Along with the growing popularity of lending clubs, perhaps best personified these days by the web-based LendingClub.com, come new features for peer-to-peer lending programs. Exhibit “A” are new five-year loans that could strip even more customers away from banks and credit unions.
In reality, that shift is already happening. The Lending Club has already exceeded $1 billion in peer-to-peer loan demands by borrowers. Sure, that pales in comparison to the $2.9 trillion loaned out by U.S. banks in 2009, according to the Federal Reserve. But all revolutions start with a single shot, and the fact that Lending Club has garnered $1 billion in loans in just a few years has to get big banks’ attention.
Plus, it’s not the amount of loans as much as it is the deals borrowers are getting.
The Lending Club claims that borrowers with decent credit can earn loans as much as 4% lower than they could with big banks.
Considering that bank lending has tightened significantly since the start of the Great Recession in late 2007, a new credit pipeline in the form of online, peer-to-peer lending should generate interest among borrowers, especially individuals and small business owners. Lending Club estimates that 60% of all of its peer-to-peer borrowers use their loans to consolidate loans or to pay down credit card debt.
Now, Lending Club is tweaking big lending institutions even harder with the announcement that it’s offering five-year loans. Up to now, Lending Club has limited loans to $25,000 or less, and they can have only a three-year term, with payments made monthly.
“These represent 60-month loans made to creditworthy borrowers under the same stringent credit policy that has made our site an attractive investment,” says Lending Club in a statement.
Lending Club, in a May 11 blog post by director of product development Rob Garcia, paints the benefits of the five-year loans, for borrowers and investors, as follows:
"Borrowers can enjoy the benefits of a lower monthly payment, making budgeting and loan repayment easier,” says Garcia. “Investors can now earn more interest by choosing 5-year Notes and receive 0.74% extra yield on B graded Notes and 1.86% extra yield on C through G graded Notes, as compared to 3-year Notes.”
Just as 30-year loans usually offer higher interest rates than 15-year loans, five-year loans will offer higher interest rates than the three-year loans that have been offered by Lending Club in the past. That’s good news for investors (or “lenders” in peer-to-peer parlance).
For borrowers, the longer terms puts more cash in their pockets every month, but will cost more cash by the end of the loan. Borrowers can still pay off loans early, but will still need a credit score of at least 660 to be eligible for the five-year loan.
Lending Club has a tutorial on its new five-year peer-to-peer lending program.
By adding a five-year loan to its three-year loan program, Lending Club is expanding the peer-to-peer model upward and outward, and in a way that may draw even more lenders and borrowers to its loan model — and away from big banks.
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