Why Lending Club Isn’t For Most People

nyseWith”high” yield savings account rates dropping to some of the lowest rates we have seen most people in the PF Blogging world are talking about the great returns you can get over at Lending Club.  I was pulled in by this constant reminder of better, or possibly better, returns in this new medium of peer to peer lending.  It turns out they aren’t quie as upfront with their lending requirements as you might think.  While I don’t dispute the returns that are possible from peer to peer lending I don’t think people get the full picture of what criteria you have to meet to be able to lend.

They only allow investors to invest in loans if they are residents of one of the following 25 states:  California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Minnesota, Mississippi, Montana, New Hampshire, Nevada, New York, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin, West Virginia, and Wyoming.  Right of the bat over 50% of America is out (Doesn’t include territories or D.C.)

Of course the state requirement may be the easier requirement to meet. In addition to having to live in one of the aforementioned states you have to have an annual Gross Income of at least $70,000 and a net worth (excluding your home, home furnishings, and automobiles) of at least $70,000.   If you don’t have a gross income of at least $70,000 you could invest if you have a net worth of at least $250,000.00 using the same exclusions as the previous net worth. If you live in California you must have a gross income of at least $100,000 and a net worth of at least $100,000 (excluding home, home furnishings, and automobiles) or a networth of at least $250,000 (same restrictions).

You have to also agree to not invest more than 10% of  your net worth. All of these exclusions do not prevent you from participating in the “Note Trading Platform” but do prevent you from participating in the standard Lending Club system.

Photo by: (Helico)

{ 9 comments… read them below or add one }

1 Prince Of Thrift March 23, 2009 at 6:06 am

well I would be shut out twice. Since I live in Kansas nd only make $30,000.

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2 the weakonomist March 23, 2009 at 8:13 am

I’m sure there are resonable explanations for the states, others states must have laws that forbid this kind of lending. Depending on the legal lingo, it might make you look like a loanshark.

Their restriction sure are strict, but that could possibly be a good thing. Somone with a heart of gold and a mind of stupid might make the mistake of investing too much and losing thier money. It would protect lending club from getting sued.

I still think their business is sound and they’ll iron out these restrictions over time. Thanks for pointing them out though, I wasn’t aware of them.

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3 Trevor @ Financial Nut March 23, 2009 at 12:32 pm

Well… that counts me out. :(

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4 Mike March 24, 2009 at 2:58 pm

Both restrictions appeared after Lending Club registered with the SEC. After the registration process, they periodically started announcing states that had approved lending. At first it was only a few states, and now stands at 25. Approval has been requested from all states and some seem to be taking longer than others. I expect that in time all states will be included and that the income requirements are stipulated by the SEC. Since Prosper is currently registering with the SEC (they’re way behind LC on that count) I expect similar restrictions to be put in place on Prosper as well.

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5 Kyle March 24, 2009 at 4:51 pm

@ Mike
I agree, I think that given time they will slowly get registered with the appropriate authorities for each state and will be able to offer it to all residents. The income requirements are kind of steep though, steep enough to count me out anyway.

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6 Slinky March 30, 2009 at 5:48 pm

I’ve also seen a huge buzz about lending club lately with all the sign up bonuses bouncing around. I’ve pointed out the restrictions to a few people, but they seem to be mostly ignored. People sign up anyway (as it’s not verified). The problem is, these people are violating all that stuff the had to agree to when signing up, so if anything goes wrong with their cash, they’ve got nothing to stand on.

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7 Stephanie PTY March 31, 2009 at 6:26 pm

After the income requirement was brought to my attention, a friend of mine emailed Lending Club to ask if the income requirement was for individual income, or household income. The answer he received was, in my opinion, hugely vague and unsatisfactory:

“Thank you so much for your email. I wanted to touch base with you regarding your question. Most State regulations require that our Lending Members represent financial suitability standards to invest. This information is self reported.”

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8 Mike April 12, 2009 at 11:10 pm

When you join Lending Club, by accepting their conditions you are declaring that you meet all eligibility requirements. They don’t check on these, as far as I know. It would be against their best interest to actively keep potential lenders out of the pool, but you can bet if someone tried to sue them for some reason, they would want copies of your tax return and net worth statements right away! It would be interesting to have the data to see how the lenders are distributed within those 25 states. Lending Club recently made an IRA investment product available as well, and I opened up an account. I had to use a different email address for the new account. The interesting part is that when I was reviewing the fine print, I came across the fact that one person can’t have more than one account! They knew I already had a regular account and wanted a different email for the IRA account. Weird…

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9 Mary June 3, 2009 at 12:59 pm

Have y’all considered your 401K as part of your net worth?

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