Lending Club – Closing the Peer-to-Peer Lending Gap
Named in 2011 and 2012 as one of Forbes’ most promising American companies, Lending Club is well on its way to leading the peer-to-peer lending websites. This may be due to new appointments in the team of the board of directors, which now includes a Chairman Emeritus from Morgan Stanley (John Mack), a former President of Harvard University and U.S. Treasury Secretary (Lawrence Summers), among other shining stars. Unlike some other peer-to-peer lending sites, Lending Club’s niche is firmly fixed with borrowers who average high credit ratings of 703, with 15-year credit histories and incomes of over $70,000, which reduces lenders’ risk. This move seems to have paid off – with 22 back-to-back quarters in the black.
Established in 2006, this San Francisco-based crowdfunding company allows investors from 28 states to lend out their money at interest, as a bank alternative to those wishing to obtain a loan. As of December 2013, funded loan amounts have reached past $3 billion, and investors have received over $270 million in interest. Loans are made with the help of Utah-based WebBank, an FDIC member. Over 80% of borrowers are using this crowdfunding method to pay off balances on their higher-interest credit cards, or to consolidate their debt payments into one monthly sum.
If this gives the impression that Lending Club has a goal of overtaking the banking industry, founder Renaud Laplanche would agree, according to recent Forbes article. A former winner of French sailing competitions, Laplanche wants to offer affordable peer-to-peer lending as a banking alternative, allowing borrowers to save upwards of 5% on high-interest credit card loans, and opening up interest rates (7% to 23%) to lenders who want more than what banks and stock markets can offer. Other leadership members share a similar drive to win, including COO Scott Sandborn, who directed marketing efforts for eHealthInsurance and RedEnvelope, and CFO Carrie Dolan, who was a former Charles Schwab Treasurer.
Lending Club does make money on all those transactions, though their operating costs are much lower than a bank’s, helping them to undercut bank interest rates. Investors pay a small fee (1%) on each payment made, and the borrower pays an up-front origination fee (between 1% to 5%) of the total loan, so long as the loan is approved. Also, smaller loan amounts (between $1,000 and $9,975) are restricted to 3-year agreements, while interest rates vary between 6.03% to 28.69%, depending on the borrower’s assessed loan grade. Loan payments can be made by either check or direct debit, but a $15 fee accompanies each check issued, whereas direct debit is free of charge. There’s also a $15 fee for unsuccessful payments that goes to Lending Club. Late payments will either be charged $15 or 5% on the amount due after 15 days, and this fee will get distributed between the lenders. Paying early is not penalized by any fee.
Beyond these fixed-income investments of peer-to-peer lending, Lending Club also offers services for rolled-over 401(k) and IRA plans. New IRA investors can pay the $100 account fee to partner company Self Directed IRA Services, Inc (a subsidiary of Horizon Bank), or have the fee waived if they maintain a $5,000 balance in Lending Club notes for 12 months, and increase the balance to $10,000 by the second year. This may balance out investors’ risk of lending to borrowers, whose accounts go into collections after 30 days of nonpayment.