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Lending Club Peer to Peer Loans


Lending Club (Sunnyvale, CA) offers personal loans with fixed interest rates based on credit criteria. Prospective borrowers post listings seeking a 3-year unsecured loan of $1,000 to $25,000. Lenders are matched with borrowers through connections (affiliations based on geography, education, profession and social networks), their risk tolerance and other loan preferences. This matches the lenders with a loan portfolio that is automatically diversified. Lenders can also build their own portfolios. Lenders can lend $25 or more in increments of $25.

Borrowers are assigned one of seven credit grades (A through G) each with 5 subgrades, based on their credit score and two risk modifiers (debt-to-income ratio and a comparison of the loan amount with a guidance limit based on cash flow and repayment capacity). Interest rates are pegged to the credit grade and subgrade, with A1 at 7.37% and G5 at 18.86% as of July 2007. The credit grades are roughly equivalent to 30 point increments in credit scores and a 1.6% increment in the interest rate. Borrowers must be US residents, have a FICO score of 640 or more, a debt-to-income ratio under 30%, no current delinquencies, no open tax liens, no bankruptcies in the last 7 years, and no charge-offs or collection accounts in the past 12 months. Borrowers must also have at least 12 months of credit history, which may preclude students with thin credit histories from borrowing.

Borrowers pay a one-time processing fee of 0.75% to 2.0% based on their credit grade (0.75% A, 1.0% B, 1.5% C, 2.0% D-G). Processing fees are deducted from the disbursement check. There is an unsuccessful payment fee of $15. There is a late payment fee of 5% of the unpaid installment or $15, whichever is greater, when the payment is 15 or more days late. Lenders pay a servicing fee of 1% of the amount paid by borrowers to lenders. If the borrower is delinquent, there is a collection fee of up to 30% of the amount recovered. There is no prepayment penalty.

Lending Club publishes a comparison chart that compares their best rates with the average rates for personal loans and credit cards. Based on data obtained from Lending Club, however, their average rate is similar to the average rates for personal loans and somewhat less expensive than the average rates of credit cards. Average interest rates do vary by credit grade, with average rates of A 8.07%, B 9.88%, C 11.34%, D 13.00%, E 14.49%, F 15.92% and G 17.84% and an overall weighted average of 12.3% as of July 2008.

The Lending Club Statistics are a bit sparse, given that the site first funded loans in June 2007. The delinquency and default rates are therefore not likely to be reflective of actual long-term performance. Lending Club quotes historical 12-month default rates by credit grade (A 0.47%, B 1.26%, C 2.05%, D 2.84%, E 3.63%, F 4.42%, G 5.21%) based on TransUnion data, but these projections are again not necessarily reflective of actual Lending Club performance. Lenders should consider that actual annual returns net of defaults may be lower than the 11.77% rate published by Lending Club in July 2008. (Defaults are defined as 120 or more days late.)

One can calculate from the Lending Club statistics, however, that they have a loan approval rate of 13.6%. While this may reduce the likelihood of default, it also makes it more difficult to obtain a loan. Of the funded loans, 40% have a credit score of 640-679, 35% have a credit score of 680-719 and 25% have a credit score of 720-850.

Lending Club was launched by Facebook in mid-2007. The social networking aspect, in theory, increases the likelihood of loan funding and loan repayment by making the person-to-person loans more community oriented.


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