Do you want to apply for P2P loan but don’t know the requirements/rates? If YES, here is a complete guide on how to get small business loans from lending clubs.
Loans are beneficial for a lot of things, and small businesses especially need these loans to rescue themselves from rough business patches. One of the ways entrepreneurs with small businesses can fund their businesses is by taking out loans from lending clubs, that is if there do not want to approach banks and other lenders for one reason or the other.
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How Do Lending Clubs Work?
Lending clubs work as peer to peer lending platforms where investors contribute money (in the form of a loan) for an entrepreneur to run his or her business, after which the loan is paid back over an agreed period with an agreed interest rate.
With the aid of technology and big data, lending clubs or peer to peer platforms are able to connect borrowers to investors, and this connection is way faster than what one can get from a bank or other financial institutions.
Lending clubs have gotten quite some publicity over the years that some borrowers have come to trust them and their services. Compared to the stock market, peer to peer investments have less volatility and a low correlation. They also offer higher returns than conventional sources of yield.
Peer to peer lending platforms have been getting a lot of investors recently because the investment yields better interest rates than government bonds and other touted safe investments. This is why lending clubs still manage to generate loans for borrowers despite the slight dip in the economy.
Advantages of borrowing from Lending Clubs
- They have better interest rates: If you want to borrow some money, lending club loans can be cheaper than banks or building societies, especially if you have a very good credit rating. The way it works is that if your credit score is high, you would typically be able to borrow more, and your interest rates would not be over the roof because you have an evidence that you can pay back the loan.
- They can give out various sums: Some lending club websites have no minimum loan amount (in contrast to most banks and other mainstream lenders) which might suit you if you only want to borrow a small amount for a short period.
- They provide an alternative: Lending clubs are another option if you have difficulty getting a loan from a bank or building society. Depending upon your credit rating, you would be able to find something that covers you.
Demerits of Lending Club Borrowing
- High interest rates: Interest rates of peer to peer loans might be higher than high street banks or building societies, depending on your credit rating. This is because the lower your credit score, the higher the interest you would have to pay.
- They are fees to pay: Depending on the platform you are using, you might have to pay a fee to the platform for arranging the loan, even if it is not fully funded. This can mean multiple fees if you have to apply more than once.
- You may not qualify if you have poor credit: You might find yourself unable to obtain a loan if you have a poor credit rating or have managed your finances poorly in the past.
- You may not be protected: You might not have the same protections using a peer to peer platform as if you borrowed in other ways. This varies according to how the loans are drawn up and who the lenders are – for example, whether they are institutional investors or private individuals. Ask the platform how this works and how it differs from a normal loan.
How Much Interest Rate Do Lending Clubs Ask for Their Loans?
The interest rates on the loans given by lending clubs vary significantly depending on how much of a risk you’re seen as. If you have a very good credit score, you might be able to borrow at an interest rate as low as around 3% but in some cases the rate might be variable, meaning the rate can go up or down each month, so you need to check.
If you have a poor credit history, your interest rate could be as high as 30% (or more likely you will be rejected). Peer to peer platforms also generally charge a fee to arrange the loans. This fee also varies depending on the lending platform you are borrowing with.
How to Get Small Business Loans from Lending Clubs – A Complete Guide
To apply for a loan, you have to go to one of the lending sites to register. Before you do this, you need to research the various peer to peer platforms available to see which one suits your purposes the best. During registration, you have to select the amount you want to borrow and select the term you want it to cover. After that, you will be shown if you qualify for the loan and the interest rate(s) you’ll have to pay.
Lending Clubs will pull the latest credit report for every borrower and use the data held in that report and other factors such as loan amount and loan term to determine the interest rate. The Lending Club will perform some level of verification on every borrower.
As this verification process is happening, investors can be funding portions of the loans. If the borrower passes verification, the loan is approved for investors and will be issued to the borrower if fully funded. If the borrower fails verification, the loan will not be issued. It will be deleted from the platform and all money that had been invested will be returned to the respective investors.
A loan can stay on the platform for up to 14 days. Most loans are funded much quicker than that and once funded the loan will be deleted from the platform. Approved borrowers will receive their money (less an origination fee) in just a couple of business days once funding is complete and then begin making payments within 30 days. These payments will be for principal plus interest on a standard amortization schedule.
Depending on your credit rating and the individual platform, you might be offered less than you want to borrow or you might be offered a certain amount at one interest rate and different rates of interest by other lenders.
- Rules You Have to Note
Peer to peer platforms and some individual lenders are regulated by the Financial Conduct Authority (FCA) so as to control their activities and ensure they don’t rip people off. This goes to show that if you are unhappy with the services you have received, you can make a complaint. If this is done, the business has eight weeks to sort it out.
If, after eight weeks, you are still not happy, you can ask the Financial Ombudsman Service (FOS) to get involved.
The FOS has official powers to sort out complaints between you and a financial business you’re unhappy with. If they agree that the business has done something wrong, they can order them to put things right. The service is free to use so do not hesitate to make use of it when the need arises. .
Things to Be Aware of When Applying for a Peer to Peer Loan with a Lending Club
Before choosing to apply for a peer to peer loan, you have to know that:
- If you default on a peer to peer loan, the company might pass the loan on to a debt collection agency which will chase it on behalf of the lender or lenders. As a last resort, it might go to court. This definitely would not look good for you.
- Missing payments or defaulting on a loan will affect your credit rating. Once the credit agreement is in place, the peer to peer lending website will register an entry on your credit report in the same way as most other loans.
4 Peer to Peer Lending Clubs You Can Apply to for a Business Loan
- Lending Club
Lending Club is the world’s largest P2P lending platform with over $20 billion in loan issuance, and it was founded in Founded in 2007. The platform offers both consumer and small- and medium-sized enterprise (SME) loans over fixed periods of 36 or 60 months.
Lending Club has grown exponentially and currently has a 45% market share. It raised over $900 million from its IPO in 2014, but its share price has since fallen 72%.
The company is well capitalized. The company prospectus states that in the event of bankruptcy, a backup system will come online and function as the intermediary. Lending Club operates on a notary Business model, meaning that it acts as an intermediary between borrowers and investors. Once a loan has been funded, the money is released to the borrower by a partner bank.
After approval, Lending Club then issues a note to the investor that is essentially a security. Lending Club offers loans from $1,000 to $35,000 for individuals and from $15,000 to $300,000 for businesses. Lending Club charges investors a fee equal to 1% of the amount of borrower payments received within 15 days of the due date.
The borrower pays an origination fee that ranges from 1% to 5%, depending on the grade. For you to become an investor, you must deposit $1,000 in order to start investing on Lending Club. Lending Club uses a model rank system to grade borrowers. The system uses a combination of a proprietary scoring model, FICO score, and other credit features of the applicant.
2. Prosper
Launched in 2006, Prosper was the first P2P platform in the US. It has since funded over $6 billion in loans and serviced over 2 million customers. Prosper only offers unsecured consumer loans and does not make SME loans.
Like Lending Club, Prosper offers 36- and 60-month loans with amounts ranging from $2,000 to $35,000. It also operates under the notary business model. Prosper charges borrowers a “closing fee,” which ranges from 0.5% to 5%, depending on the grade. Investors are charged a 1% annual fee based on current outstanding loan principal. The minimum investment is $25.
Prosper grades borrowers through its Prosper Score. This proprietary system focuses on criteria such as debt-to-income ratio and other sundry checks conducted by credit bureaus. Prosper uses both the custom score and the credit reporting agency score to assign the borrower a grade. Prosper bundles all non-performing loans and sells them to a third party. The affected investors then receive an amount proportional to their defaulted loan.
3. Upstart
Launched in 2014 by a bunch of ex-Googlers, Upstart has originated more than $300 million worth of loans. Upstart uses a unique grading criteria. It looks at FICO scores but also considers educational background. The firm has the lowest default rates across the industry thus far. Over 94% of loans are on track to be repaid in full on the platform.
Upstart’s target niche is young professionals—over 90% of borrowers are college graduates—and small-business start-ups. It offers loans between $3,000 and $35,000 for fixed periods of three to five years. Their interest rates range from 4% to 26%, depending on grade of the borrower.
The way Upstart operates differs in many ways from other P2P lenders. To start, investors do not pay fees. The company makes its money solely on origination fees from the borrower. If a loan defaults, Upstart refunds the investors using the origination fee. This means if loans go bad, Upstart loses. This is one of the downsides the platform has to endure, that is why it is strict with some of its criteria.
Upstart has become increasingly popular with the younger generation (20s and 30s) who don’t have a long credit history, making it hard to get a loan based on conventional criteria, but who have the potential to honor the commitment.
4. CircleBack Lending
CircleBack Lending offers various types of loans. Their personal loans range from a minimum of $1,000 to a maximum of $35,000, their payday loans start at $100 up to $1000 and their installment loans begin at $1000 and have a maximum of $5000.
The APR moves in the range of 6.63% to 36%, and the actual rate that a borrower gets depends upon the credit score, amount of loan, tenure, and credit usage and history and also the state the borrower resides in.
CircleBack Lending offers personal loans for various purposes such as credit card refinancing, debt consolidation, home improvement loans, medical expenses, auto loans, wedding loans, engagement ring loans, small business loans, relocation loans, vacation loans, green loans, motorcycle loans and boat loans. CircleBack Lending gives small businesses access to personal loans to individuals rather than as a business.