Wow, here’s an interesting promotion from person-to-person lender Lending Club. They are currently offering a 5% cash bonus if you lend $5,000 or more by February 3, 2008 for both new and existing lenders on top of their $25/$50 sign-up bonus. Here are the details from their announcement:

You will qualify for the bonus by lending $5,000 or more to borrowers between December 14th, 2007 and February 3rd, 2008 (at 11:59PM Pacific time). Your bonus will be 5% of the amount you lend.

For example, if you lend $7,500 Lending Club will credit your Lending Club account with $7,500 * 5% or $375. Funds count as lent once a portfolio (or portfolios) is submitted during the aforementioned eligibility period. The loans do not have to be issued by February 3rd to qualify.

We will notify you of the amount of your bonus by the end of day, Friday, February 8th, 2008, and your account will be credited with your lending bonus by Friday, February 15th, 2008. No special sign-up or tracking is required ? we will run reports on the system to determine bonuses. Feel free to email us at lender.offer@lendingclub.com to ask about your bonus.

[…] Lenders can each earn a maximum payout of $20,000 (if they lend $400,000).

A 5% bonus definitely grabbed my interest again after making a few initial test loans. If you haven’t already, check out my LendingClub review to learn more about their setup for person-to-person lending.

At first I got all excited since banks are only paying 5% interest themselves, but then I remembered that LendingClub loans are spread out over 3 years, so it’s not like you are getting a 5% interest bonus each year (that would be sweet!). Instead, 5% spread out over 3 years is like adding roughly an additional 1.65% annual interest to the existing rate set by LendingClub. (Actually, since the 5% is given upfront, it would actually boost your returns even more.) But remember, these are unsecured loans similar to credit cards, and there is a risk of principal loss. Is that cushion worth putting in $5,000 in?

So far all of my existing loans with LendingClub are rated a safe A3-A4 (7.75 to 8.07%). Given that their minimum allowable credit score is 640, and their credit grades run all the way from A1, A2, A3 to G3, G4, G5, I would estimate that such people have credit scores well over 700 as well as other positive criteria like a reasonable debt-to-income ratio. Therefore, I would love so see my return increase to a 9.4 to 10.72% return on high-quality loans. With $5,000 available to spread across 200 loans ($25 each), that would also smooth out the default risk from a few bad loans.

Lending $5,000 for 3 years is a lot of money, but this is the best person-to-person lending deal I’ve found. Hmm… very tempting!

Next up in the person-to-person lending showcase is Lending Club. I recently joined up because they were offering the carrot of $25 sign-on bonus, and I was curious to see how they differentiate themselves from Prosper Lending (review, $25 bonus). As usual, this overview will primarily be from the perspective of a potential lender/investor in these unsecured consumer loans.

Lending Standards
LendingClub only allows borrowers with a minimum credit score of 640. Prosper initially had no bottom, but later raised it’s floor to a 520 credit score, which by itself eliminated 45% of their loan listings! So lots of subprime action over at Prosper, but very little over at LendingClub. Some people may disagree on whether this a plus or a minus.

Setting Interest Rates For Loans
With Prosper, prospective lenders bid on loans in an eBay format. Essentially, all the lenders as a whole set their own market rate. But with LendingClub, they do all of it for you.

The mechanism for setting a fair interest rate is complex: it involves a proper assessment of the risk associated with each loan (based on the borrower’s credit history, current situation, income, debt and other factors), an understanding of the volatility associated with each level of risk, and a proper reward for that volatility. We have access to large amounts of information and historical data from the credit bureaus, which puts us in a unique situation to set attractive, fair and equitable interest rates. Rates also depend on the amount of the loan (with larger loans bearing higher rates).

Each loan request made by a borrower is attributed a Lending Club grade ranging from A1 to G5. Here are some sample corresponding loan rates:
[Read more…]

Looks like TradeKing is trying to convert some customers from “one of the larger online brokers”… I wonder who they are talking about? From an e-mail today:

Due to the effect the sub-prime mortgage fallout has had on one of the larger online brokers, some investors have asked us if we’re at risk for similar problems. The answer is a resounding “No.” TradeKing does not invest in any mortgage-related securities, including sub-prime mortgages.

Furthermore, we protect your account against losses up to $25 million as a member of the Securities Investor Protection Corporation (SIPC), and with supplemental coverage from Lloyd’s of London. If you’re concerned about an account you hold with another broker, perhaps you should consider consolidating your assets with TradeKing. We’ll even reimburse any account transfer fees your other broker may slap on you between now and December 31, 2007.

This reimbursement offer may save you $50-$100 if you’ve been wanting to do an ACAT account transfer to them from your existing broker. Scottrade also offers up to $100 in fee reimbursements for inbound transfers [update: if your account value is greater than $25,000]. Read more about both brokers in my TradeKing review and my Scottrade review.

You’ll should also weigh the upfront benefits against the potential commission savings if you go with a broker offering free stock trades.