How Lending Club Works

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Over the next few weeks I’m publishing the entirety of my free report on “How to Make Money with Lending Club” as blog posts, so you can access them without having to download the report. Last week was My Lending Club Story. If you’d like to read everything ahead of time, go ahead and download the report today!

Lending Club allows you to act like a bank. Instead of going to a bank for a personal loan for an addition on a house, medical expenses, or credit card debt consolidation, borrowers can apply for a loan on Lending Club. Credit card interest rates can be as high as 18, 25, even 29% or higher! Payday loan or personal loan rates can be just as damaging. Meanwhile, savers are stuck with savings accounts that return .05% annually.

Enter Lending Club, who plays matchmaker between those looking for a lower interest rate loan and those looking for a better investment option than a 1% CD. Lower interest rates are charged to borrowers, higher returns go to investors, and Lending Club takes a small percentage of the returns. Everyone wins. Except the banks, who are going to have to offer better interest rates to borrowers AND investors if they want to stay in business.

Lending Club is a simple concept. Creditworthy borrowers, usually with FICO scores over 700, go to the site, request a loan for anything they need (car, wedding, debt consolidation, credit card payoff, whatever). Based on the borrowers’ creditworthiness, they are assigned a letter from A-G and a number in each letter grade as well.

“A” grade loans therefore have the lowest default rate and the lowest interest rate. “G” rate loans are the most risky but also have the highest interest rate. The loans go up for a few days for investors to ask questions and look at the due diligence (verification of employment, income, etc) Lending Club automatically performs for you. Once the loan is fully funded, it’s issued to the borrower. The investors then receive principle and interest payments every month. Every time your payments add up to another $25, you can purchase another note and invest in a new loan.

Loans can be any amount from $5000-$35,000. Obviously, this is an enormous amount of money to invest in any one person. Lending Club makes diversification easy by creating “notes” out of each loan. A note is a sub-unit of the loan. The smallest note possible is a $25 note. So on a $5000 loan, you may have 200 lenders investing. In case the borrower defaults, your exposure to them was only $25, rather than the full $5000 of the loan.

By spreading the risk across multiple lenders, Lending Club can keep returns high for each investor. If a loan is completely repaid early, you can take the principle and interest you receive and invest in new notes. Borrowers get access to low interest loans, you can access to solid returns, Lending Club takes their cut for matching borrower to lender, and everyone wins!

Next week we'll cover the risks associated with peer to peer lending through Lending Club. If you can't wait until then, download the free report now!

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