Micro-lending and crowd funding have been around for a while but often the high risk and high minimum entry level of investment has put people including me off.
Recently I heard of a company named Lending Club, based in San Francisco . Lending Club has been in business for several years and specializes in small loans, mostly to individuals at low interest rates 6% upwards and an investor can lend from just $25 to any single loan. You can even open your account with just $25, though this is very risky indeed if your one loan fails to pay back. Lending Club therefore ask that you increase your minimum investment to $2,500 by the first anniversary of opening the account.
How it Works.
A borrower asks for a loan from Lending Club. who procede to do credit checks and also advertise the purpose and assessed interest rate to lenders.
If you are a lender you can choose to buy a share of this borrowing note for $25 or even buy all the outstanding value of the note which could be several thousand dollars.
Lending Club then after all checks are made, funding has been received and notes prepared send the borrower the money less a fee for finding the lenders.
At monthly intervals the borrower repays the loan over 36 or 60 months to Lending Club who pay back the lenders in proportion to their ownership of the particular note. This includes a portion of interest plus the original principal.
How Are Notes Assessed?
Notes are given an assessment by Lending Club assigned by factors such as previous payment records, debt to income ratios etc. Note nates go from G5 returning about 30% interest (but at very high risk of default) tio A1 with an interest rate of 6.03%.
In order to increase your chances of having a good return on your money it is neccessary to diversify across several hundred notes and varying the grades of note. Bearing in mind that there is no guarantee that any note will not go into default.
What Can You Do to Reduce Your Risk?
When you are choosing your notes you can add in a variety of filters, you can ask for loans to home owners, renters, set length of employment times, have only notes offered where a borrower is in little debt to income percentages or deselect borrowers who have had recent records for collection against them.
So if you set filters for borrowers with only A grade notes, with high credit scores above 700, home owners with zero defaults in the past five years that is all Lending Club will show you.
You can read the borrowers details, occupation, State of residence, default history, length of time since last default , their debt to income ratio and also their current revolving debt as well as if they have a mortgage, rent or own their own home.
What does it Cost?
Lending Club take 1% of your return as a fee, plus for accounts valued under $10,000 on each anniversary there is a current $100 fee to you.
Lending Club suggest a minimum of $2,500 to open the account but at the moment you can open the account with just $25. At the end of the first year however you must have a minimum of $2,500 in the account to keep it open.
Funding Your Account
Funding your account is simple all you need is to send a check to Lending Club or set up an electronic transfer from your bank.
Funding your account takes four business days, then you can invest in your choice of notes.
Funds received from borrowers are paid back into your lending club account throughout the month depending on the borrowers repayment schedule and you may choose to reinvest the receipts or withdraw them allowing a four business day window for funds to pay to your bank.
Find out more
The Lending Club Homepage