Peer to Peer Lending

Peer to peer lending (P2PL), do you know exactly what that is? Until today, I must admit that I had never heard of it. Yes, I have heard of peer-to-peer sharing, which in my mind, for the most part is the illegal sharing of copyrighted material. Anyway back to P2PL, what I found was that it is a service that matches borrowers and lenders. The rates charged are lower than bank rates. The Lending Club shows a current interest rate charge of 6.78%.  The current credit card rates you are probably paying are most likely significantly higher than the 6.78%.

Here’s how it works. Let’s say that you are trying to get out of debt, pay-off a credit card(s), or need money to start a business, or you need a loan for whatever reason, you decide to join a P2PL club. In order to qualify at Lending Club you must have a FICO score of at least 660, which means 50% of borrowers are not approved. You cannot have any late payments on your credit report for the last year. This  disqualifies another 25 % of the applicants.  In all, only 10% of the people who apply for a loan at Lending Club actually get funded.

Pretty rigid standards, but this helps protect the lenders (investors) because the loans are unsecured.  An unsecured loan means that there is not an asset that secures the loan, e.g. a car for a car loan, or a house for a mortgage. The maximum amount you can borrow is $35,000. The minimum is $1,000. The interest rate is determined by Lending Club. It  is based upon the applicant’s credit rating. The term or the length of loan is three to five years. The interest rate is a fixed. This means it will not go up or down during the term of your loan. The application is done online.

You must register on their site in order to borrow money. This includes several steps. They collect information to verify your identity and assess your creditworthiness. You will then be asked to complete a simple loan request. If you pass the initial screening, they will show you several loans for which you qualify. After you select the loan option you prefer, they will list the loan. You will be asked to authenticate your bank account, which must occur before you can receive your loan funds. Your loan will be listed on their site for two weeks or until you get fully funded, whichever happens first.

Alright, this might sound like something you want to try. How does Lending Club get the money to loan you? It actually does not come from Lending Club. It comes from investors. Investors can open an account for a minimum investment/lending money of $25. In order to invest, you must meet these requirements:

  • Income Level – In most states, you must have a gross annual income of $70,000 or more and have a net worth of $70,000 or more.  In the state of California, investors must have a gross annual income of $100,000 and a net worth of $100,000.
  • Approved States – You can invest if you are you a resident of: California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Kansas, Kentucky, Louisiana, Maine, Minnesota, Missouri, Mississippi, Montana, New Hampshire, Nevada, New York, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin, West Virginia, and Wyoming.
  • Net Worth – If your total net worth is great than $250,000, there is no annual income requirement.  In the state of Kentucky, investors must qualify as an “accredited investor” under the securities act.
  • Asset Allocation – Lending Club investors must not deposit more than 10% of their net worth in Lending Club notes.
  • $25 – Only $25 is needed to start.

The investor is able to manually select which loans he or she want to fund. Alternatively, the investor can use tools on the site that selects loans based on filters the investors select.  When investors use those tools, it doesn’t take much time at all to get a diversified portfolio of loans. More than one person can fund the loan. Let’s say you want to borrow $1,000. Then, up to 40 people could fund your loan. This happens because interested lenders contribute portions of the amount you requested. You might have less lenders because one person could fund the whole thing or maybe two people will fund it.

Once your loan is funded, they will let you know. You will then be able to receive your full funding or partial funding if it was not fully funded. They can relist your loan if you don’t receive full funding.

It sounds like a very good deal for both the borrowers and the lenders. You pay a lower interest rate and investors/lenders receive a higher rate of return (the interest you pay them) than they would receive from investing their money in a bank. One thing you must remember is that if you default (you don’t pay back the loan), the default is reported to all three credit bureaus. The Lending Club uses debt collection practices on all borrowers who default.  This runs the gamut between making nice reminder phone calls, to working out a payment schedule to legal recourse. If you’re a lender, you still have a chance of collecting after the loan defaults.

Other P2PL companies are Prosper, America One, Peer Lend, Funding Circle. Next Level Funding, and Social Lending. Funding Circle and Next Level Funding offer business lending.

If you decide to borrow or invest from a P2PL, drop us a comment on this post and let us know about your experience.

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Disclaimer: We do not endorse or recommend any of these P2PL companies. We are in no way associated with any of them nor do we receive any type of remuneration from them. Borrowing from and/or investing in these companies is at your own risk. You will not hold mrherrera liable for any harm, damage, or lose you might incur. This post is provided for informational purposes only.

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