I've taken out two loans with Lending Club over the last 3 or 4 years. Each time I've compared the rate with my bank (Citi) and others, and each time LC has been competitively cheaper.
Citi advertises "Get a fixed rate ranging from 8.99% APR to 20.74% APR." and my rate with LC has been typically 7.86% APR (forget exact decimal place figure). The 8.99% rate with Citi assumes they give me the best rate - not guaranteed.
Its fast, friendly, and I can repay early at no penalty.
Ultimately, their sustainability will depend on the cost at which they can raise funds. Banks can raise funds cheaply through deposits (and many other sources like wholesale funding which may be at a higher cost), which they lend out at slightly higher interest rates than they pay their depositors. Given that LC is not a depository institution, the only way I see them providing lower interest rates is they have figured out a cheaper source of funding - or burning investor money to do this which is not sustainable and the big banks will defeat them eventually. The moment you start taking deposits, you will be regulated like any other institution and they need to compete with other banks on the same terms. Another aspect is that banks are in the business of risk management, so it is probable that LC has figured out a better way to manage their risks than existing institutions - again, this is something where existing institutions have enough resources to catch up easily.
> But all of the things that make banks scary don't apply. A run on Lending Club is not possible; nobody can pull their money out of notes or certificates. And if a lot of loans go bad, that will hurt the investors in those notes, but Lending Club as an entity won't be insolvent or even have any losses at all.
This is true, but one should recognize that for Lending Club to sustain itself over time, it must be able to acquire borrowers and sell notes. There are a number of events that could put a dent in both supply and demand.
On the demand side, if and when there is a recession, defaults will almost certainly rise and it's likely fewer investors (retail and institutional) will be eager to take on new credit risk. If and when interest rates rise, funding these loans may become a lot less appealing. One must also assume that at least some borrowers, particularly those who are heavily indebted, are themselves vulnerable to interest rate increases, so I wouldn't be surprised to see rising rates negatively affect the repayment performance of certain types of portfolios.
> There's another point that's a flip side of this one, which is: Equity-funded banks are great at lending. Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks.
Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks, because yield-chasing investors are currently willing to misprice risk. What happens when the music stops?
> Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks, because yield-chasing investors are currently willing to misprice risk. What happens when the music stops?
Very much this— I've been a lending club 'lender' for a number of years now, and for the last 9 months or so have had a very hard time obtaining practically any notes.
People are hyper eagerly funding notes which my models suggest have very poor risk adjusted performance. (And, if anything, I'm concerned that my models are too conservative— since they're based on historic LC data and lending club has been reaching out to less and less credit worthy lendees).
As a result I'm slowly reducing my amount in lending club as notes return funds and I'm unable to invest it effectively. It was neat in the beginning, but it's a pain to report taxes on, and the decreasing risk adjusted returns make it much less attractive than it used to be.
Lending Club will not have trouble raising capital or finding borrowers because it is a lower-cost operation than banks. As such, it can reduce the spread between the yield 'investors' earn and interest rates borrowers pay, making it more attractive to both. The growth of their total loan activity bears that out: 5 Billion in total loans over the last 5 years. 1 Billion of that in the last quarter.
The key to their business is in their ability to accurately forecast the default rate of borrowers. The more they can predict the performance of the loans, the more 'fixed' the income seems to investors and the more attractive it is. They do predict default rates for loans and inform investors what those rates are for each loan. Over time, I'd expect their statisticians and big-data analysts will be able to refine the models to be highly accurate.
I've been experimenting with LC as an investor for about a year and a half. So far, my loans are performing about 1% better than Lending Club forecast they would. I attribute that to an improving economy.
I ditched BofA, signed up with a credit union, and enjoyed fantastic service since. If you don't want to risk these guys in case they get screwed over by regulators, talk to your local CU!
> Lending Club is not a bank. So it's not subject to banking regulation, which means that it can do a core function of banking much more efficiently than an actual bank can.
Are the various banking regulatory agencies in agreement with that? (FDIC, Federal Reserve, Comptroller of the Currency, Thrift Supervision, as well as the various and sundry states)
I don't know about federal regulations, but state regulations have made things difficult. I can't use lending club here in Ohio, and a few other states don't allow it either.
Well, LC doesn't do deposits, so it is not doing partial reserve banking. I suppose there could be extra regulation attached to what they do, but I don't think it is much different than a message board that connects buyers and lenders at its core.
Can you invest in Lending Club if you don't live in the US? It doesn't mention anything in the terms of use but they ask what state you live in when you sign up. Can I just put a friend's state or something?
I really liked the observation that in exchange for your deposit (investment in a note) not being liquid (secondary market notwithstanding), Lending Club is able to match the maturity of their assets and liabilities, thus eliminating this portion of risk from themselves. Theoretically, this could be one of the causes for the lower rates borrowers can obtain and the higher returns that investors get. (Obviously a portion of the higher returns come from the lack of liquidity offered by the notes)
I always wondered why big banks didn't get into the business that Lending Club started. I figured that it was due to inefficiencies in the consumer credit model that made it such that "high risk" borrowers were ineligible for secured loans and that LC found a better way to accurately measure that risk. Who knew it came down to accounting?
> I always wondered why big banks didn't get into the business that Lending Club started.
LC didn't start it, it followed a number of other generally similar "peer-to-peer" lending services (Prosper.com is the first US one I'm aware of -- about two years before LC -- and ISTR there was at least one UK one about the same time as Prosper).
And banks don't get into it because it would involve risking the resources on a new business whose success outcome would be driving customers to account choices where the bank keeps less of the income from lending.
If the quasi-peer-to-peer-model becomes popular, banks will grudgingly get into it because then the choice will be between giving up all of the money to competitors rather than giving some of it up to investors in quasi-P2P loans, but they'd rather not stamp their imprimatur on the model while it still might fail to become a significant factor in how people invest and seek loans.
Use BTCJam and Lending Club. LC is amazing and I am happy with my returns. BTC seems like a scam as the reputation of borrowers means very little in their willingness to repay. I've seen many people build their reputation in order to borrow more and then bounce.
[+] [-] donohoe|11 years ago|reply
Citi advertises "Get a fixed rate ranging from 8.99% APR to 20.74% APR." and my rate with LC has been typically 7.86% APR (forget exact decimal place figure). The 8.99% rate with Citi assumes they give me the best rate - not guaranteed.
Its fast, friendly, and I can repay early at no penalty.
Extremely satisfied.
[+] [-] radmuzom|11 years ago|reply
[+] [-] 7Figures2Commas|11 years ago|reply
This is true, but one should recognize that for Lending Club to sustain itself over time, it must be able to acquire borrowers and sell notes. There are a number of events that could put a dent in both supply and demand.
On the demand side, if and when there is a recession, defaults will almost certainly rise and it's likely fewer investors (retail and institutional) will be eager to take on new credit risk. If and when interest rates rise, funding these loans may become a lot less appealing. One must also assume that at least some borrowers, particularly those who are heavily indebted, are themselves vulnerable to interest rate increases, so I wouldn't be surprised to see rising rates negatively affect the repayment performance of certain types of portfolios.
> There's another point that's a flip side of this one, which is: Equity-funded banks are great at lending. Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks.
Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks, because yield-chasing investors are currently willing to misprice risk. What happens when the music stops?
[+] [-] nullc|11 years ago|reply
Very much this— I've been a lending club 'lender' for a number of years now, and for the last 9 months or so have had a very hard time obtaining practically any notes.
People are hyper eagerly funding notes which my models suggest have very poor risk adjusted performance. (And, if anything, I'm concerned that my models are too conservative— since they're based on historic LC data and lending club has been reaching out to less and less credit worthy lendees).
As a result I'm slowly reducing my amount in lending club as notes return funds and I'm unable to invest it effectively. It was neat in the beginning, but it's a pain to report taxes on, and the decreasing risk adjusted returns make it much less attractive than it used to be.
[+] [-] 11thEarlOfMar|11 years ago|reply
The key to their business is in their ability to accurately forecast the default rate of borrowers. The more they can predict the performance of the loans, the more 'fixed' the income seems to investors and the more attractive it is. They do predict default rates for loans and inform investors what those rates are for each loan. Over time, I'd expect their statisticians and big-data analysts will be able to refine the models to be highly accurate.
I've been experimenting with LC as an investor for about a year and a half. So far, my loans are performing about 1% better than Lending Club forecast they would. I attribute that to an improving economy.
[+] [-] foobarqux|11 years ago|reply
Probably just statistical variation.
[+] [-] spiritplumber|11 years ago|reply
I ditched BofA, signed up with a credit union, and enjoyed fantastic service since. If you don't want to risk these guys in case they get screwed over by regulators, talk to your local CU!
[+] [-] chiph|11 years ago|reply
Are the various banking regulatory agencies in agreement with that? (FDIC, Federal Reserve, Comptroller of the Currency, Thrift Supervision, as well as the various and sundry states)
[+] [-] aaron987|11 years ago|reply
Here is more about that: http://www.lendacademy.com/why-some-states-dont-allow-p2p-le...
[+] [-] IgorPartola|11 years ago|reply
[+] [-] aianus|11 years ago|reply
[+] [-] dragonwriter|11 years ago|reply
No. And not if you live in certain parts of the US, either. And, in the states where it is available, there are additional restrictions.
http://blog.lendingclub.com/is-lending-club-available-in-my-...
http://kb.lendingclub.com/investor/articles/Investor/What-ar...
[+] [-] stygiansonic|11 years ago|reply
[+] [-] juanplusjuan|11 years ago|reply
[+] [-] dragonwriter|11 years ago|reply
LC didn't start it, it followed a number of other generally similar "peer-to-peer" lending services (Prosper.com is the first US one I'm aware of -- about two years before LC -- and ISTR there was at least one UK one about the same time as Prosper).
And banks don't get into it because it would involve risking the resources on a new business whose success outcome would be driving customers to account choices where the bank keeps less of the income from lending.
If the quasi-peer-to-peer-model becomes popular, banks will grudgingly get into it because then the choice will be between giving up all of the money to competitors rather than giving some of it up to investors in quasi-P2P loans, but they'd rather not stamp their imprimatur on the model while it still might fail to become a significant factor in how people invest and seek loans.
[+] [-] prostoalex|11 years ago|reply
https://www.wellsfargo.com/personal_credit/
http://www.eloan.com/personal-loans
https://www.discover.com/personal-loans/
My guess is that they constitute such a small revenue stream for the banks, that banks skip on marketing and execution.
[+] [-] novalis78|11 years ago|reply
[+] [-] snapclass|11 years ago|reply
[+] [-] kaushalc|11 years ago|reply