As a venture capitalist, Craig Jones prays that the market for the initial public offering will return soon and allow him to withdraw his illiquid investments. In the meantime, Jones is putting his cash to use. He committed $ 1.2 million, or one-fifth of his investment portfolio, in loans to other Americans.
A few are starting businesses, expanding existing businesses, or improving their homes. Most are just Joes in debt looking to consolidate their debts or roll over Visa and
“It’s hard to find a return these days that isn’t correlated to the stock market,” Jones said. “I had to get creative.”
It did so through Lending Club, a company whose website has, in its three years of operation, matched 23,000 lenders with 18,500 loans. Total outstanding balance: $ 179 million. Lending Club was founded by Renaud Laplanche, a native Frenchman who worked as a securities lawyer in New York City before starting the database research firm MatchPoint. Laplanche took out his plastic (and paid 18% annual interest) to cover the cost of computers and furniture from the start. When he later told this war story to friends, some said they would have gladly loaned him money on cheaper terms.
“It got me thinking,” he says. “Banks are intermediaries.”
Laplanche sold MatchPoint to Oracle in 2005, pocketed $ 10 million, and after spending two years at the tech giant, he went on a scheduled one-year European sabbatical. He returned seven weeks later to start the Lending Club.
The service was launched in May 2007 as one of Facebook’s first apps, which attracted buzz and young borrowers with limited credit histories. Laplanche shifted gears and primed the pump with $ 12 million from angel investors and Silicon Valley Bank.
These days, Lending Club is one of the few peer-to-peer lenders to fill a void created by die-hard bankers. Prosper, another such firm, holds competitive auctions in which lenders bid to offer borrowers the lowest interest rates.
Lending Club classifies borrowers into 35 levels based on their credit history and other data. To be eligible, a borrower must be “prime”, with a minimum FICO score of 660, a debt-to-income ratio (excluding mortgage debt) of less than 25% and no outstanding defaults, no recent bankruptcy or tax lien. Lending Club rejects around 90% of potential borrowers.
Creditors can choose who to lend to and commit as little as $ 25 for loans ranging in total value from $ 1,000 to $ 25,000. They can also become creditors in baskets of loans to debtors of different levels of risk.
Lending Club charges borrowers an upfront fee and pockets a spread between the interest that lenders earn and the higher rates that borrowers pay. Revenue is expected to triple next year from $ 7 million in 2010, with profit in sight.
After Jean and Erica Etjeke’s home in Clearwater, Florida was nearly destroyed by fire two years ago, the couple said their home insurance check went straight to their mortgage lender. The bank was slow to distribute funds for the repairs. A local bank was charging 13% interest. The Etjekes turned to Lending Club and borrowed $ 10,500 at 8.94%.
How do lenders fare in such transactions? Fairly good, it seems, by bond market standards. Newly issued five-year B-rated corporate debt yields around 7.5%, with defaults averaging 3.4% over the past nine decades. In comparison, creditors can earn 14.5% per year on five-year Lending Club notes, 4.9% of which have defaulted in the past three years. Remove defaults and the Lending Club’s own cut, and its creditors have earned 9.6% a year before tax, Laplanche says.
The lender David Niekerk, a