditional business loans, so P2P loans can be a valuable alternative.
When deciding which loan type is best for you, keep in mind that peer-to-peer loans can have higher-than-average interest rates and added fees, such as origination fees, that can add to your overall cost.
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What Are The Grading System And Note All About
With peer-to-peer lending, everyday individuals fund small portions of loans, called notes by most P2P lending sites, and receive their principal plus interest when the borrower repays the loan. An investor typically can choose to: 1) invest in a number of different notes and 2) determine how much to invest in each note.
The risk grading system is based on a credit score-based model for evaluating investment options. Each loan applicant’s credit rating is evaluated and translated into a letter grade, and investors can then choose how much risk they wish to take when funding a loan.
A P2p Investment Strategy To Consider
I recommend focusing on higher quality borrowers in the A and B grade. Although you will receive a lower interest payment, the likelihood of getting paid back increases tremendously.
Focus on high quality borrowers who are looking to refinance their credit card debt. Credit card debt often runs in the 15% 30% range, which is why to such borrowers, paying 6% 10% is a good deal.
If possible, look for borrowers with a FICO score of at least 680, a debt-to-income ratio of at least 30%, no delinquency history, and positive reviews.
Despite focusing on high quality borrowers, Ive still had delinquencies or defaults over the past five years of investing. As a result, its important to diversify your loans into at LEAST 10 investments. Ive spoken to the team, and they recommend an even greater amount. They said with a 100 investment portfolio, you would have still made money during the financial crisis vs. -50% in the S& P 500.
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Whatever Happened To Peer
While individuals can still invest in loans to consumers, most digital credit is underwritten by larger funding sources.
Even before Uber upended the taxi business and Airbnb disrupted vacation rentals, the idea of peer-to-peer lending was meant to give individuals alternatives to traditional consumer sources of credit, both as borrowers and investors. But the fintech market is continuously evolving. Well catch you up on whats happened to the concept, and how you can invest or borrow from a digital lender.
Most of the firms that started out as online platforms to connect consumers who wanted to borrow money with individual investors who financed loans, also known as peer-to-peer lending, now primarily partner with larger financing sources, like banks and hedge funds, using their artificial intelligence tools to evaluate creditworthiness. Other players have exited the business or had regulatory problems. As the business model continues to grow, its also being called marketplace lending or fintech lending.
These days, individual investor funding of digital loans has been dwarfed in the marketplace by larger sources of funds, according to Nimayi Dixit, fintech analyst for S& P Global Market Intelligence.
How Lending Club Fits In My Overall Portfolio
How do I view Lending Club in my overall investment portfolio? Well, we already have our emergency fund and we have our savings account this is just something to complement what Im doing in my stocks. Like I said, I only have a small investment now, but after doing my initial Lending Club review we are planning on shifting some more money there.
We were building a house, had some other improvements we were doing, and having a third child, so we wanted to have more in cash then we probably should, but we just felt more comfortable doing that. Now that we have some of those things out of the way I am definitely a lot more comfortable moving some more cash into Lending Club and start making some more interest.
I should also say I have never had any notes default on Lending Club up to this point. Ive been doing it for just over two years, and I believe and have not had a default yet. Im not saying I wont, but I havent had one yet. If I do I will definitely report it.
If you have any more questions let me know. Youll find an affiliate link, so if you do click and open an account I do earn a bit of money for you doing that. You can also go to LendingClub.com directly. I wont get the commission and thats fine by me as well.
If you have more questions on my Lending Club review or if you have any experiences, please share. Id love to hear more about it as this becomes more of a mainstream investing approach for a lot of people.
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How Lending Club Sets Interest Rates
To understand how Lending Club sets interest rates, the first step is looking at a borrower’s qualifications. Lending Club is pickier than Prosper. This is good for investors, but not always so good for borrowers. Here’s the list of borrower qualifications:
- To borrow through Lending Club, you must be a US citizen or permanent resident and at least 18 years old with a valid bank account, a valid Social Security Number and a FICO score of at least 600.
- Borrowers will need a debt-to-income ratio no greater than 40%.
- In addition, your credit history must show that you are a responsible borrower:
- at least three years of credit history, showing no current delinquencies, recent bankruptcies , open tax liens, charge-offs or non-medical collections account in the past 12 months
- for credit scores 740 and higher, you need to have less than nine inquiries on your credit report in the last six months
- for credit scores below 740, you need to have less than four inquiries on your credit report in the last six months
- a revolving credit utilization of less than 100% and more than three accounts in your credit report, of which more than two are currently open.
From all the above data, Lending Club assigns a grade to each borrower. The credit grades range from A to G, and each letter grade has a sub-grade ranging from one to five. For each grade and sub-grade, Lending Club sets what it calls a base rate. Lending Club then adds to the base rate an adjustment for risk and volatility.
The Lending Club Loan Application Process
You start the loan application process by checking your rate. This requires providing just general information and should take no more than a few minutes. This step will have no impact on your credit score.
If you meet the loan criteria, you will be presented with multiple loan offers. You can then select the offer that best meets your needs.
You then submit your application, and your loan is then listed for review by investors. The investors are the one who posted the capital you use as your loan. Your personal identity is protected during this process. Your name and other personally identifying information does not appear on your listing.
Once set up, the verification process will take place , the loan will undergo a final review, and then loan documents will be prepared.
The loan application process can take as little as three days, based on approximately 60% of borrowers who received offers through LendingClub, according to the most recent data. The time it will take to fund your loan may vary.
Verification process
Lending Club will require documentation in order to verify your income and employment. Income documentation may require pay stubs, bank statements, W-2s, pension awards, 1099s for investment income, or income tax returns. In order to verify employment, Lending Club may contact your employer.
As is the case with most lenders, P2P or traditional, they will typically require copies of documents for identification purposes in order to comply with federal law.
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Do P2p Loans Affect Your Credit Score
Whether a peer-to-peer loan affects your credit score depends on the lender. Most P2P lenders have minimum credit score requirements and perform hard credit inquiries, and each inquiry can cause your score to drop.
One exception is crypto-backed P2P loans. These loans are secured by collateral and can be issued without credit checks, so there are no credit inquiries that can affect your credit.
With all P2P loans, your timely payments can affect your credit, too. If you fall behind on your payments and your debt is sent to collections, those actions will show up on your credit reports and cause your score to drop.
What Types Of Loans Are Available
Most P2P lending sites make either personal loans or business loans, but very few make both. Lending Club has both business and personal loans, and they also make specially designed medical loans too.
Here is a rundown of the types of loans that are offered through Lending Club.
Personal Loans
Lending Clubs personal loans can be used for just about any purpose. This includes credit card refinancing, debt consolidation, home improvement, major purchases, home buying, car financing, green loans, loans for business purposes, vacations, and moving and relocation. You can even take a personal loan to have a swimming pool installed in your backyard.
Credit card refinancing is perhaps the most interesting of the personal loan offerings. When you consolidate several credit card balances into a single personal loan, it usually results in an increase in your credit score. This is because the payoff of the credit card balances results in both a lower credit utilization ratio and a smaller number of debts with open account balances. Both outcomes have a positive impact on how credit bureaus calculate your credit scores.
Most other P2P lending sites cap their personal loan amounts at $35,000 Lending Club recently increased their limit to $40,000. Whats more, all personal loans made through Lending Club require no collateral. That even includes personal loans used to purchase automobiles.
Business Loans
Medical Loans
This is a loan type whose time has truly come!
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What’s The Risk With Investing In Peer
Although the benefits of peer-to-peer lending can be lucrative for investors, you need to be a somewhat risk tolerant investor. Risk of loss is the biggest downside to investing in peer-to-peer lending. P2P loans are unsecured, meaning there are no assets backing each individual loan. So if a loan goes unpaid, investors are at a loss. And, of course, there’s always the risk of the P2P lending site discontinuing its services. Notes are not guaranteed or insured by any third-party or governmental agency.
Diversification is key. The range of risky versus not-as-risky borrowers you have to choose from as an investor really depends on the lending site – some have a solid base of less risky borrowers others not so much. Some lending sites offer good risk investment tools to help investors determine how to best meet their individual needs. As a general rule, it is best to invest in small portions of many different loans rather than putting all your eggs in one basket.
How We Chose The Best Peer
Our team evaluated 38 lenders and collected 1,520 data points before selecting our top choices. We weighed more than 20 criteria and gave a higher weight to those with a more significant impact on potential borrowers.
The top picks were selected based on factors like membership requirements , average fixed APR , and average origination fees .
We also took into account the flexibility of repayment terms, helpful features like prequalification, and whether a co-signer or joint applications are permitted to ensure borrowers get the best possible experience. For further information about our selection criteria and process, our complete methodology is available.
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Some Background On Filtering
It can feel a little overwhelming when you first start investing. You wonder how you should go about choosing loans. When I first started I did it kind of randomly with very little strategy. Then, for a while I let Lending Club choose the loans for me. Finally, I decided to get serious. What did I do? I spent dozens of hours analyzing the loan history of both Lending Club and Prosper.
The original goto site for this kind of analysis was Lendstats. Today, Nickel Steamroller is the leader and that is the place where investors should go to analyze the p2p lending loan history. Prosper and Lending Club make their entire history available for public analysis and Nickel Steamroller has produced an excellent tool to easily inquire on this history. You can get very detailed with this analysis with dozens of data fields to choose from. I encourage all serious investors to spend some time studying to see what has produced above average returns in the past.
Before I go any further I need to stress this point. My investment decisions are based on historical analysis. There is no guarantee that the loans will perform in a similar way going forward. And if the economy tanks as it did in 2008-09 then it is likely that future returns will look quite different.
If you want to compare my filters today to previous years here are links to my 2012 and 2013 strategies.
Profiting From The Spread
Heres how peer-to-peer lending works: After opening an account online, the investor browses hundreds of borrowers requests for a loan. The requests are accompanied by a brief statement about how the borrower intends to use the loan. In the majority of cases, the reason is the same: The loans are intended for debt consolidation.
The more important piece of information for the investor is the credit rating Lending Club and Prosper assign to the loan. That helps determine the potential return for the investor, which can vary widely. At Lending Club, recent annual returns ranged from 6 to 13 percent.
When it comes to making a loan, it is not an all-or-nothing deal. If a single borrower is seeking $16,000 in loans, you can lend any portion of that amount in increments as low as $25. For the investor, making smaller loans to multiple borrowers instead of one big loan to a single individual is a way to reduce risk by diversifying investments among borrowers.
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How It Works For Investors
For investors, Prospers most popular offering is Notes, or shares of individual loans with a value of $25 and up which is also Prospers minimum investment amount. Notes are shares in loans that havent yet originated, not already-funded loans. Some Prosper loans dont receive enough funding to originate. But if you reserve Notes in a loan that doesnt originate, you dont lose the amount you put towards that loan. Instead, Prosper returns your funds and lets you allocate them to other loans Notes.
Prosper Review Should You Take The Social Lending Plunge
by Neal Frankle, CFP ®, The article represents the author’s opinion. This post may contain affiliate links. Please read our disclosure for more info.
Prosper is a peer-to-peer lender. That means they match up people who need to borrow money with people willing to loan out their cash.
The loans are unsecured. That means the people who borrow money promise to pay back the loans but they arent required to provide collateral. Its a personal loan.
Borrowers come to Prosper hoping to get money cheaper than they can get it anywhere else.
Lenders make loans hoping that at the end of the day, theyll make more than they could with alternative investments.
Thats the theory behind Prosper. Now lets consider the reality.
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