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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. If you’d like to read everything ahead of time, go ahead and download the report today!
Peer to peer lending is a new and very exciting development in the financial world. However, the principle behind P2P lending is as old as the banking industry. The first P2P lending companies were founded in the mid-2000s. Since then the industry has grown rapidly and already there have been over $2 billion loaned just in the US.
Peer to peer lending, also known as person-to-person lending, peer-to-peer investing, social lending, or abbreviated as “P2P lending” is:
the practice of lending money to individuals or “peers” through an online platform.
I’ve found the easiest way to understand Lending Club is you are acting like a bank. When someone needs money for a house, a car, a personal loan, or to start a business, they can go to the bank to apply for a loan. This is the same process Lending Club follows, except instead of the borrower paying the bank back, you get paid!
Most peer to peer loans are unsecured, meaning there is no collateral put up by the borrower to protect the lender against default. This creates the risk for no principle recovery in the case of a default, but we’ll get to that later.
With Lending Club, You Are the Bank!
Lending Club is a United States based peer to peer lending company headquartered in San Francisco, California. LC was the first P2P lender to register its loans as securities with the Securities and Exchange Commission, adding an enormous amount of legitimacy to its new and innovative financial service. Because of the SEC registration, each note (a percentage of the loan, smallest size $25) is a tradable and transferable legal document that can be bought and sold on secondary markets to other investors.
Lending Club started as a Facebook app in 2007. Originally, the idea was that you would borrow money from people who were connected to you socially. The founders of Lending Club believed that this would decrease the instances of defaults. After about a year of operations, Lending Club suspended new lender registration. On June 20, 2008, LC filed an S-1 statement with the SEC to issue $600 million in promissory notes to lenders. The registration was completed on Oct 14, 2008. The social aspect of connecting with Facebook is no longer included in Lending Club. Instead, the company relies on proprietary algorithms to offer the most credit worthy borrowers to investors for investment.
In April 2012, the 2008 SEC filing was renewed for an additional $1 billion in loans. The company became cash flow positive in November 2012. As of April 1, 2013, Lending Club issued over $1.5 billion in more than 100,000 loans. The company is now working towards a potential IPO in 2014.
Creating a More Efficient Marketplace with the Internet
Peer to peer lending allows for much more efficient lending operations. Take a bank for instance. They are hampered by immense regulation and overhead costs like office space, marketing, employees, etc. Lending Club removes these inefficiencies by taking the entire lending and borrowing process online. Instead of a bank acting like a middleman by using your deposits to lend out to borrowers, you can lend your own money directly to borrowers.
This allows the borrowers to borrow at a lower rate and the lender to get a higher rate of return for their investment. Lending Club still acts like a middleman and takes a small cut of each loan payment, but since they operate online their costs are minimal, and the majority of the interest payments are based on to you. This allows them to post average net annualized returns of 6-18% for 93% of investors. Compare that to your bank interest rate. Granted, Lending Club is not FDIC insured, but I believe the rewards are well worth the risks.
Next week on the How to Make Money with Lending Club Series: My Lending Club Story! If you’d like to read it ahead of time, download the free report now!
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