LendingClub.com, a new peer-to-peer (P2P) lending site launched via Facebook in May, has plunged into the P2P market that is booming in the U.S. and Europe. The company has distinguished itself from its competitors with higher credit score requirements for borrowers and a more personal touch to the P2P lending world, resulting in fewer defaults and more security for lenders.
LendingClub closed its first loan on June 3 and exceeded $528,200 in investments as of July 31. The U.S. peer-to-peer lending industry leader, Prosper, has passed out $70 million in loans to date; in the first month it was open to the public, Prosper netted $582,000 in loans, according to Eric Petroelje of Eric’s Credit Community, a Prosper data and statistics website. Though it is too early to tell precisely what rates of return investors in LendingClub will see, it is worth noting that as of July 31, only 27 out of LendingClub’s 131 available loans were not fully funded.
“We are very surprised at the high volume of loan origination,” Renaud Laplanche, founder and CEO of LendingClub, said. “We didn’t expect to originate such a significant number of loans. We closed our first loan on June 3 and five weeks later, we’re already at $400,000 in loans among Facebook members only. That is about four times what we had projected.”
Facebook’s online community provides a personal touch to P2P lending by building on a pre-existing social network. While LendingClub borrowers are listed by the amounts they’re borrowing and what they’re borrowing for, they are also tracked by their membership in Facebook groups. These groups are centered around schools, companies and personal interests such as music and politics.
Prosper also offers a groups feature allowing lenders and borrowers to join social groups, but those groups are specific only to Prosper, while the affinity groups on LendingClub are part of a larger social networking website. Facebook’s affinity groups are a well-established networking feature that has grown since Facebook’s creation in 2004, and they are completely separate from LendingClub itself.
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“We believe that person-to-person lending will gain adoption faster in an environment where people feel connected to each other,” Laplanche said. “These connections among members provide two key elements: first, a sense of trust among members, and second, the desire to help each other.”
Laplanche came up with the idea for LendingClub after running into some money troubles of his own. “This goes all the way back to 1999 when I started my first company. At that time, I charged the first big expenses on my credit card,” he said.
“Before I knew it, I had a $20,000 balance carrying interest at 18 percent interest rate despite my good credit. I was too busy to shop around for better rates,” Laplanche said. “After a couple of months, a few friends offered to lend me $20,000 at a 10 percent interest rate. That was the first time I thought of creating an online platform where people could borrow money directly among each other.”
LendingClub allows lenders to earn higher rates than those offered by Certificates of Deposit (CDs), savings or money market accounts. Like Prosper, LendingClub offers borrowers fixed-rate installment loans with predictable monthly payments for a three-year period.
Additionally, LendingClub prevents those with credit scores of 640 or less from borrowing. In contrast, Prosper’s cutoff is 520. LendingClub borrowers with a pre-mortgage debt-to-income ratio of 20 percent or less can list their loan requests, Laplanche said. These factors provide additional security for LendingClub’s lenders, though investors should still do their own due diligence before lending.
Money transfers are insured by FDIC pass-through insurance, and if a borrower is late on a payment, LendingClub charges a fee on behalf of the lender. If a borrower defaults on a loan, LendingClub reports that information to credit bureaus and contracts with collection agencies to recover the money. Thus far, there have been no defaults, Laplanche said, but it “is still very early.”
According to LendingClub’s website, LendingClub uses an algorithm called LendingMatch™, which finds relationships between borrowers and lenders based on geography, education, profession or connectedness within a given social network and then presents lenders with portfolios reflecting these relationships and the lenders’ individual risk preferences. This technology provides further incentive for borrowers not to default by reminding them that lenders are individuals, not institutions.
With the LendingMatch™ technology, lenders can see a recommended portfolio provided by LendingClub. Investors are always in control of their portfolio, however, and can make adjustments to the recommended portfolio or build their portfolio from scratch.