Lending Club is better than a lot of banks. That’s partly because the peer-to-peer lending company isn’t subject to the same regulations.
How it works:
- You want a loan.
- You got to Lending Club’s website and fill out a form with, like, your name and how much money you want and why.1
- I have some extra money.
- I go to Lending Club’s website and open an account.
- I browse the borrowers and think you look like a likely candidate.
- I lend you money.
- Lending Club sets up the loan, collects payments from you, keeps an eye on things generally, and takes a fee for its trouble.
But where are some differences:
- Lending Club’s assets and liabilities are perfectly matched induration: Those notes and certificates mature when the corresponding loans mature. A bank, on the other hand, is in the business of borrowing short to lend long.
- Lending Club’s assets and liabilities are perfectly matched in loss bearing: Every dollar that a borrower doesn’t pay back to Lending Club is a dollar that Lending Club doesn’t pay back to note holders. The note holders know going in that they bear the entire risk of loss on the underlying loans. A bank depositor expects to get her money back even if the bank makes some bad mortgage loans.