Rainy Day Pennies | Debt Free Living and Personal Finance

All investments carry risk.  There are no guarantees, and Lending Club is certainly no exception.  In The Lending Club Primer, Part 2, we explored Lending Club as an alternative to a traditional bank loan, and as an alternative or supplement to your investments.  As with all investments, we must be well informed about the risks.

When someone applies to borrow money, Lending Club performs a credit check.  Based on their FICO score, debt to income ratio, and revolving credit utilization risk they are assigned a credit grade.  There is no direct correlation between FICO score and credit grade.  Lending Club factors in the whole picture on a number of variables.  Read Interest Rates and How We Set Them on exactly how this is done. Lending Club puts a cap on the maximum a person may borrow based on their grade up to $25,000 for the top tier.

Income can be verified by Lending Club by faxing a current pay stub, but this is not required.  However, potential lenders will almost always ask you to do this.  You’re more likely to get fully funded if you get it verified by Lending Club.

It’s not a done deal when applying for a loan with Lending Club, even if you have a top level FICO score.  Approximately 1 in 6 applications are approved.  I’ve read that it is more difficult to get a loan through Lending Club than through their competitor Prosper.com. Even so, defaults do occur.  Let’s take a look at the average default rates.

As of 3-1-2009 on their Historical Defaults page, average 12-month default rates based on risk grades are as follows:

Lending Club has only been open since 2007, so the broad picture is not yet known.  However, independent financial research group Javelin Strategy & Research in January 2009 published a Lending Club Investment Analysis document. In the graphic is a breakdown of the issued, late, and defaulted notes.  Of the total number of notes issued, only 2.8% defaulted.

That’s beating the credit cards by a long mile. The charge off rate for credit cards as of January 2009 is 6.8%.

So who is Lending Club?  What happens if they take my money and run off with my dog and truck?  Well, there would definitely be a tear in my beer and a WTF!  They shut down trading last year to file with the SEC.  They have completed that filing, and are now registered and regulated by the SEC.  (Assuming of course they are now awake at the wheel.)  Money that is in your Lending Club account is FDIC insured like your regular bank accounts.  Money invested in notes are not covered.  As with any investment, don’t put all your money in the same pot, and don’t invest more than you are willing to lose.

Read: The Lending Club Primer, Part 1 and The Lending Club Primer, Part 2.

Filed under:
Finances, Investing, Social Lending by Cathy