Rainy Day Pennies | Debt Free Living and Personal Finance

With the economy in an uncertain state, I’ve been looking for avenues to invest my money that is not related to the stock market. One of these is through the peer to peer lending site LendingClub.com. I’ve been a member since about April 2008, so here is my brief take on how it works, and how well it works.

What is Peer to Peer lending? Lending Club is a social network like Facebook or MySpace, but it connects people for borrowing or lending money. Borrowers and lenders are average citizens, not a banking entity.

Cool. What are the requirements to be a lender? The requirements are similar to opening any other bank account in the United States (US citizens only – Zopa.com is the equivalent in Europe). You must be at least 18 years of age and have a social security number. There are no credit checks for lenders. To transfer money, you need to setup a link to a bank account that is verified through random deposits.

Update: Since the time I first signed up, Lending Club has changed its filing with the SEC and their requirements for lenders is different. You now need a minimum income level and net worth. It is not available to residents of all 50 States yet. Read the details in their Lender Requirements FAQ.I don’t know how they are checking income levels and net worth.

I need some money to visit my alien cousin on Mars. What are the requirements to be a borrower? Ok…that’s cool. We’re not here to judge. Well that’s not entirely true – we’re here to judge your FICO score. I’ve seen some funky things being funded that a traditional bank wouldn’t approve you for. You tell everyone why you’re asking for a loan. They may ask you questions about it (like, if you’ve seen a psychiatrist lately). Most likely, though, we’re going to want to know how you’re going to make your payments if you’re on Mars. Do you have direct deposit from the mothership? Fax the stub to Lending Club and we’ll check it out.

You meet a minimum set of requirements to become a borrower. You submit information for a credit check. Your FICO score needs to be a minimum of 660+, which is a little over subprime. Your debt to income ratio is below 25% (excluding mortgages). Your revolving credit utilization is less than 100%. You have no bankruptcies in the past 7 years, or collections in the past 12 months. There are a couple of other minor details, but those are the biggies. If these things check out, you’ll probably get your money and you’re going to Mars!

How do I sign up? Use my referral link, you’ll get a signup bonus of $25 to try out. Score!

Scored! So how do lenders and borrowers meet up? I am a lender. As a lender, I browse ‘notes’ from borrowers. I can browse their requests for average rates of return, credit score, debt to income ratio, and delinquencies. Basically, I can choose the risk level that I want. There’s a chance that my borrower could default on his/her loan. Looking at the overall picture of their credit history, I can guess how likely they are to pay me back. Just like how loan officers used to do it before they went all "Banks Gone Wild". I can lend my money to only A+ borrowers if I want, or diversify with a few more ‘risky’ borrowers. By lending a portion to higher risk borrowers, I can increase my average rate of return.

The graphic illustrates what browsing notes looks like, and how to define your search criteria for your risk tolerance. I’ll explain more in the next installment.

Read: The Lending Club Primer, Part 2 and The Lending Club Primer, Part 3

Filed under:
Finances, Investing, Social Lending by Cathy