Compared with a traditional loan application, Lending Club is blissfully easy. To qualify, borrowers need only an active bank account, a minimum FICO credit score of 660–the approximate subprime cutoff point–and at least three years of credit history. A proprietary underwriting algorithm approves or rejects the loan on the spot.
On the surface, lending might seem just as simple. Prospective backers can create a Lending Club account and fund it through a bank transfer. They can choose loans to fund individually or set parameters regarding loan size and risk and let Lending Club’s systems assign the funds automatically. But while it’s tempting to view that activity as lending–the natural flip side of borrowing–what’s actually going on is more complex. What lenders are really doing is investing: they’re putting their money in notes backed by the prospective repayment of loans. The sizes of the loans range from $1,000 to $35,000. Investors can buy notes in increments as small as $25–which means they can purchase small slices of lots of different loans, spreading the risk around.
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