In calculating a personal loan interest rate, various things are considered. To begin with, the credit worthiness of the borrower is reviewed. The lender wants to know if the person seeking the loan can be trusted to repay the loan. In this case, ones credit history is examined to show if they have repaid loans previously, if they pay their bills on time and if they have any arrears at all. Another factor that is considered in determining personal loan interest rate is whether the person is gainfully employed or if they own a business. If the person has been in steady gainful employment and has a good credit rating then the interest rates may be adjusted downwards.

If the loan is secured, meaning that there is collateral put up, this means that the risk to the lender is lower. Should the person default in payment, legal recourse may be sought and the lender can liquidate the said collateral in order to recover the necessary funds. This affects the personal loan interest rate by reducing it. However, there are people who do not have any collateral to put up and who are then left with no choice but to get unsecured loans. In this case, the interest rate is higher than average as all risk is borne by the lender.

One thing that the average consumer may not be aware of is that even though the personal loan interest rate may be higher than that of a secured loan, it is still lower than that of the average credit card. It would therefore be in ones best interest to get a personal loan than a credit card any day. One other major factor to consider is the current economic status of the nation. If the country is doing well financially then in most cases the financial institutions will be looking to lend out money. This will mean that they may have to drop the rates in a bid to lure in people looking for a loan.

Personal loan interest rates should not be a deterrent to anyone looking to borrow money. To those with bad credit, a personal loan may be what is needed to begin building good credit again. For those with no collateral, a personal loan may be the only option available. Either way, go ahead and get the money you need to move forward in life.

Peer lending, or person to person lending, is a relatively new way of getting personal and business loans. It is all about getting a loan from a lender who is one’s peer rather than a traditional financial institution. Most of this lending takes place online where borrowers can get in touch with potential lenders through different companies dedicated to providing this service. According to The Harvard Business Review, predictions are that peer lending will be one of the most important innovations in the financial sector in the second decade of this century.

Peer lending as a source of personal bad credit loans has several advantages over borrowing from financial institutions. First, banks and other financial institutions have stringent requirements and operate under a tight lending environment.  A person with impaired credit may not qualify for a personal loan offered through traditional channels.  However, this same individual may be able to find a peer lending service that would provide a personal loan as long as the borrower meets certain minimum requirements.

Given the advantages of peer lending, many naturally wonder whether or not this solution is safe for both the borrower and lender.  The good news is that the United States Securities and Exchange Commission recently ruled that all companies that are involved in peer lending must be registered with their organization. This has reduced the chances of getting scammed and it has led to the increased adoption of peer lending among consumers.

In spite of these favorable trends, one should take certain precautions to ensure you are receiving a reasonable interest rate and to protect one from being scammed.  The first step is to compare as many institutions that offer personal bad credit loans as possible since they have different interest rates. One can easily compare the rates from peer lending services such as LendingClub and Propser to traditional financial institutions.  From here, one should develop a shortlist of institutions offering the best rates.

The next step is to compare the terms offered by the companies on the shortlist. This is important in order to avoid such things as hidden charges, closing costs that are too high, and loopholes that would increase the amount paid back. All documents should be reviewed before putting pen on paper and if the language is too technical, one should enlist the services of an accountant.

In most cases, one will find that a reputable peer lending company offers the lower rates and better terms than the traditional financial institutions.  These companies do not have the same overhead and operating costs as the big institutions.  As a result, they are able to pass along the savings to the consumers.  So the next time someone asks you to recommend a solution for personal bad credit loans, let them know about peer to peer lending.  It just might be the answer to their personal financial situation.

The majority of people find themselves in one of two situations.   Either they cannot qualify for a personal loan or if they do get the loans they pay very high interest rates.  Credit cards do not offer a viable alternative either.  These days, consumers quickly discover that the credit limits are low while the interest rates and penalty fees for defaulting are high.  It is no wonder why individuals are turning to peer lending services.  These services charge lower interests rates hence allowing individuals to save.

The thing about these companies is that they are in a position to compete not only with credit card companies but banks as well.  This is because unlike the traditional banks and credit card companies peer lending companies have lower operating costs and overheads.  Subsequently, they are able to pass these savings which are in the form of lower interest rates and service charges to individual borrowers.

Another advantage of peer lending companies is the fact that they provide an alternative to individuals who cannot qualify for personal loans from the traditional banks.  Examples of individuals who fall within this category includes those who have a lower credit score, one or more delinquencies, or a slightly higher debt to income ratio.  If the individual is able to qualify for a loan through a peer lending service, they can expect to be charged a higher interest rate.  On the other hand, if the individual’s credit score is good, these peer lending companies will offer the same loan at lower interest rates.

In order to qualify for a loan, each peer lending company has defined a minimum set of prerequisites.  While these requirements vary from one company to another, the most common requirement is the FICO score.  In other words, peer lending companies will only lend to individuals who have a certain FICO score or above.  Having a screening process such as this allows the peer money lending companies mitigate their risk of the borrower defaulting on the loan.  So, if you’re fed up with the high interest charged by the banks or credit card companies, take a look at a peer money lender.  You just might be able to put some extra money back into your pocket!

Tip #1 – Diversification

The most successful investors never concentrate their investments in a single Lending Club note or notes. Instead, they allocate their funds across at least 100 or more notes. For instance, if an investor has $1,000 to invest, then he/she will allocate $10 across 100 notes to reduce the risk and impact of defaults. By creating a portfolio of many notes, the expected result is likely closer to the industry average default rates. In addition, the greater number of notes invested in, the less impact a single default has on the return.

Tip #2 – FICO Scores

Borrowers with high FICO scores have the lowest default rates even during the worst recession. Another way to look at this is those with higher FICO scores rarely default while those with the lowest FICO scores default more often. For instance, those with a FICO score of 740 or greater have a default rate of less than one percent. Lending Club only deals with borrowers who have a FICO score of 660 or greater. In other words, investors are only purchasing notes from prime borrowers—not sub-prime borrowers. Investors that want to further reduce exposure to defaults with prime borrowers will purchase notes with high FICO scores, sacrificing some potential interest return upside.

Tip #3 – Seek Those with Job Stability

This tip goes hand-in-hand with tip #2. Those with good credit will work hard to keep it that way. However, the one thing the credit score does not reveal is job stability. All things being equal, someone who has jumped from job to job but pays his/her bills on time will have the same score as someone who has been at the same job for over 10 years. So how do the most successful Lending Club investors invest based on job stability?

They do not invest in borrowers who:

• Have only been working at their current employer for a very short time.
• Work for companies that have hit hard by the recession (i.e. automobile, financial, real estate)
• Do not appear to have a job or job skill that is in demand. In other words, if the borrower was laid off, would he/she be able to easily find another job at the same pay level or higher.

Based on this information, savvy investors look for a borrower who is better positioned to withstand a tough economy for two to five years such as:

• Government employees with a long tenure.
• Workers in the health care industry, especially fields with known shortages of the labor pool.
• Employees at stable companies with a long tenure.

Tip #4 – Think Twice About Business Loans

Most of the Lending Club investors do not invest in business loans. These are one of the most risky notes no matter what the borrower says. The following are a few examples of business loans that one might encounter.

• The borrower needs a loan to provide an existing business with capital. In this case, the borrower is using personal credit to sustain the business. There could be a couple of reasons for this need. For instance, this might be a last ditch effort to keep the business from going bankrupt. Alternatively, the borrower might be a victim of tighter bank credit. There really isn’t a way to tell which is the case.
• The borrower is still has a job, but wants a loan to start a business. In this case, it is important to review the amount the borrower needs. If the loan amount is greater than what they can pay back through their job, then steer clear of this note.

Also, one must realize that 90% of new businesses fail within the first five years. It is no wonder why most Lending Club investors avoid business loans in general.

Tip #5 – Reinvest Interest & Principal

Lending Club investors do not let repaid interest and principal just sit idle. They reinvest in additional notes to take advantage of the power of compounding interest. Simply put, compound interest is interest earned on reinvested interest as well as the original amount invested. There are numerous examples of the power of compound interest. A very simple one to understand is the “dollar a day” graph below.

In this graph, the parents or grandparents of a newborn baby begin saving one dollar a day from the baby’s birth and each year that is invested into a vehicle with an average annual return of 9%. When the baby gets older they continue investing one dollar a day until they are ready to retire at age 65. While the total investment over this period is $23,725, the actual value of the account, though, is now $1,094,375 because of the power of compound interest.

BONUS: Other Investment Considerations

In addition to these tips, successful investors target a specific goal for their portfolio when constructing a portfolio of Lending Club notes. For instance, the most conservative approach would be to target the loans with the highest credit rating because the default risk is extremely low. The returns for these kinds of notes may vary between 6% and 8% factoring defaults and fees. An investor pursuing this strategy will forego the chance of higher returns (9% or above) in exchange for lower risk.

Other investors who pursue and achieve higher returns only target notes with a certain interest rate and never invest in anything below that rate of return. In this case, an investor who wants to achieve an average of 12% return may decide not to invest in any note below 11%. In addition, this investor will allocate more time to scrutinize the borrower’s job profile to identify job stability and minimize default risk.

Even after employing these tactics, an investor pursuing a higher return will assume a higher level of default risk. Subsequently, the higher return investor may invest in higher return notes assuming a certain percentage of notes may default. For instance, if the investor is seeking an average of 12%, he/she will add notes offering 14% or higher and assume some of those notes will default.

What Next?

Now that you’ve finished reading, are you ready to start putting what you’ve learned into practice. Here’s a quick step-by-step guide to take your learning to the next level.

1. Identify your target rate of return and risk tolerance.
2. Open a free account at Lending Club.
3. Identify notes to fund.
4. Review the borrower’s credit history, intended use of funds, and ability to repay the loan.
5. Reinvest the re-paid interest and principal.

Let’s start with the top reasons why others have become a Lending Club investor:

1. Earn Higher Returns – Since 2007, investors have earned an average net annualized return greater than 9%.
2. Creditworthy Borrowers – Only one out of every ten borrowers are accepted to receive a loan. This means you’re minimizing the default risk by investing in the most creditworthy applicants.
3. You’re in Control – You have the ability to decide which Lending Club borrower will receive your money. This means you can build your own fully customized lending portfolio.
4. Flexible Options – You can reinvest the principal and interest payments; you can withdraw them like an annuity; you can even trade your notes for a profit.
5. Risk Management – As with any investment, peer to peer investments entail a certain amount of risk. The biggest risk is that the loan goes into default and is not paid back (charge off). To prevent this, Lending Club has a robust collection process that enables it to achieve a successful collection rate higher than the industry average.
6. Investor Privacy – Your personal information and privacy is kept strictly confidential and secure. Lending Club stores all sensitive financial data such as Social Security numbers and bank accounts in a highly secure environment hosted by our partner, BankServ, a PCI-compliant payment solution provider.
7. Company Safeguards – Last but not least, Lending Club has a back-up solution in the event its business is no longer viable. A back-up processor will step in to manage the existing loans so payments are made to the investors for the life of the loan.

Now that we’ve explored the benefits for investors, let’s look at how a peer to peer lending service like Lending Club really works.

The Secret Banks Don’t Want You to Know

Peer lending is an investment vehicle that enables the average investor to earn the same kind of high interest that banks have been making off your hard earned money. Peer lending now gives you an option to make better use of your money while helping creditworthy borrowers.

Traditional banks are charging borrowers very high interest rates.  At the same time, they are only paying a few percentage points for savings and certificate of deposits (CD).  Your money is stuffing their pockets and is falling behind the pace of inflation!

Peer lending creates disintermediation and stuffs your pocket instead.  With services such as Lending Club, you get to decide who to fund and how much you want to fund.  Best of all, this model provides the average investor with an opportunity to achieve higher returns compared to a savings or CD account.

­According to these graphs, your money is definitely worth more than the 1-3% you receive.  If you do not have another investment vehicle to achieve higher returns than what the banks are paying you and others are, then you should be asking yourself why aren’t you getting your fair share.

How It Really Works Behind the Scenes

The diagram below illustrates how Lending Club facilitates a loan between a borrower and investor.

Per the illustration, investors do not make loans directly to our borrower members. Instead, investors purchase notes (aka Member Dependent Payment Notes) issued by Lending Club, the proceeds of which are designated by the investors who purchased the Notes to fund a loan to an individual borrower member originated through the Lending Club platform with WebBank.

It should also be noted that the simplified diagram above does not illustrate additional details of the Lending Club platform such as pre-payments, late payments, late fees, and collection fees.

Let’s Talk Performance

Now that we’ve covered the benefits and the basic process of Lending Club, let’s take a look at a few charts.  The first is a graph depicting the performance of Lending Club Notes versus other familiar investment vehicles.

Compared to other investment options, a $10,000 investment in Lending Club notes in June 2007 is worth more today than the same investment in any other major asset class.  This chart was based on Average Net Annualized Returns from June 2007 (inception) to October 2009. As with any investment vehicle, past performance is no guarantee of future results.

Another graph that provides additional insight is the actual range of investor returns using the Lending Club platform.

Currently, 83.80% of the Lending Club investors are earning returns between 6% and 18%.

These are just a few examples of the real-time statistics Lending Club tracks.  Lending Club publicly displays the most current version of this information on their website, including loan performance, default rates, etc.

Getting Started with Peer Lending

By now, you’re starting to see why peer lending services such as Lending Club offer you the potential for attractive investment returns, the ability to diversify your portfolio beyond traditional stocks, bonds and mutual funds, and the opportunity to do well while helping others.

Here’s how to get started:

1. Open an account online – The sign up process is fast and easy.  You simply provide your name, email address, password, address, etc.
2. Fund your account – You can fund your account right away or later using several convenient options such as electronic funds transfer (ACH), free wire transfer, check, or PayPal account.
3. Select notes to invest in – You can use either Lending Club’s proprietary LendingMatch tool to help you find notes that match your specific criteria.  Alternatively, you can browse the notes and build your own customized search.
4. Receive monthly payments – Now, sit back and let those monthly payments roll into your Lending Club account.  You can either re-invest those payments or withdraw them out of your Lending Club account.  Cash balances in Lending Club are FDIC insured too.

Are you ready to get started? 

Become a Lending Club lender and you’ll receive a special $25 bonus in your new account.

You’ve worked hard to build or repair your credit score. Unfortunately, the banks aren’t giving you a break. This is why peer lending services such as Lending Club are a perfect alternative. Lending Club offers a 3-year, fixed-rate loan from $1,000 to $25,000 to help you out.

The following are just a few reasons why others are using a Lending Club loan today:

• Eliminate or reduce credit card debt
• Pay for school tuition
• Purchase a new or used automobile
• Start or expand a business (small business loan)
• Remodel and upgrade their home
• Pay for adoption expenses or fertility treatments
• Borrow money for a wedding or engagement

Now let’s compare Lending Club rates to those of other banks.

Here are some additional benefits:

• Convenience – The online loan application is fast and simple.  You’ll probably complete the application process in 5 minutes or less.
• Low Interest, Fixed Rate – You’ll receive a fixed-rate loan that is often lower than the credit card companies and banks.  In addition, your interest rate on that loan will never change.
• No Pre-payment Penalties – You can pay off your loan any time without incurring penalties and fees.
• No Hidden Fees – No need to read the fine print.  Everything is transparent.
• Direct interaction with lenders – You’re not just another loan application in a pile.  Once you complete the initial application, you will have the opportunity to answer investor questions and position your application in the best possible light.
• Safe and Confidential – Your personal information and identity is kept private.  In addition, through our research we discovered the underlying bank issuing the loans is WebBank in Salt Lake City, Utah.  This is not a scam!

Don’t take our word for it.  Here’s what others have to say about peer lending.

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“Lending Club helped me cut an outrageous credit card interest rate in half. This loan will save me thousands of dollars as well as allow me to pay off the loan in half the time it would have taken me otherwise. 28.99% interest down to 14.18% interest!!!”

Matthew,
Columbia, MO

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“I have enjoyed the ease of the application and approval process. For any questions or concerns that I had, I would receive a prompt email within 24 hours! I have been able to breathe easier knowing that my bills are paid and I have just one payment to worry about each month. It has saved me money and time! Thank you, Lending Club.”

Stephanie,
Dryden, New York

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Are you ready to get started?

The process is simple, easy, and quick.