Lending Club is a peer-to-peer lending and investing website. As a Lending Club user, you can seek personal loans that are funded by other users on the site. Or, vice versa, you can choose to be an investor, loaning money to Lending Club borrowers.

Technically, Lending Club is not a straight peer-to-peer lending/investing process. There is still a financial institution acting as an intermediary; in this case that is a bank called WebBank. WebBank technically makes the loans to Lending Club borrowers. (See who else WebBank works with.)

Why would you use Lending Club?

  • If you are seeking a loan, Lending Club may be a way to get that loan at a lower interest rate than from a bank or other lender.
  • If you are an investor, you may be able to get a higher return on your money than you’d get from other investments you might make.

Neither of those things is guaranteed, however.

Let’s look closer at the borrower side…

Lending Club gives borrowers the opportunity to obtain personal loans generally in the area of $1000 to $4000, though higher amounts might be possible. (Lending Club also does small business loans and auto refinancing.)

As a borrower you will be charged in two ways when you obtain a loan:

  • A loan origination fee of 1% to 6%
  • Interest on your loan balance

The amount you pay for either of these will depend on your credit history. The better your credit history, the smaller the origination fee and interest rate. Of course, if your credit history is not so great, your origination fee and interest rate will be higher.

You should understand that the origination fee comes out of your loan amount before the money gets to you. That means you’ll actually get slightly less money in your hands than the amount of the loan you’ve requested.

For example, if you get funding for a $2000 personal loan but have a 5% origination fee, you’ll actually only get $1900 in your hands because Lending Club will take its $100 fee, or 5% of the loan amount, and then give you the rest.

In the end, you might get a better interest rate with Lending Club than with credit cards or other personal loans, but make sure you understand what that origination fee does to your overall costs. There’s no reason to assume Lending Club is a better deal than other potential lenders just because it’s “peer to peer.”

Finally, understand that your payment history with Lending Club, whether good or bad, is reported to the credit bureaus and will affect your credit score. Making late payments or defaulting on a Lending Club loan is not somehow hidden from your overall credit history just because it’s peer to peer instead of a traditional bank loan.

Now let’s look at the lender/investor side…

Setting up as an investor with Lending Club is fairly easy. You’ll put money into a Lending Club account and then have a password-protected area that shows you how much money you have to lend, potential loans you can make, and how your loans are performing.

In terms of how you lend, you will see a list of potential borrowers once logged in to your Lending Club account, and each will have a letter grade based on their credit risk — A, B, C, D, etc. What you will find is that the better they are graded, the lower the interest rate you’ll make if lending them money, because they are at less risk of default and thus can get better rates from Lending Club lenders. Those with worse letter grades will yield a higher interest rate for you as an investor — but they are more likely to default on their loans, so there’s no guarantee you’ll actually earn more if you lend to them. You will likely want a mix of higher and lower graded borrowers to see what works best for you.

An important point here: When you lend money out, you are not the only lender on any particular loan. You will be lending part of the loan and other Lending Club lenders/investors will be supplying the other slices of that loan. This is good because it shields you from taking all the risk of any individual borrower, which diversifies your portfolio of loans so you can’t lose too much on any one person that fails to pay a loan back.

What kind of returns can you expect? It is hard to say. Lending Club’s numbers seem to suggest a 4%-6% return is likely, but you could do better or worse depending on the loans you choose to fund. You will see potential borrowers paying much higher interest rates, but again be aware that with that higher potential reward comes higher potential risk.

Bottom Line

If you are a borrower, Lending Club could be a good choice for you, but be sure to shop its interest rates & fees against other loan options. If you are an investor, take it slow and see how your initial investments do before putting too much money in. It usually takes a while to see whether borrowers are going to continue to pay their loan bills over the long haul.