A recent study from Gartner suggests that peer-to-peer lending will grow by 66% between now and 2013, so we thought it would make sense to look at the fastest-growing peer-to-peer lending site and explain just how Lending Club does work.

Lending Club works by connecting borrowers and individual investors that are acting as lenders. Borrowers are hoping to get an unsecured loan at a better interest rate than they would be able to get from a bank and lenders are hoping to make a better rate of return than they would be able to get from the local bank. Lending Club saw an opportunity to take banks out of the borrowing process and providing a better deal to both borrowers and lenders, and it did just that.

If you want to get a loan from Lending Club’s investors, simply go through Lending Club’s online application process and then Lending Club will provide instant approval and state an interest rate that you can get a loan at. After you complete your loan application, the loan will go into a 2 week funding period where individual investors can opt to partially fund part of the loan. After the loan is fully funded, you will receive the funds and repay the loan across 36 equal payments. Lending Club takes care of the payment processing and distributes your payments back to the participating lenders.

Some investors that have decided to do their own Lending Club review have earned between 9% and 12% on their money. A few investors have even earned as high as an 18% rate of return on their money, but they are few and far between. Lending Club provides a great way to diversify your investment portfolio outside of stocks, bonds and real estate. Before you begin investing, make sure to understand how the process works and understand the risks involved. Start out with a small loan portfolio and be ready for some trial and error before figuring out a good mix of loans to invest in.

A unique feature of Lending Club is that one loan for a borrower can be funded by dozens of different investors. This way, lenders fund are diversified have more protection of a single borrower chooses not to repay.

Lending Club does work up some revenue by charging an origination fee to borrowers and collects a 1% annual portfolio management from its lenders. The company doesn’t announce much about its financials, but it has received $22 million across two rounds of venture capital. Lending Club is a rather unique company that has an innovative business model and is providing some much needed innovation to the financial industry.

Hopefully this article will help you understand just how does Lending Club work. If you have questions about the company, feel free to leave comments below and we’ll respond to them.

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