P2P Lending With LendingClub: A Review

I’ve written quite a bit about the merits of LendingClub in the past because I love the idea of peer-to-peer (P2P) lending. However, I’m skeptical and scared to invest in anything but the most reputable of P2P lending platforms online. The two big dogs in the industry are Prosper and LendingClub, respectively. I’m more a fan of LendingClub myself, and this article will review the website and the reasons that I’m such a big fan.

LendingClub: An Overview

Before we get into what LendingClub does, let’s look at some street cred the website has under its belt. The company was named as a member of the top 20 “Breakthrough Ideas for 2009” by Harvard Business Review. It was also recently nominated by The Industry Standard to be one of the “Top 100 Innovators”. LendingClub has quite a few other accolades that make it legit in my book, but let’s move on to what the website actually does, shall we?

LendingClub’s motto is “Better Rates. Together.” The website defines itself as an online financial community, and its sole mission is to unite borrowers who are worthy of credit and investors who are willing to back their personal loans. The website effectively cuts out the middleman by eliminating banks from the equation in lieu of charging a small fee for each funded loan to support the platform. That’s it.

Becoming a LendingClub Member

It’s really easy to become a LendingClub member. You can join up like I did in about five minutes. I joined as an investor, but you can join as either a borrower or investor, it’s up to you. If you decide to borrow, you can apply and LendingClub will issue you an instant quote with your potential loan rate before you decide to post a loan request.

As an investor (the side of the platform that I’m most interested in), you just need to verify your bank account by authorizing a couple of small deposits. The process takes about three to four days. I’m already at the point where I’m browsing loans and looking to fund my portfolio. I’m excited because I stand to earn a much higher interest rate than I would with savings accounts or traditional CDs. It’s private, it’s in real-time, and you can watch your loans every day if you want. To the point of obsession. Which I very likely will do. Don’t judge.

Warnings and Wisdom

As of the end of August 2012, LendingClub had funded $875,419,700 worth of loans. Last month alone, the website had funded $60,067,825. Here’s the kicker: since the company began, it’s paid $75,212,804 to investors. That’s nothing to scoff at.

However, if you’re serious about LendingClub, remember a couple of things. First, diversifying by funding multiple loans with very small amounts – say, $25 a pop, for instance – is the best strategy because you minimize your risk when you have (inevitable) defaults. Second, spreading your risk around loans with many different credit grades will help insulate your investment as well. Keep it balanced and you’ll yield some sweet returns. At least, I hope I will. Good luck!