My interview with Barry Moltz on borrowing from Lending Club.
In this article I will review in detail the subject of borrowing from Lending Club and then provide perspective from several individuals who have experience investing with Lending Club. Enjoy.
How Lending Club Works
From the horses mouth…
Lending Club is a social lending network that brings together investors and creditworthy borrowers to offer value beyond traditional banks.
Borrowers with good credit can get personal loans from $1,000 to $25,000 at interest rates that are often significantly better than rates from conventional sources.
For lenders, money invested goes immediately to Lending Club’s approved borrower members. Most lender members spread their investment across tens or hundreds of qualified borrowers. Notes (that correspond to specific borrower loans) are offered only by means of a prospectus.
Is Lending Club right for me?
Those of you who read DFA on a regular basis know I am on a purpose driven mission to free myself and my family from the bondage of debt. For the last 7 months I have been trimming excess fat from every part of our budget and after making many positive changes have recently shifted my focus on getting a few big wins. That’s when I stumbled upon Lending Club…
A little background…
A while back I had the eye opening experience of calculating my interest amount paid, and ever since have been growing increasingly restless over the high interest rates on my auto loan and 3 remaining credit cards. The rates, already high enough to make a gangster blush… were recently pushed even higher by my big bank lenders. And that was the last straw for me… I was ready for a change.
Here are my current loans, banks, and corresponding rates:
- Auto Loan – Capital One @ 10.5%
- Credit Card 1 – JP Morgan Chase @ 14% (rate recently increased due to “bad economy”)
- Credit Card 2 – Capital One @ 16.25% (rate recently increased due to “bad economy”)
- Credit Card 3 – Citigroup @ 19% (rate recently increased due to “bad economy”)
I am almost never a proponent of borrowing money, but this is one exception where it is actually quite wise to in more than one way. It did not take much deliberation between me and my wife before drawing the conclusion that it was clearly in our best interest to go ahead and borrow from Lending Club in order to consolidate our high interest debt into one loan at a MUCH LOWER RATE.
Why Borrow with Lending Club?
Let’s be honest… nobody wants to borrow money… period. In fact — as I mentioned above — if you have been following my Debt Free Adventure then you know full well how adamant I am about paying off my debt and reaching financial freedom.
So why did I borrow?
I had heard about peer to peer lending, aka social lending, aka p2p lending before but had never really paid much attention or explored if it could be an option for me. Why? Because I am not looking to borrow money!
Then I had an idea…
Since I hate dealing with credit card companies and big banks in general I wondered… could I borrow from Lending Club to consolidate my high interest consumer debt and pay less interest in the process?
Once on the scent of a big win, some obvious questions racing through my head included:
- Who is lending us the money and would we be repaying “regular Joe’s” instead of the Big Banks whose practices we have grown to abhor?
- What kind of interest rate could we get?
- Will they approve our loan?
- How long will it take?
- How much are the fees?
- Is this a wise alternative to simple debt repayment of our numerous individual high interest debt accounts?
- Can I prepay the loan early without penalty?
To better educate myself…
I started poking around on the Lending Club website… studying every inch of it, especially the fine print! All of my questions were answered rather quickly and directly. Here are the answers I found to the above questions:
- Individual investors (regular Joe’s like you and me) were lending me the money. As a matter of fact, I ended up getting financed by many other personal finance bloggers I interact with on a daily basis. This story is covered in detail on FiveCentNickel.com and coined “Lending Club: Invest in Your Friends“
- With our credit score we were able to secure a rate of 9.32%.
- Our loan was approved in just a matter of hours.
- An $11,000 loan cost us only $85 in fees.
- Even after adding the $85 fee into the calculation, we stand to save $500+ over the life of the loan.
- There are no prepayment penalties… so I could pay the entire loan off tomorrow if I so desire (although that may not make my investors the happiest campers!)
It was an awesome feeling to think I would be saving over $500 because of a much better rate, then also paying the necessary interest to friends and business associates rather than huge corporate banks in whom I have nothing short of anti-confidence.
While this was the best decision for my situation, make sure you evaluate your own situation strategically before proceeding — every situation is different and each will require careful attention to detail.
Use this calculator to help determine if consolidating your high interest debt through Lending Club is the best mathematical option for you.
Why Invest with Lending Club?
“Our investors join Lending Club for the opportunity to make above-average returns and to diversify their current holdings in the stock market and other traditional investment vehicles. As the economy starts showing signs of recovery, many investors are also moving away from “defensive” assets like CDs and high-yield savings accounts.
With a 9.61% net annualized returns since we opened back in June 2007 (net of fees and defaults, across all credit grades) despite the tough credit market, Lending Club certainly is an attractive option to benefit from a recovery in consumer credit.”
– Rob Garcia, Director of Product Strategy at Lending Club
Although I am not currently in a position to invest with Lending Club, the system they have in place is fast becoming one of the best decisions to be made with investment dollars… especially in a down market. The alternatives available to the average investor pale in comparison to the several benefits offered when investing through Lending Club.
Below I will list all the reasons to invest as found on the Lending Club website, then deliver several testimonies from actual investors that I know personally. Several of which are my financial mentors, and all of which I trust.
On their website Lending Club gives us these 7 Lucrative Reasons to Become an Investor:
- You can earn better returns – Since June 2007, Lending Club investors have earned an average net annualized return of over 9%. Read the report by Javelin Research.
- It’s straightforward – The money you invest funds loans made to creditworthy borrowers.
- We’re selective – Many borrowers apply, but less than one in ten are accepted. Lending Club approves only creditworthy borrowers as members.
- It’s easy – We make it easy to build a portfolio based on your criteria. Most lending members spread their investment across tens or hundreds of qualified borrowers.
- We set fair and fixed rates – Our rates are based on historical trends and the current economic climate. Borrowers pay a fixed rate for the 3-year life of the loan.
- You get flexibility – You can reinvest any interest and principal payments each month or withdraw them like an annuity. You can also put your notes up for sale on the Note Trading Platform.
- Do good while doing well – Many of our lender members find it rewarding to help others meet their financial goals. Especially in this economic environment, Lending Club members come through when big banks do not.
Investor Testimonials…
Each of the following testimonials are from individuals in my own personal contact list. They are not paid by Lending Club to share their opinion, rather they simply wanted to share their story in an effort to help other investors — seeking stable opportunities — to plug into the lucrative option they have found.
Another great part of Lending Club is the ability to invest in those you trust. Both Nickel and Erica invested in us and helped fund our loan. I believe Pete tried, but our loan was funded so fast that he didn’t get the chance!
All of these investors agree that the returns they are making on Lending Club far exceed that which the could be making in a high yield savings account
- Nickel of FiveCentNickel.com
Over the past few months, I’ve become a fan of investing through Lending Club. Prior to actually trying it out, I’d been pretty skeptical of peer-to-peer lending. After all, the idea of lending money more or less directly to other people is pretty “out there” nowadays. I finally decided to give it whirl with a bit of “fun money,” and I haven’t look back since.
It’s too soon for me to make any grand claims regarding investment performance, but things have been going great so far. Lending Club is very easy to use, and the interest rates are great. The fact that you can invest as little as $25 per loan also means that you can really reduce your risk by spreading your money around.
While we haven’t abandoned more traditional investment vehicles, we’ve been gradually increasing our Lending Club investments as we’ve become more comfortable with the concept. On top of everything else, it’s kind of fun to know that your loans are directly helping real people.
- Erica Douglas of Erica.Biz
I’m a high net worth investor, and I chose to invest through Lending Club over many alternatives. Here’s why:
- The stock market is risky and could plummet
- It’s easy to get started with as little as $25
- Lending Club handles all the payments, so I don’t have to worry about collecting money directly from people
- There aren’t any mammoth trading fees that would eat up an entire small investment like mutual funds/the stock market.
- Besides, even a “high-yield” savings accounts is only paying 1% right now. 1% should be pretty easy to beat.
I use Lending Club the way many people would use a CD ladder. I can liquidate my positions easily if needed via their Note Trading Platform. And it has far better returns than a CD ladder would.
- Pete of BibleMoneyMatters.com
Over the past year or so I’ve heard a lot about the peer to peer lending market, and investing through Lending Club. For quite some time I’ve been pretty skeptical about the concept, and I just assumed that most of the people borrowing through Lending Club were big credit risks unable to get a loan elsewhere. I also didn’t want to be lending money to people for irresponsible reasons. After talking with other lenders and doing a bit of research I’ve found that while there certainly are some folks on there that are big credit risks, as a lender you’re able to choose who you loan your money to, and what you lend for. That allows me to be picky about who I’ll lend to, and how much risk I’m willing to take. Add to that the fact that Lending Club registered with the SEC in 2008, and their credibility in my eyes has increased quite a bit. I’m finally taking the plunge because I believe my money can give help to others, and still make me a little bit of money in the process.
- Jacqui Pittenger of Twitter
I signed up in February 2009 through a free $25 referral link on one of my favorite blogs – Dual Income No Kids. I figured there’s nothing to lose when you invest free money. I enjoyed the experience so much, I soon added another $500 to my account.
While I would not consider peer to peer lending safe enough for an emergency fund, or even as a primary investment strategy, it’s a worthwhile addition to my investment portfolio. My mix of loans skews to the riskier side with rates ranging from 8% to 18%. My current Net Annualized Return is 13.55% and all payments are current (so far at least). Even a few defaults would still leave me with an acceptable return.
The promise of yields far in excess of a savings account or CD is very tempting. But my favorite feature is being able to fund loans to people I want to help – like those digging out of a mountain of medical debt, moving closer to their place of employment, or purchasing a motorcycle to reduce fuel consumption. If I have any doubt about person’s ability to repay the loan I move on. There are plenty of applications to choose from, so trust your instincts.
In the spring I signed up to automatically transfer $25 from my checking account to Lending Club each month, though I opted out of their automatic investment plan. I prefer to hand pick my loans each month. Soon I’ll reach the point where I can not only invest in a ‘new money’ loan each month, but will also have a ‘repayment reinvestment’ every month as well.
Closing Thoughts…
For a long time we have bestowed great confidence upon our financial institutions; but with all the recent bail out money — that seemingly grows on trees — a rapidly increasing number of people, myself included, are turning to social lending providers like Lending Club for simplistic and transparent borrowing and investing. A lot of people are hungry for change, for the power of choice, and for greater control over their own financial destiny! And in my experienced opinion… Lending Club seems to be answering that call quite nicely.
Using Lending Club has indeed been a big win for me and my wife and I do not hesitate to recommend their service.
What do you think?
Have you recently borrowed through Lending Club and want to share your experience? Are you an seasoned Lending Club investor with a testimonial of your own? Maybe you simply have an opinion that just has to be voiced. Whatever it is… let us hear it!
Other Bloggers featuring Lending Club
- Lending Club: Peer-to-Peer Lending @ MoneyFunk
Other websites featuring this article
- Carnival of Personal Finance #235: The Cinderella Edition @ WellHeeledBlog.com
- Carnival of Debt Reduction
- Money Hacks Carnival XCV – The Tiger Woods, We Hardly Knew Ye Edition @ LenPenzo.com
- Carnival of Financial Planning – Edition #120 @ TheSkilledInvestor.com
- Carnival of Money Stories @ AlmostFrugal.com
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I love the idea of peer-to-peer lending and cutting out the big banks, but do keep an eye on returns and bad debts.
Here in the UK we have Zopa (which withdrew a while ago from the US) which has recently reported a slight increase in bad debts, and that it’s having slightly more difficulties recovering money than it expected.
As a result, it’s increased its estimation of the impact bad debts will have on your investment.
As I recently wrote on my blog, I’ve seen three debts go bad. Not statistically meaningful in terms of whether p2p lending is a success, but nearly a 3% dent in my returns. Hopefully that’ll be the worst of it going forward.
What a great primer for those of us interested in using P2P loans to get a lower interest rate!
You may have spurred me to action.
Great post, and great primer on Lending Club Matt! Sounds like getting a loan from LC is a good idea in your situation since you’re working with several credit cards and an auto loan that are all higher interest rates than the new loan. One caution – as you mention – is that if you’re consolidating your debt – make sure that you’re not consolidating lower interest rate debts in with higher interest rate debts. That can help negate some of the benefit. Obviously that isn’t the situation for you since you bettered your rate for all of the loans.
As mentioned in my testimonial I’ve finally taken the plunge with Lending Club and will be trying it out as an investor for a while. I’d been skeptical up until several blogging colleagues told me their positive experiences with LC. So we’ll see how it goes!
.-= Peter´s last blog ..Middle Class Anxiety And Suggestions For Overcoming It =-.
I’m just pleased to have had the opportunity to invest in such a fine, upstanding gentleman as yourself.
.-= nickel´s last blog ..The Fallacy of Relative Price Evaluation =-.
This is crazy, I feel like I was “channeling” you. Last night, my husband and I sat down and talked about borrowing through a peer to peer lending site so that we could stop paying interest to banks that keeping raising our rates without cause. But we were looking at Prosper. Did you do any “comparison shopping” with P2P lenders before you borrowed? Or did any of your investors?
.-= a.b. @ Modern Tightwad´s last blog ..Festival of Frugality #189 – Extreme Heat Edition =-.
Thanks for the great introduction.
For lenders it is essential to track your overall returns based on a balanced portfolio. There will be loan defaults and you will want to include them in your estimation. Be selective. Your mind will play tricks on you unless you track it on paper so you know your actual returns.
.-= Craig @ Money Help For Christians´s last blog ..A Million Dollars: So What’s the Bad News? =-.
@Peter: Good point, everyone please remember to only consolidate if you are lowering your interest rates! Do not include loans with lower rates that you can get through consolidating.
@a.b.: Ha ha… great minds think alike!
I did look into Prosper but decided to go with Lending Club because I had more personal feedback from people I knew, and also noticed the SEC filing issues Prosper was JUST recently able to overcome. I have not ruled them out as far as investing in the future.
If anyone has any input on using Prosper… please do comment.
I have never heard of this until last week when I saw from Twitter comments about you doing this. Seems like a very cool idea and a win/win for everyone involved! Thanks for letting us know about it.
.-= Jason @ Redeeming Riches´s last blog ..Should You Give Money to a Homeless Person? =-.
I have to admit Peer to Peer Lending seemed like a terrible idea, and I’m still not sold on it, that being said if we weren’t rolling our own gigantic debt snowball ourselves I would have gladly contributed. I just don’t know how I would feel funding loans for joe average citizen. I also worry about the implications of loaning a friend or family member money and then them not being able to repay on time or other situation which so often occurs, it’s almost like you are cosigning with your own money. I’ll have to investigate more my inner skeptic requires it.
.-= Paul @ FiscalGeek´s last blog ..In Which I Give Thanks =-.
One other question for you Matt: Do you have any idea how LC’s rating system works?
.-= a.b. @ Modern Tightwad´s last blog ..Festival of Frugality #189 – Extreme Heat Edition =-.
Unfortunately I cannot speak intelligently about the investment side since I have not partaken…
That said, I plan to get into this very soon (maybe before my debt is gone, maybe not… unsure yet). I will also post about it as soon as I have more investment experience.
Looks like Lara gave a solid answer below. Thanks Lara.
Just a word of caution: you’ll get “hooked” and want to review all the loans. I felt in that trap and can’t get my eyes off of the screen reading all the loan descriptions before deciding whether to invest in that person (specially after you get your first default). I love the “ask a question” feature, which allows me to probe the borrower if I have doubts. But if anything I learned from this, is that you should just put the money to work and forget it, or else you’ll be spending lots of time researching each loan, which is not sustainable when you are investing thousands of $$s. But other than that Lencing Club rocks. Love the concept and the returns.
Thanks for the insight Matt! My highest interest debt will be paid off by September so it is not in my best interest to switch, but I’ve definately been looking into social lending as an investment vehicle once some of my other financial goals are met. I would start small with a little “buffer money” to see how it works. I think I favor Pertuity Direct over Lending Club. For one, their requirements for lenders are not as strict. Also, you don’t have to manually search and research lenders…it takes that portion out and your money is pooled together more like a mutual fund.
.-= Lakita´s last blog ..abunDANCE =-.
Great post! Wish I had known you were borrowing on LC. Would have tossed in a few bucks.
Did you mention that you were a personal finance blogger in the “more info” section. If so, I bet the investors ate that up.
.-= Matt SF´s last blog ..How Does Your Emergency Fund Compare to Your Confidence Fund? =-.
@Lakita: I have yet to check into them, but will now… thanks!
@Matt_SF: You’re darn right I did… I talked all about my Debt Free Adventure and gave them all links to my website. I think that is part of why it was funded so fast.
You are my hero!
This has got to be the safest investment I’ve ever seen. Of course, I have a lot of conversations to make me feel that way.
A great example of how to step-up, take control of your situation, and pile on the accountability.
Once we are both debt-free, I fully expect you and your wife to come out to New Zealand. We can tour the South Island and celebrate. You can take out another Lending Club loan to pay for the plane tickets
.
Seriously, though. Fantastic idea. You rock!
.-= Baker @ ManVsDebt´s last blog ..Get Rich Slowly Staff Candidate & Minor Site Updates! =-.
I think that using it for the reason you did was smart. It’s always nicer to lower the interest costs when possible. I think it is obvious that I would not recommend anyone use it to go into debt since I am strongly opposed to slavery.
I certainly couldn’t enjoy counting my profits made by giving someone else debt, but I realize that to some I am extreme. To me debt is debt, and I am against giving it to someone else, as much as I am of being in it myself.
.-= Brad @enemyofdebt´s last blog ..“He Who Has Not Christmas In His Heart, Will Never Find It Under A Tree.” ~Roy L. Smith =-.
I too, tried to get to ya and toss a few bucks your way, but alas…you were 100% funded by the time I got to ya!
Even so, Congrats Matt!
.-= Matt @ Financial Methods´s last blog ..Feel Like You Can’t Budget? Step 3-Determine Your Income =-.
Matt,
Interesting article! I love hearing about new programs and opportunities that can help people. I never knew much about the details of this particular program and appreciate you laying it out here in this article. Okay, my first feeling was of skepticism, but you and some of the comments above have helped stifle that feeling. I would like to read more. It certainly sounds like this worked out nicely for you. I love the stories of hearing of friends or people coming together to help others get out of debt. I think as a lender you have to be prepared for default in payment, but that is a risk you can obviously consider when making the investment as you would with any investment.
.-= Jason @ One Money Design´s last blog ..OMD QuickPress: Money Map Coaching =-.
I have used lending club about a year ago. It is not a bad place to invest your money, however people do default on their loans and you lose money as easy as you would anywhere else.
.-= jason´s last blog ..I hate pop ups… =-.
I think peer to peer lending is a great thing. Even if the interest rates were the exact same, I’d so much rather have the money I’m paying in interest go somewhere other than the big bank’s inflated pocketbook.
For borrowers I think its really can’t miss. For lenders its a little dicier, but it has to be looked at as strictly an investment. There’s inherent risk involved in it, but that’s how your making money, by assuming that risk.
Big up to peer to peer!
.-= Frank Fitton´s last blog ..Peer to Peer Lending Provides Nice Alternative to Banks =-.
I am an investor on LC. I started small in January 2009 with $200 and have been increasing my investment since. I chose LC because they are so careful with the loans they give out. I have had several loans I financed get kicked out (and my money refunded) at the final review before the loan funds. I have also had a couple of loans start to show signs of trouble. I like the fact that I can sell those on the Trading Platform to people with more risk tolerance than I have! (And I wish them all the best with those loans too.) If I price it right, the loan sells quickly and I can can have my cash back in about a week. (A couple days for the loan to sell and a couple days to transfer the money back to my bank.) The costs I pay as an investor are low. I only pay 1% of the loans in fees and those are taken at each payment (usually a penny per $25 invested). I find myself leaning towards borrowers that are trying to get out from under credit card debt, students funding their education and business loans. I like that fact that I can invest in people trying to make their lives better. As far as paying your loan off early – I have had two loans pay off early and I was proud of both of those borrowers! The money I am putting into LC is coming from the extra money I have set aside lately to be more liquid in this very scary economy. My plan is to take the money that accumulates from LC payments and add that to my mortgage payments. I wish you the best in getting out from under your debt. The process isn’t any fun, but the result is liberating!
Thanks so much for the encouragement, we are making more & more progress each day and it is so cool to watch.
You mentioned one of my favorite parts about Lending Club… the fact that you can choose the types of loans you want to fund, and the types of people and situations you want to fund. It is an awesome set up. If I HAVE to pay interest to someone other than myself (at least for a little while longer) I would much rather it be you than the big bankers!
I checked out the LC website as an option for consolidating some of my high-interest credit card debt, and as far as I can tell from the FAQ, I won’t even qualify. The debt to income ratio has to be under 25%, and between credit cards, car loans, and my gigantic loan from getting my pharmacy degree, I’m well over 100%. The student loan itself puts me at nearly 90%. Are those counted? I’m frustrated because I am trying really hard to get out of debt, and I’ve paid off nearly 10k of my debt in 8 months, but lower interest rates would help me get it taken care of more quickly.
Hey Nicole: You can request the loan via the web interface and they may approve you. Also you can give Lending Club a call to see if they can give you any further insight as to whether or not you would be approved.
Did Erica really say “I’m a high net worth investor?” Oh boy
Matt, if you want to borrow money from me directly, I’m happy to lend you up to $100,000 at an even better discount of 8%! Seriously, let me know.
Best,
FS
.-= Financial Samurai´s last blog ..My SUV Will Beat Up Your Hybrid & Save The World! =-.
Thank you kindly sir, but I will stay loyal to those who originally funded me… they will be paid off in a very short time anyway!
Just found this site as I’m investigating debt consolidation. Credit is a mess right now (but it was good!) and have looked at nonprofit consolidation programs that while workable, end up really hurting the credit (even more!) would love to consolidate with a p2p loan. Close the accounts, and pay back that single source. Definitely on my radar for early 2010. Thanks for the informative article!
Glad you found value here Christopher. I can tell you from experience that LC is definitely a solid move as long as you can get approved and land a rate that is lower than the loans you need to consolidate.
LC let’s you apply and see what your rate is without any obligation to move forward so you might as well give it a shot. Let me know how it turns out.
Godspeed.
My biggest question is the funding process. Let’s say I was approved for a $10,000 loan, but it was not funded 100% right away. What happens when 25% is approved, then 30%, then 40%, etc? Do you get the cash at each approval step or only when it’s 100% funded? I don’t want it to be like a credit card approval where you get a cc application that says “up to $2,000″, and then you get the card for $500 limit and can’t consolidate any meaningful loans. Any insights would be great! Thank you.
.-= TexasT´s last blog ..Second Income – The Spice of Life! =-.
Good question. A quick and short answer is, if you are not 100% funded before the listing expires, you can accept the partial funding or relist the loan.
Hope this helps.
There is definitely risk to social lending, however, there is no place to make a decent return as an investor with minimal risk. As a borrower its a great place to get low interest loans (if you have good credit). I’d rather put my money in Lending Club instead of the stock market.
As would I Patrick… as would I.