Lending Club has provided an alternative to bank financing with their peer to peer loan marketplace since 2007.  During that time they’ve continually been improving the process of lending and borrowing money with a peer to peer model and now they’re closing in on 25K investors.

Lending Club is giving away $2,500 cash to the person that becomes their 25,000th investor; based on their growth rates they anticipate that person will join sometime in the month of September. 

Lending Club Giveaway Rules

If you’re interested in going after the $2,500 prize, the only requirements are that you must be 18 or older and a legal resident of the US.  You have to open an account before the end of the month and link it to a verified bank account.  If you’re the 25,000th investor Lending Club will notify you by e-mail within 5 business days of the end of the month.

Lending Club Performance

I included a Lending Club review a while back about how you can borrow money with the peer lending model. 

It seems as though Lending Club has plenty of people looking for loans and in order to meet the demand they’d like to encourage more people to become investors.

They’ve been closely tracking the performance of peer loans and from July of last year to July of this year the average net annualized returns have been 9.6%.

Of course you don’t have to fund part of a loan in order to be eligible for the prize; which is a good thing because I don’t think people would want to invest any money without taking the time to learn the ins and out of the peer lending process.  Lending Club does have good tutorials and guides to help you understand the process and tools to help you search and evaulate loans.

If you’re interested in becoming a lender or entering the $2,500 cash giveaway you can enter by registering with Lending Club – Click Here.

Have you decided it’s finally time to take charge of your finances and work on a plan to get out of debt once and for all? If so, congratulations! The bad news is that it may take a while to dig out of your debt hole, the good news is there are dozens of options available to help you through the process.

Debt Consolidation

One of the options you may be considering is debt consolidation; a process that allows you to consolidate your high interest balances into a lower interest loan. This is a popular method of debt reduction due to the fact that you have only one payment to make versus multiple payments throughout the month. Additionally by consolidating into one lower interest loan more of your payment will be applied toward the principle loan amount, therefore not as much money will be wasted on interest.

Unfortunately in today’s economic climate qualifying for a loan to pay off your high interest debt may be challenging. For people who feel debt consolidation is the right answer for their debt elimination plan, social lending networks might be an option to consider.

Social Lending

Social lending networks such as Lending Club offer peer-to-peer (p2p) lending for individuals who qualify for personal loans. The concept is simple enough, borrowers can apply online for personal loans at a lower rate than offered by more traditional lenders (banks, credit cards). In turn lenders can help borrowers while seeking attractive returns.

How does Lending Club work?

If you are looking to consolidate higher interest loans you can apply online and instantly view the interest rate you qualify for. As part of the loan application you will have to provide your social security number and other identifying information in addition to meeting certain credit qualifications. Qualifying borrowers will have their loan request listed for a two week period in which lenders have the opportunity to select requests to fund. If at the end of the two week period your loan is not funded you can either re-list the loan or accept partial funding if it has been offered. You can see the full application process explained in this Lending Club review.

Lending Club Terms and Fees

The loan amount is set to fully amortize over three years with monthly payments to include principle and interest ranging from 6.69%-19.37%. Once you submit your loan request it will be assigned a Lending Club “grade” which correlates to a predetermined interest rate. As with many other types of loans a borrower can expect to have processing fees (determined by the grade assigned to your loan) as well as unsuccessful or late payment fees if your payment is not honored by your bank or paid late.

Social lending vs Traditional loans

The main difference with peer-to-peer (p2p) lending seems to be the loss of the middle man. When you remove the middle man- traditionally a bank- less money is lost in the transaction to cover the profit for the financial institution. While there are some processing fees involved both the borrower and lender can benefit financially by using this system.

Trisha Wagner is a freelance writer for DestroyDebt.com, a debt community featuring debt forums. Trisha writes regularly on the topics of getting out of debt and personal finance.

Lending Club is a company that allows you to borrow money directly from other people instead of from a bank. Lending Club has built a system that allows you to apply for a personal loan on their website and lets other consumers lend you the money.

This approach to getting a loan is known as peer to peer lending, or social lending, and the main concept is that loan rates are lower because you cut out the middle man, banks, and borrow directly from other people.

Borrowing or Lending Money

You can become either a lender, a borrower, or both with Lending Club but this post will take a look at the process of applying for a loan through the Lending Club website. 

Some people may be hesitant to apply for a personal loan through a peer to peer lending site since it’s different than the traditional method of borrowing from a bank or credit union but thousands of people have collectively borrowed millions of dollars from peer lending sites and have had great experiences.

Sign Up for Lending Club

The first step of getting a personal loan through Lending Club is to signup for an account at their website.  All that’s required as part of the initial signup is entering your email address, a security question, and creating a screen name for the site.

You’ll receive a verfication email containing a link asking you to confirm that you registered with Lending Club.  Once you click the link to confirm, you’ll get another email welcoming you as a member and letting you know how to get started

When you’re ready to invest money or get a loan, just click on the Invest or Borrow tab or any of the “Start Investing” or “Start Borrowing” buttons

Apply for a Personal Loan

Once you’re logged in and you click on the Borrow tab at the top of the screen, if you’re taken to a screen that talks about the loan application,
interest rates, and privacy there should be a Get a Loan button at the bottom of the page that will take you to your loan application.

Lending Club has organized the process of applying for a loan into 8 steps.  The first information you enter is how much you’d like to borrow and what the money will be used for. 

Here you can see an example of the first screen, the description of the loan request is an important part of getting the money you’re asking for.  Of course people will look at your credit rating as part of the evaluation process but they’ll also pay close attention to what you’re using the money for and how you’ll pay it back.

Here is an example of a loan application where I specify what I need the money for and how I plan on paying back the money I borrow: 

I’m looking for funds to turn my eBay inventory into cash.

 

I’ve run an eBay business for the past several years, purchasing items at 60-70% off retail and reselling them for a profit on eBay.

 

I have about $3000 worth of inventory that I need to sell this Christmas season and I am going to hire an assistant to list the products on eBay, handle the sales process, and ship the products.

 

This loan would pay the salary of the assistant.  The amount I spent on the inventory is around $3000, since I purchase items 60-70% off retail, the retail value of the inventory is $4800 – $5100.

 

I will pay back this loan with the cash I earn from the sale of this inventory.

People that are considering funding your loan will want to know how much of a credit risk you are so the more detail you can give them as to how you’ll use the money and pay it back the better.

Personal Loan Application

The next step is to fill in your personal information: name, address, birthday, social security number.  Most personal information will not be made available to potential lenders, any data that is, such as your city and state, is highlighted so that you see feel secure about your privacy.

The same screen also asks for your income and employer information, whether you rent or own, and asks for permission to obtain consumer reports from agencies such at TransUnion, Experian, and Equifax.  They use this consumer information for the next step,  identity verification.

Identity Verification

Below are some sample questions that Lending Club might ask you to verify your identity:

What year was your most recent mortgage established?
# 2000
# 1994
# 2003
# 1998
# None of the above

On which of these streets have you lived previously?

    * NE DIAMOND
    * OAK
    * CAMBRIDGE
    * WASHINGTON
    * None of the above

Which zip code has never been a part of your address?

    * 20401
    * 57186
    * 57361
    * 98101
    * None of the above

If your answers to the questions match what is on your consumer credit reports then Lending Club deems your identity as verified, that you are who you say you are.

Personal Loan Terms

The next step in the application process is to choose your loan terms.  You are shown your loan APR that was determined based on your credit score, loan amount and Debt-to-Income ratio (DTI), and presented with a choice of loan amounts. Below is an example:

Truth in Lending Disclosure Statement

Once you select a loan term you’re taken to your Truth and Lending Disclosure Statement that shows you your Annual Percentage Rate, Finance Charge, Amount Financed, and Total of Payments.

Bank Funding

After you’ve accepted the loan terms you’re then asked to setup your bank account information so that you can receive the money if your loan is funded.  As you can see below, it’s the standard ACH setup where you enter the bank name, routing number, and your account number.  You are also asked to agree to some terms that authorize Lending Club to verify your bank account.

Borrowing Affiliations

You’re almost finished with the application at this point.  In this step you can setup what Lending Club calls affiliations. Here is how they describe them:

“Lenders often review personal profiles and sometimes decide to fund loans based on their shared interests and backgrounds with the borrowers. The information you provide below will be displayed publicly (yet anonymously) in your loan listing.”

These affiliations include

• Education (List any colleges, universities or other accredited institutions that you have attended or are currently attending)
• Workplace (current or former places of employment)
• Geography (city, state)
• Associations (trade associations, charities, service organizations, or groups with which you are affiliated as a member, volunteer, board member, etc.

Review and Submit Loan Application

The final step in the application process is to review the information you’ve submitted and verify it’s all correct.  Here you can edit your Loan Title and Loan Description and are shown your Loan Terms, for example:

    Requested amount: $1,000.00
    Loan length: 36 months
    Grade: A
    Rate: 7.68%

Here Lending Club also explains the details of your loan listing.  In this example case the loan request will be listed in the loan marketplace for people to fund for either 14 days or until the loan if fully funded, whicheve is sooner.

The last thing you do is to agree to their Loan and Borrower Agreements and once you click the Submit button on that page your loan application is complete!

Prosper is going through a process to “register, with the appropriate securities authorities, promissory notes that may be offered and sold to lenders through our site in the future” so that they can offer a secondary market for loans.

During the registration process, Prosper is having to go into somewhat of a holding pattern, the details are described in the email I recieved below.  Another peer to peer lending company, Lending Club, started a similar process months ago but I have reason to belive that Lending Club will begin accepting new members again in the coming months.  Below is the email I recieved from Prosper:

The registration filing is a necessary step toward making the secondary lending market available to the community. This is something many of you have been asking for, and we believe the liquidity of a secondary market will make Prosper even more vibrant.

Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders. If you’re an existing lender, your current lender agreements will be unaffected; your existing loans will continue to be serviced; you’ll be able to track and monitor your loans; and you’ll be able to withdraw funds from your Prosper account.

If you’re a borrower with an existing loan, you will continue with your current borrower agreement and be unaffected by the registration process. If you’re a borrower seeking a loan, you will still be able to create a new loan listing, which we will endeavor to fulfill through alternative sources.

A successful registration can take several months, but we assure you we will do our best to move forward as quickly as possible. Until this process is complete, we’re required to be in a quiet period and will be unable to respond to press, blogger or other inquiries about Prosper or the registration filing until it becomes effective.

We apologize for any inconvenience this may cause, and want to thank you in advance for your understanding and support.

Peer to peer lending is making an impact on the way some people borrow or invest their money and the word is spreading about both Lending Club and Prosper.

Within the last week and a half, person to person lending has seen coverage on the CBS Evening News, the Wall Street Journal, and Entrepreneur.com:

• In Credit Crunch, Lending To Each Other – More Americans Turning To New Source Of Money: Person-To-Person Lending – CBS News
• Where Either a Borrower Or a Lender Can Be – Wall Street Journal
•  Business Loans Get Personal – Entrepreneur

While CBS focused more on the ability of individuals to borrow and lend money, the Wall Street Journal article looked at both entrepreneurs and consumers, and Entrepreneur.com covered how small businesses are using peer to peer lending to raise capital. 

The CBS report estimated the size of the peer lending industry to be about $1.6 billion dollar now and expects it to grow 800% in the next 2 years. One things for sure, if Katie Couric keeps reporting on the industry, that will speed its growth.  The next thing Chris Larsen (Prosper CEO) and Renaud Laplanche (Lending Club CEO) need to do is get on Oprah : )

You can watch the CBS clip below:

Congratulations to Dawn on winning a copy of the Complete Guide to Prosper!  She’s all signed up at Prosper and her registration is pending the bank confirmation process.

You can see some other reviews of the book at the sites below:

• Rate Ladder met the book’s author at Prosper Days.
• Digerati Life and Lazy Man both contributed content as part of the bonus offer.
• Debtsmart says “Prosper is changing the face of lending every day and will be a financial force as people discover they can cut out the middleman”.

The first chapter in a new book about lending and borrowing on Prosper is entitled “How & Why Prosper.com Will Revolutionize America”.  The book is called “The Complete Guide to Prosper” and is authored by Sean Bauer, a borrower, lender, and group leader on Prosper.

It’s nice to see an author enthusiastic about the topic they’re covering but I think “Revolutionize America” is a little over the top. Perhaps a more appropriate title for the first chapter might have been “How and Why Prosper Can Become Your Personal Banker”.  Bauer explains how Prosper makes this scenario possible by cutting out the middle man.  Of course, when you remove the bank from the borrowing and lending equation new risks are introduced.

Peer Lending Risks
The first chapter responsibly covers these risks right up front to help people understand the potential downside risk that peer to peer lending does face in terms of loan defaults.  Really the only risk that I saw listed for borrowers is that they might spend their time building a listing only to not have their loan funded. I suppose another possible risk for borrowers would be that they could over extend themselves and borrow more than they could afford to pay back. 

Benefits of Peer Lending
People borrow on Prosper for a wide range of reasons such as funding a new business, consolidating debt at a lower interest rate, or simply just improving their credit score.  Bauer lists the ways that Prosper benefits these borrowers:

• Borrow for a fixed 3 year term, unlike the perpetual debt of credit cards
• Get the amount you need, not what the bank’s willing to lend
• Access to funding not available through traditional banks
• Potentially lower interest rates
• Ability to use groups for support

One benefit I don’t think he mentioned is the ability to apply for a loan from the comfort of your own home.  This could be especially beneficial to someone who has a disability that can’t easily make it into a bank or even a single mother who doesn’t have the time or patience to drag her rambunctious kids into a waiting room while she applies for a loan in person.

Bauer also covers how Prosper benefits lenders, here are the key points:

• You can beat the interest rate offered by your bank
• Lend as little or as much as you’d like, minimum $50 – maximum $25,000
• The ability to lend small amounts allows you to easily diversify your investments across multiple loans

Since the book is all about Prosper it doesn’t mention that you can get involved in peer to peer lending with an even smaller initial investment, only $25, at another peer site called Lending Club.  Lending Club is actually offering a $25 bonus for new lenders so you can basically give peer lending a try at no risk.

Complete Guide to Prosper
After explaining what Prosper is and how a borrower or lender could benefit from it’s use Bauer goes on to provide a users guide to borrowing and lending on Prosper in subsequent chapters.  The chapter list is below:

• Getting Started on Prosper: Creating an Account
• Borrowing: Should You Borrow With Prosper?
• Borrowing: Creating Your Borrower’s Listing
• Borrowing: Endorsements Give You a Helping Hand
• Borrowing: Managing Your Loan
• Groups: Take Advantage of Their Huge Potential
• Groups: Starting Your Own
• Groups: Managing Your Group for Success
• Lending: Becoming a Lender
• Lending: Listings
• Prosper.com Fees
• Tools for Using Prosper.com
• Forums & Conclusions

Book Review
Peer lending is a relatively new addition to the personal finance industry. Anytime something new and different is introduced people look for resources to help them understand the new development. After reading through the The Complete Guide to Prosper, I think it would be a good resource for anyone that’s heard about peer lending but isn’t really sure how it works or how they could benefit from it. 

Book Launch Special Offer
The book goes on sale today on Amazon.com and as part of the book launch the author is offering several bonus gifts to anyone that buys it within the first 24 hours.  You can see the details of the offer and how to claim it here.

If you’re interested in learning more about peer to peer lending, I have an extra copy of The Complete Guide to Prosper that I’m giving away. I’d prefer to ship the book to someone that will make good use of it, so I’ll mail it to the first person that opens a Prosper account through this link and sends me an email with their new Prosper screen name.  Hopefully the book will guide you through your first borrowing or lending experience on Prosper.

Bill Griffeth interviewed Renaud Laplanche the CEO of Lending Club on CNBC’s Power Lunch yesterday – Video.

Laplanche answered questions on how peer to peer lending sites have lower overhead than traditional banks and how they’re able help borrowers and lenders find better rates than they could get at a bank.

Peer Lending & the Economy
Griffeth made two comments that I thought were particularly interesting. At the very end of the interview he mentioned that you tend to get a lot more economic bartering and peer to peer interaction as the economy slows down.  As we’ve seen economic growth take a hit lately, that may drive more people looking for money to sites like Prosper & Lending Club, especially as financial institutions tighten credit standards.

Peer Lending & Dating
The second comment Griffeth made was that peer to peer lending seemed kind of like a dating service for money.  I had to chuckle thinking about in these terms. Here are some peer lending “dating” tips:

-You can recover from getting your heart broken with a loan default but it will definitely make you gun shy.

-Playing hard to get by chasing good quality loans is a good thing.

-If none of your friends are dating a borrower, there’s probably a reason why.

-You may go on 10 good dates but that one bad one ending in default can really ruin the whole lending experience.

-Don’t court a lender unless they’re ready for long term commitment. You shouldn’t be wooed by high interest rates into one night stands with high risk borrowers, you’ll regret it in the morning.

What are some more dating tips for person to person lenders?

If you are like me, social lending is a new concept. What is it anyway; and how might it turn the financial world of borrowing and lending on its proverbial ear? To find the answers, go to Prosper, the leader in social, or peer-to-peer lending, at least for now.

Lending with Prosper works much the same as bidding for a freelance project or shopping on an auction site. As a Prosper lender, you will apply for an account, state what amount you are willing to invest, and the minimum amount of return on your dollar that you are willing to accept.

The amount you are willing to invest can range anywhere from $50-$25,000. Although most borrowers will obviously need more than $50, it is no problem. Prosper establishes groups of lenders with similar goals and expectations. So, when a potential borrower requests a loan, up to 50 lenders can be awarded the bid.

Now the thought may be disconcerting for someone who wants to finance a home renovation, consolidate loans, paying for an education and more. However, multiple lenders are not a precursor to multiple loans. More than just matching lenders with loans, Prosper consolidates the lenders and varying interest rates to find the best possible deal for paying back the money.

A recent article by BusinessWeek tells the story of Chris Lindgren who used Prosper to help fund his successful textbook business. He needed more money for advertising but was in a cash crunch so he turned to Prosper.

“Lindgren applied for the maximum $25,000 loan the next day, offering to pay 17.5% interest. Lenders found the offer so attractive that they bid the rate down to 10.2%, and Direct Textbook had the cash in its account within two weeks.”

Although Prosper currently holds the lead in peer to peer lending, a couple of competitors such as Zopa, Lending Club, and Loanio are entering the game. Hopefully this competition will keep the peer to peer lending industry changing and adapting to continue to provide good investment opportunities for lenders and much needed money for borrowers.

Would you consider becoming a peer to peer lender?

“Loans that change lives” is Kiva’s tagline. Based upon the testimonials I have read, I believe they are keeping their word. So, how can they make such a claim?

Kiva is a peer to peer lender with a charitable mission. Unlike their counterparts who pay interest to the lenders, Kiva matches small business owners around the world with lenders who want to help them get the financial backing to succeed, without paying interest.

A more traditional social lending site will loan money for home renovations, education, loan consolidation and more. But, Kiva is concentrating on the poor who want to start a business and raise their standard of living. So, they do not loan money for building a new deck, consolidating credit card debt, purchasing a new car, or whatever. It is strictly for helping others help themselves. The people borrowing the capital don’t pay interest on the loan but they do have to pay the money back.

This idea of microcredit or microloans is somewhat modeled after the successful Grameen Bank which was initiated by the winner of the 2006 Nobel Peace Prize, Professor Muhammad Yunus. Kiva has a good example to follow in Grameen Bank and adds in their own approach by making great use of technology to connect developed country lenders and 3rd world borrowers. In a recent interview the CEO of Kiva, Matt Flannery, shared Kiva’s next goal. To connect people in developing world who are willing and able to lend capital with people looking to borrow money in the same country or region.

Kiva lenders can search through over 1556 pages of journals from men and women in Bolivia, Ecuador, Uganda, and other less fortunate nations to read how the money they lend is making a difference. Kiva is constantly adding new lenders and borrowers to the site so would-be entrepreneurs world-wide can succeed and start to climb out of poverty.

Altruistic at heart, I love this idea. So many people have more money than they know what to do with, yet they take it for granted. The borrowers at Kiva simply want to have the opportunity to have a decent life.

Check out www.kiva.org. Let me know what you think.

Tina