The Most Common Lending Club Complaints Explained
Is Lending Club a Good Choice for Me?
What do the person who owes between $5,000 and $35,000 on his credit cards and the person who has $35,000 in the bank have in common? Lending Club is looking for both of them. Lending Club is a good place for people who need to borrow money to get it, and it is also a good place for people who have extra money to invest it and earn rates far in excess of what the bank is paying.
As a peer-to-peer lender, Lending Club links those two groups of people and makes its money from origination and processing fees. Surely there has to be a catch, it can’t be that simple, can it? Don’t people who use Lending Club have complaints? Yes, some do, but most of the problems are overblown. We dispel the top 4 myths of this lending service below.
Myth #1: Anyone Can Get a Loan from Lending Club
Could Lending Club Make Money Lending to Just Anyone?
While the fact that Lending Club advertises it can save you money by consolidating your credit card debt makes some people believe that Lending Club will accept all applications, those who invest in Lending Club loans are glad they do not. According to Nick Clements at Magnify Money, Lending Club requires a minimum credit score of 600.
Lending Club’s proprietary criteria also consider the number of hard credit inquiries, the debt-to-income ratio, and the borrower’s employment status and income. Investors who fund the loans may apply their own screen criteria to the data collected on the Lending Club application, and it is possible that loan applications accepted by Lending Club could end up not being funded by investors.
As of this writing there are over 150 loans on the Lending Club platform that have one day until their funding deadline expires; and most of those lack funding for a substantial portion of the loan. It is likely many of them will not be funded because investors did not believe they were good investments.
Not only does Lending Club turn away borrowers it considers to be poor risks, investors can refuse to fund those they do not believe likely to repay the debt. When potential borrowers from Lending Club post complaints on internet forums, it is often because they did not get a loan. However, Lending Club funded over $1.2 million in loans during the last quarter of 2015, so many people with decent credit do get granted loans.
Myth #2: Lending Club Loans Are Cheap
It Depends on Your Definition of Cheap
Current Lending Club rates range from 5.32% to 31.89% and while most borrowers would like to think they fall on the lower end of the range, most of the loans issued by Lending Club were rated “C” or higher, meaning the interest rates were between 11.99% and 31.89%. Some Lending Club complaints seen online are from customers who are unhappy with the fees, but those fees are disclosed when you apply for the loan as well as on a public page on Lending Club’s website.
While “A” rated borrowers and some “B” rated borrowers may pay less, most Lending Club borrowers will pay a 5% origination fee on top of the interest rate. That origination fee is deducted from the amount borrowed before the money ever hits your account.
In other words, if you ask to borrow $10,000 and the origination fee is 5%, only $9,500 is deposited in your account, but you will have to repay and pay interest on the entire $10,000.
If you are late with payments or if Lending Club is unable to automatically draw your payment from your account each month, additional fees will be incurred. Lending Club loans may not be cheap but the fees are reasonable compared to the alternative of carrying high balances on high-interest credit cards.
Myth #3: Investors Should Try to Find Safe Loans
Safe Loans Don’t Pay Well
If you read blogs about investing with Lending Club you are sure to come across an article like this where the author describes a conservative strategy and then justifies it by pointing to the low number of defaults (loans the borrowers do not fully repay) in his or her portfolio. However, these bloggers then complain that their returns do not approach those touted by Lending Club.
One person generally considered an expert on Peer-to Peer Lending is Peter Renton of Lend Academy. He analyzed several common filters people use and concluded the important lesson is this: Don’t rely on what you think should be correct when investing. There is enough loan history for investors to see what has and hasn’t worked in the past. I think investors should base their investment decisions on data and not on a hunch that may or may not be true.
The thing to remember is that the goal of Lending Club is to price loans appropriately. Those loans their data shows have a high chance of defaulting have higher interest rates than those their data shows have a low chance of defaulting. Like my brother the used car salesman said “I can make money lending money to any group of people; I just have to price it right”. Renton and other experts do favor filtering loans but recommend doing so based on data, which can be parsed at NSR. Once you find a filter that increases ROI (return on investment), Lending Club’s Automatic Investing feature will allow you to use that filter on a “set it and forget it” basis.
Myth #4: I Can Make Over 15% Annually at Lending Club!
Only if No Borrowers Default
Sometimes those new to Lending Club are excited to see the high rates of return shown the first few months they invest. If they are bloggers, they post screenshots showing these terrific returns. What they often don’t do is post the screenshots when the returns become more realistic.
Freely available data from Lending Club shows that the annualized return on a year’s loans, as a group, drops precipitously during the first eighteen months of the loan’s life, continues to drop a bit for the next six months and then levels out.
The annualized return on years in which all three year loans have been completed ranges from 2.35% in 2008 to 7.34% in 2012. The reality is that defaults are going to happen. The other reality is that except for 2008, the best returns were on the mid-grade, C, D, and E loans. Many Lending Club complaints about lower than expected returns are unwarranted due to the inherent risk of investing and the possibility of defaults.
The Final Verdict
For those with realistic expectations, both on the borrower side and on the lender side, Lending Club can be a valuable financial ally. While they are not giving money away, borrowers - particularly those with good credit - will find the interest rates and fees to be competitive with other loan sources.
While some investors may see returns close to 15% for a few months, over the long term, the return of those who invest in mid-range loans will be close to 8%, which compares favorably with the stock market.