LendingClub Lures Investors as Consumer Loan Rates Top Bonds

LendingClub Corp., a startup that lends money to help consumers pay off credit-card bills, consolidate debt and take vacations, is attracting investors who buy pieces of those loans and get higher returns than they can from stocks or bonds.

Peter Thomson, director of Thomson Reuters Corp. (TRI), is investing in some of LendingClub’s top-rated loans that mature in 36 months, he said in an e-mailed statement. Thomson will invest a total of $25 million, said two people familiar with the matter, who declined to be named because the amount is private.

Since San Francisco-based LendingClub began issuing loans in 2007, investors have earned more than 9.5 percent a year on average, according to the company’s website. Rates on two-year U.S. Treasuries are near a record low of 0.2 percent, while 30- year bonds yield about 3.3 percent. For stock investors, the Standard & Poor’s 500 Index has dropped 18 percent in the past four years.

“In a world where rates are zero or near zero, you have to go quite a ways out on the curve to get anything that’s satisfactory from a yield standpoint,” said Stefan Clulow, who helps manage Thomson’s personal funds in Toronto. “We can get better returns by going into products like the one offered by LendingClub.”

Clulow declined to say how much he’s committing to LendingClub’s loans, calling it a “material investment.”

LendingClub Chief Executive Officer Renaud Laplanche also declined to comment on the amount, though he said it’s the company’s biggest investment from a single individual or institution.

Credit Scores

LendingClub issues loans ranging from $1,000 to $35,000 and then lists them on its website, where investors purchase the debt. The loans run for three or five years, with annual interest rates ranging from 5.4 percent for the highest-rated notes to almost 24 percent for the lowest-rated. The company rates the notes based on a borrower’s credit score and issues loans to fewer than 10 percent of applicants, Laplanche said.

LendingClub is originating more than $23 million in loans a month. At the end of June, 3.3 percent of loans were at least 30 days past due. American Express Co., the biggest credit-card issuer by purchases, had a delinquency rate of 1.5 percent. Bank of America Corp. said 4.16 percent of loans were delinquent, while JPMorgan Chase & Co. reported a rate of 2.59 percent.

LendingClub makes money by charging an origination fee to the borrower on each loan and the investor on each transaction. Together these generate revenue equal to about 5 percent of the loan amount, Laplanche said.

Borrowing for Less

For borrowers, LendingClub offers a source of capital at a time when banks have made it more difficult to get loans and credit-card rates have surged. The average variable-rate credit card has jumped to 13.8 percent from as low as 10.7 percent in March 2009, according to data from Bankrate.com. LendingClub customers can borrow at less than half that rate to pay off existing balances.

“There’s a big opportunity to offer better rates to prime consumers who want to borrow,” said Jeff Crowe, a partner at Norwest Venture Partners in Palo Alto, California, which first invested in LendingClub in 2007. “And to offer far better rates to the people who are lending to those prime consumers.”

LendingClub offers lower rates than banks by eliminating administrative and marketing costs, such as the millions of mailed promotions sent by credit-card companies every year.

Not Yet Profitable

Still, the company isn’t yet turning a profit. While revenue more than doubled in the second quarter to $2.79 million, LendingClub’s operating expenses were $5.89 million, resulting in a $3.11 million net loss. LendingClub is bolstering sales, marketing and customer support to win business from banks and fend off competition from Prosper Marketplace Inc., another San Francisco-based startup.

Prosper, founded in 2006, says on its website that it has funded $255 million in loans, compared with $353 million for LendingClub. Prosper promotes rates for borrowers starting as low as 7.4 percent and average returns for investors of 10.6 percent. Both companies are regulated by the U.S. Securities and Exchange Commission.

They’re also competing for money from venture capitalists. In June, Prosper raised $17.2 million in funding, led by Draper Fisher Jurvetson and Crosslink Capital. Last month, LendingClub brought in $25 million in financing led by Union Square Ventures, a funding round that included participation from Thomson’s venture fund, Thomvest. In total, the companies have raised more than $150 million in venture finance.

“Peer-to-peer lending is for real,” said Tim Draper, founder of Draper Fisher Jurvetson and a Prosper board member. “People are looking for an alternative, and Prosper is showing better results for both investors and borrowers than banks.”

Investment Portfolio

Thomson, 46, is putting his money in a LendingClub unit called LC Advisors, which was formed last year to manage money for accredited investors. LC Advisors buys pieces of loans across the LendingClub site, creating diversified portfolios for clients.

Thomson is the grandson of Roy Thomson, who began buying newspapers in the 1930s. His family company, which later became Thomson Corp., bought Reuters Group Plc in 2008 for $15.9 billion, forming Thomson Reuters. Bloomberg competes with the New York-based company in selling financial and legal information and trading systems.

Laplanche, 40, expects more institutions and wealthy individuals to follow Thomson’s lead as investors see his company as viable and safe. He projects revenue of about $20 million this year.

“It took some time to build investors’ confidence,” Laplanche said. “We wouldn’t be growing at the rate we’re growing if we didn’t offer a great return for investors.”

To contact the reporters on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net; David Scheer at dscheer@bloomberg.net

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