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LendingClub is a peer to peer lending platform that allows investors to earn interest by lending money to borrowers. LendingClub provides a medium of exchange between borrowers looking to take out loans and investors looking to lend money. This new method of lending takes the bank out of the picture, allowing individual investors to benefit and earn monthly cash flow from the notes they invest in.
Looking to learn more? Check out our full review of LendingClub.
How Does LendingClub Work?
Peer to peer lending is an alternative lending process that takes a new approach to traditional borrowing and lending. With peer to peer lending, you are essentially taking the middleman out of the picture. Lenders will directly lend money to borrowers who apply for a loan. Borrowers then pay back their loan over time, paying both interest and principle with each payment to the lender.
To reduce risk, each investor on LendingClub has the option to invest a minimum of $25 in each note. The investor may then purchase 40 or more notes in order to diversify their portfolio and reduce risk. This will allow investors to spread risk across a number of notes. Rather than lending one person one thousand dollars, you will lend 40 different people $25 each. This greatly reduces the risk for the investor in the case the borrower defaults on their loan. This is similar to diversifying investments in the stock market. You don’t want to have all of your eggs in one basket!
LendingClub gives you the option to use their automated investing tool to match your risk with your optimal portfolio. Automated strategies allow you to invest in preset strategies that align with your investor profile. You may also choose to manually choose your notes creating strategies based off of loan grade, interest rates, or borrower criteria.
When Do I Get Paid On LendingClub?
LendingClub notes are installment based loans meaning borrowers must pay interest and principle back monthly. These monthly payments made by borrowers mean that investors will receive payments on a monthly basis as well. It is important for investors to understand that with each payment they are receiving a portion of their initial principal investment as well as interest earned for that period. Investors who want to maximize their return may want to reinvest their principle in order to keep earning interest on their capital.
What Happens If Borrowers Don’t Pay?
LendingClub collects the majority of monthly payments by automatic electronic transfers directly out of the borrower’s bank account. Once the funds are available, the funds are withdrawn out of the borrowers account, then sent to LendingClub, and finally disbursed to the individual owners of the notes.
If a borrower fails to make a monthly payment then LendingClub’s collection team will reach out to the borrower the same day via telephone, email and letter. If the borrower fails to respond then LendingClub will evaluate their best course of action for collecting and bringing the account current. Once the payment is 30 days delinquent then LendingClub will turn the account over to their external collections agency. This agency has more resources and will make efforts to contact the borrower and learn information about changes in information or recent locations. External collections may negotiate with the borrower to structure a new payment plan, or they may take further legal action to collect the amount owed.
Once the Note is 121 days past due then it officially enters Default Status. Once the note is in default a Charge Off will occur within 150 days past due (no later than 30 days after it has reached default status). Once the note is charged off, the remaining principle will be deducted from your account balance. Bankruptcies may be charged off at the time LendingClub is notified of the bankruptcy. LendingClub adheres to the Federal Fair Debt Collections Practices Act (FDCPA) which ensures collectors use fair and non-harassive collections policies.