In this video, a Lending Club borrower explains what it is like to get a personal loan at a lower rate. An Investor also shares his experience investing in hundreds of borrowers and getting a better return while helping them.

Originally aired on WUSA-TV in Washington, DC on September 29, 2010: "Need Money? Ask A Peer".

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Lending Club: Better Rates. Together.

@RobGarciaSJ

Many things have changed since the early 1980’s including the fact that interest rates have dramatically dropped.  It is simply amazing to contemplate that in 1981 U.S. citizens looking to purchase a home were actually facing the prospects of paying a mortgage interest rate of close to 20%!   Obviously, part of these high interest rates was offset by high inflation and things are quite different now.  Mortgage rates are the lowest they have been since the 1950’s and the U.S. Government is paying lower interest rates than at any other period in post-WW II history.

Consumer credit, however, hasn’t experienced the blessings of this dramatic interest rate drop, down only slightly since 1981.  Why?  Many speculate it’s because of the higher risk associated with consumer credit.  But that surface analysis doesn’t hold much water.  Yes, aggregate consumer credit charge-offs soared to record highs in the 2008 crisis, reaching over 10%.  Yet almost all forms of private credit suffered huge jumps in delinquencies and charge-offs.  (A little known fact is that mortgage delinquencies are currently higher than unsecured consumer credit!)

Even accounting for the large surge in charge-offs an investor still would have earned a competitive total return.  More importantly, the aggregate numbers do injustice to the fact that the top 20% of credit worthy customers had substantially lower charge-offs than the average but still paid excessively high relative interest rates because most credit cards issuers do not offer risk-based pricing.  This dichotomy points to the structural inefficiency of the consumer lending markets and represents why we believe Lending Club offers a compelling value proposition to both credit worthy borrower and investor.

For more on this topic, read on:

"Why Is Consumer Credit Still So Expensive?" by Daniel Indiviglio, on TheAtlantic.com

"Chart of the Day, Consumer Credit Edition" by Felix Salmon, on Reuters.com

"Off the Chart" on CBCNews

When it comes to lending money, banks can be rather inefficient. In spite of the rise of technology meant to help streamline such processes, many banks remain mired in the past, with outdated systems for examining, and approving loan applicants, translating into long approval times.  Another issue with bank efficiency is the difficulty in getting a loan from a traditional bank in the current climate – even for sound, creditworthy borrowers.

If you go to borrow at a traditional bank, you will typically get the entire loan amount from one lender.  But it isn’t the loan officer that makes a decision:  there are teams of people who comb through your application, and you may be asked for documentation again and again.  Additionally, since many traditional bank loans are done using paper, the potential for lost documents and human error increases.  In the current climate, with lenders licking their wounds from recent events, there are cases when the inefficiency stems from standards that are too tight and not designed for the best of borrowers.   Add closing costs, higher interest rates on personal loans and other fees, and banks can be inefficient in terms of cost to you as well.  What would they not be expensive? After all, they have so much infrastructure to maintain: buildings, branches, ATMs, personnel, paperwork, lawyers, large advertising bills... the list is endless, and you are the one shouldering some of that cost through the interest you pay.

A myriad of web-based innovative financial products are now available to you to help you manage, track, save, invest, and borrow fully online without the traditional financial institution slowing things down.  For example, peer-to-peer lending truly streamlines the process of borrowing, with the ability to do complete applications online, and with proprietary formulas that can help assess your risk profile, it becomes faster and easier to get funding.  But that’s not all,  if you have been responsible with your finances and have a clean credit history, peer-to-peer lending offers better rates than traditional lending institutions.  And let's not even compare to credit card rates and gimmicky introductory rate offers.   Another refreshing feature that peer lending brings to you is the direct lending done by “investors” who are willing to help fund your loan, so you do not have to rely on one source to get the financing you need, but can instead rely on the power of the crowds.

So stop and think before you feed your hard-earned dollars into the inefficient behemoths that banks are.  Nowadays, you have options.

The views and opinions expressed in this post are solely from the author and do not  necessarily reflect the views or policies of Lending Club, its management, employees or associated entities.

Today it appears that the major topic on investors’ minds is the potential implication of a double-dip recession.  While no one can be certain what will happen, we can identify some important signposts that might point the way to what could unfold.  Let’s start by examining how often double-dip recessions have occurred.  The reality is that they are extraordinarily rare.  Since 1854, there have only been three in the United States: in 1913, 1920 and 1981.   All three occurred during periods of tightening central monetary policy which stands in stark contrast to today.   The first, 1913, came during the birth of the Federal Reserve which was prompted by the severe banking crises of the previous decade.  The latter two occurred during a period of rapidly escalating inflation, which does not seem to be a concern at the moment.

If we avoid a double dip recession, one can reasonably surmise that credit quality will improve as the economy begins to grow (albeit slowly) and less American workers lose their jobs.  A potential counter balance to improving credit quality will be the rising interest rates that could negatively impact fixed income prices  While high quality, higher yielding instruments may also fall in price, they typically fall less than low yielding instruments and offer significantly more current income.  If interest rates don’t rise (and we also don’t see a double-dip) the increases in yield will improve portfolio returns without the price-risk associated with a rising interest rate environment.

What if history is wrong and we do experience a double-dip?  Given that previous double-dip periods had substantially different circumstances we will be to a great extent in uncharted waters, but we certainly can speculate.  Another downturn in economic growth will likely punish equities and most commodities as it implies shriveling end-demand.  Low yield, fixed income instruments should rise in price but will offer little in current income as yields are already at, or close to, historical lows.  Such an environment would likely make investors very defensive and fall back to cash and CDs to avoid capital losses.  Higher yielding fixed income opportunities would remain for investors who focus on higher quality credit. These particular instruments would likely rise in value and produce enhanced monthly income during a period of turbulence.

Double dip or slow economic growth? Let us know what you think!

The above is for informational purposes only and represents the opinion of the author and is not investment advice, is not specific to any investor’s financial situation and may not be suitable for any investor.  Before investing, you should consult with the appropriate advisors.

Last month proved to be another exciting month at Lending Club:  continued consumer demand for loans at lower rates and increased investor appetite for Lending Club Notes delivered a record $12,021,775 in issued loans to creditworthy borrowers.  This is the largest single monthly dollar amount ever.  Here are some other key stats for the month:

• Avg Loan Amount: $10,231
• Number of loans issued: 1,175
• Average interest rate: 12.58%
• Most popular loan purpose: 50% of the loans were used for debt consolidation
• Net Annualized Returns to Investors: 9.66%

Looking at our growth for the last year, we are very proud to have nearly tripled the volume as compared to August 2009, while showing a steady monthly growth pace.   Cheers to the Lending Club community of investors and borrowers for making this happen.

Not an investor yet?  Take advantage of our September blog promotion and get a $50 bonus.

Lending Club: Better Rates. Together.

@RobGarciaSJ