Peer-to-peer lending is arguably one of the greatest financial innovations of the past few years, especially for borrowers.
The peer-to-peer model allows borrowers to access loans at better rates than they could get through traditional banks because they are borrowing from individual investors, rather than monolithic banks.
The lenders/investors are also able to get a better return, so it’s a win/win.
Lending Club is currently the largest peer-to-peer lending network, responsible for over $13 billion in loans as of September 2015. It is available to borrowers in every state except Idaho and Iowa, where borrowing from Lending Club is against the local laws.
If you’re looking for a loan—and in particular, if you want to consolidate debt—Lending Club can be an excellent option. Here’s why:
Only Four Steps to a Loan
Lending Club offers loans ranging from $1,000 to $35,000 at rates from 5.99% to 32.99% APR. The loans are unsecured, and can be used for anything you choose, which helps explain why 67.7% of Lending Club borrowers report using their loans to consolidate debt or refinance existing loans. According to Lending Club’s own research, borrowers who use their loans to consolidate loans or pay off credit card debt reduce their rates by an average of 33%.
For well-qualified borrowers, the process of applying for and receiving a loan is fairly quick and painless.
Step 1: Check Your Rate
The landing page of the Lending Club website asks you to specify the amount of money you are looking to borrow, the purpose of the loan, and your (self-reported) credit score.
Once you click “Check My Rate” you are then asked to provide some more information, including your name, birthdate, mailing address, and annual income. (As the website points out on this page, checking the rates available to you will not affect your credit score.)
Once you click the “Get Your Rate” button after providing this information, you are either approved or denied for your loan. If you are denied at this point, it is likely because either your credit score is below the minimum score of 620, or because the amount you want to borrow represents too much debt compared to your income.
If you are approved, you will see your interest rate and monthly payment for the specific amount you have requested, as well as other loan amounts you may have qualified for. For instance, if you request a $2,500 loan, you may also receive approval for loans that are higher or lower than that amount. You can compare the loan payment amounts and terms, which will range from 36 to 60 months, to see what will best fit your needs.
Step 2: Personal Information
Lending Club needs to know your Social Security number, employment, and housing status in order to verify your identity. The website secures this page with 128-bit encryption, so it’s safe to provide such personal information.
Once your personal information has been verified, you are presented with the terms of the loan, which you must agree to by e-signing your name to the loan application.
Thus far, all you have done is qualify for the chance to receive a loan. You have to remember that Lending Club is peer-to-peer, so there is not yet any money available to you since investors have not yet decided to loan you money. What happens next is that your loan becomes open for funding so that investors can choose to fund your loan.
Step 3: Getting Funded
Once your loan has been approved it will be ranked with a letter from “A” to “G” to approximate your risk of default. Your loan will then be open for funding for a listing period. Investors can choose to put as little as $25 toward any particular loan, which means your loan will be funded by a number of different lenders.
Obviously, A loans, with a lower risk of default, will be more likely to attract lenders than G loans. However, more than 99% of approved listings on Lending Club receive full funding within 14 days.
If you reach the end of the listing period without receiving full commitment, you will be offered the amount committed as a loan, provided it is at least 60% of the requested amount, and at least $1,000. (This is a rare phenomenon.)
In most cases, funding happens very rapidly.
Step 4: Verify Your Identity and Banking Information
The final step to receiving your Lending Club loan will require the most legwork. Lending Club requires that borrowers who have reached this step to electronically submit a variety of paperwork to prove income. You may be asked to submit anything from tax returns to pay stubs to bank statements. Each borrower is different, so you may be asked to provide any or all of these items.
In addition, Lending Club will need to verify your bank account, which it will do by making a small trial deposit of less than a dollar into the account. Once the deposit has been made, you will log back into Lending Club to verify the trial amount on their site. This bank account will be where Lending Club deposits your loan once the funds become available (which will only take a few days).
Finally, Lending Club may also run a hard credit inquiry on you. While simply checking your rate to get the ball rolling with Lending Club does not affect your credit score, this hard inquiry will lower your score for a few months. If you do take a loan with Lending Club, it’s a good idea to wait at least six months before applying for another loan to let your score recover.
Rates and Fees
While Lending Club advertises rates as low as 5.99%, it is very unlikely that you will see a rate that low, since it is only available to individuals with near-perfect credit. Even borrowers who have an A grade loan may pay as much as 10.27% APR for a 36 month loan. Borrowers whose loans are graded F or G may want to think twice before signing up, since the interest rates can go up to 32.99%.
In addition to your APR, it’s important to remember that Lending Club charges an origination fee of between 1.11% and 5% on each loan, depending upon your credit. The origination fee is how Lending Club makes its money, and it’s something you need to take into account when you request your loan. For instance, if you need to have exactly $5,000, you should make a request for $5,250 to compensate for the 5% origination fee.
Paying Back the Loan
One month after the loan is deposited in your bank account, Lending Club will begin automatically debiting your monthly payment from the same account where the loan was deposited. If you do nothing, your monthly payment will continue until the loan is paid off.
If you want to make extra payments or pay the loan off early, there are no prepayment fees. You just need to call Lending Club at 1-888-596-3157 to arrange extra payments or an early payback.
The Bottom Line
Depending on your credit-worthiness and your financial needs, Lending Club can be a great option for an unsecured personal loan. This is particularly true if you need to refinance a loan with unfavorable rates or consolidate credit card debt.
Take a look at the below example of using Lending Club to refinance a credit card.
It’s important to recognize that Lending Club is not for everyone. Even if you can qualify for a loan through their peer-to-peer network, it’s a good idea to crunch the numbers to determine if their rates and repayment terms really are your best option.
Click here if you’d like to learn more about Lending Club and if it meets your needs.