Can You Really Become a Bank with Lending Club?

Back in the day, if you needed money, the most logical solution would be to approach the bank for a loan.  Now, there’s a new and potentially better option for both borrowers and investors and that’s peer to peer lending.  Through peer to peer lending, borrowers can loan money from a group of people instead of through a traditional financial institution.  Peer to peer lending has recently become more popular, and the top choice in the industry is currently Lending Club.

There are many advantages if you join Lending Club.  People who need money either for a personal or a business loan have higher chances of approval plus a lower interest rate if they apply through Lending Club.  Lending Club also offers the opportunity for regular people to become investors by allowing them to invest a smaller amount.  While you need a much higher amount and a certain profile to invest through banks, aspiring investors can already start buying notes from Lending Club for as low as $25.  Let’s take a look at what you should know if you’re interested in making money through Lending Club.


The Lending Club process

Applying for an unsecured loan on Lending Club is easy as long as you pass their borrower’s criteria.  Lending Club will evaluate an applicant’s profile based on their personal details, the most important of which is their credit standing; their FICO score should be above 660.  The minimum loan amount is $1,000 and the maximum is $35,000.  An applicant’s interest rate will vary depending on the result of their evaluation, the lowest is 5.99% per annum and this is offered to borrowers with superb credit standings.  After submitting an application, borrowers will need to wait to receive the funds for their loan from various investors.  Once the loan has been completely funded by investors and approved by Lending Club, applicants only need to submit documents, confirm their email address and wait for Lending Club to check their bank account.

To become an investor on Lending Club, a lender needs to create an account and give his personal information including payment method.  After his identity and bank account are verified and he has successfully signed up, he can start buying notes worth $25.  He can have a diversified portfolio where his money is lent out to different types and grades of borrowers based on his chosen criteria or he can manually choose from a list of borrowers who he’d like to lend his money to.  Resulting profit is based on a particular loan’s interest rate and the amount he invested in that loan.  Higher loan grades (A being the highest) mean lower interest rates for borrowers, lower risk for investors but also lower rewards or profit.  Lower loan grades (G being the lowest) mean higher interest rates for borrowers, higher risk for investors but higher potential profit.


Requirements for Investors

There are several requirements for people who wish to become investors on Lending Club.  First of all, an investor needs to have both a gross annual income and net worth of at least $70,000.  Annual income will not be an issue, though, if the investor’s net worth is at least $250,000.  He must also be a resident of the US, and part of Lending Club’s list of approved states.  Most states are part of this list except:  Alaska, Maryland, New Mexico, North Carolina, North Dakota, Ohio, and Pennsylvania.  Take note that there may be additional requirements or policies depending on the state.  Investors from California, for example, need to have $85,000 for both their gross annual income and net worth.  Meanwhile, for residents of Kentucky, only accredited investors according to the U.S. Securities and Exchange Commission (SEC) criteria, are qualified to join Lending Club.  Finally, investors are limited to buying notes a total of only until 10% of their net worth.


What are the potential risks?

Just like any other investment, investing in Lending Club also has some risks involved:

  • Some borrowers may fail to pay off their loan which means a significant loss for you since this type of investment is not FDIC insured.
  • Your profit from the interest rate is deducted an annual service fee worth 1% and there’s no guarantee that this fee will not increase in the coming months or years.
  • All businesses have to face the threat of potential bankruptcy and Lending Club is not immune to this.
  • Borrowers have the option to fully pay off their loan early and this could affect your expected profit. You can offset this though by choosing another loan.
  • You have no control over the interest rates granted to borrowers. The best thing you can do is to check the profile of each borrower yourself and manually select the loans you’d like to help provide funding to.


Most effective techniques for investors

Use these best practices to lower your risk of lending to defaulting borrowers and at the same time maximize your return of investment:

  1. Make sure all the funds in your account are regularly invested

Your cash and profits will begin to accumulate in your account as the borrowers pay off their loans.  If these funds just remain passively in your account, they will not earn anything.  To avoid this, you can let Lending Club automatically invest for you using criteria you’ve pre-selected.  If you prefer to manually choose the loans you fund, your other option is to set up a regular schedule of when you check your account and choose loans to invest in.

  1. Build a diverse portfolio, including small loans

The greatest advice all investors know by heart is to not put all their eggs in one basket.  You need to spread out your funds across different loan grades.  This may diminish the returns but it also counterbalances the risk.  If you want to earn more from Lending Club, you should also invest significantly more funds.  Experts recommend buying at least 200 notes, so that’s worth around $5,000.

  1. Select a few higher-risk loans

Be prepared to have some borrowers defaulting on their payment, whether the loan is low or high risk.  To further diversify your portfolio, you also need to choose some higher risk loans which have potentially higher earnings.

  1. Look for borrowers with more attractive profiles

When checking a borrower’s profile, ask yourself how likely that person is to pay off their debt.  Some borrowers to look for are those currently employed for at least 1 year, with a credit score higher than 678, no delinquencies in the last couple of years and with a low debt-to-income ratio.


Lending Club is definitely legitimate and has proven to be a good investment option for those just starting out in investing.  The minimum amount for investment is lower, the requirements for application are not as stringent as banks and the risks are lesser compared to traditional investments.  Just remember to diversify your portfolio, check potential borrowers’ profiles and set realistic goals as this is more of a long term investment.


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