Americans are paying way to much to borrow money, given that the interest rates that banks give on savings accounts hover at 0.01 percent on savings account deposits, yet the banks that run credit cards are charging millions of Americans 15% to 29% interest on credit cards. Granted there are a few credit cards that charge from 8% to 12.5% interest but these are few and far between and you need a stellar credit rating to even obtain one.
Americans have charged more than 800 million on their credit cards last year. The profit made on interest payments alone from this 800 billion is staggering, and that is not counting the ton of fees that credit card companies love to levy on people like the infamous annual fee charge. Nearly every consumer is paying high interest rates on these cards, which in turn enriches the banks with incredible profit. Credit card companies have a much higher return on investment than traditional banks ever will.
Since interest rates currently are close to 1 percent there is no reason for U.S consumers to be paying 15% to 29% interest rates on borrowing money. A new player in the game is looking to change this up however. Enter LendingClub who Just announced in December that they are looking to raise about 692 million in an initial public offering. This would put a value on LendingClubs business at around $4 billion dollars. LendingClubs news of a public offering has already attracted high caliber investors such as Google and even some Hollywood elitists. LendingClub provides a platform that cuts out banks from the equation and has facilitated more than 5 billion in consumer loans, while at the same time empowering individual investors.
LendingClub see’s opportunity in the fact that it costs way to much to borrow money in this country. For those who are looking for a good return on there money, LendingClub also caters to this market. Where as banks are only offering 0.01 to 0.03 percent return on savings accounts LendingClub offers savvy investors a return of about 7% on their investments after losses. While investors can opt for investments other than LendingClub these investments can be wrought with risk. LendingClub looked at some of these platforms and sensed an opportunity, for example high yield bond funds are only paying out about 5% ROI, where as most investors with LendingClub are earning around 7% adjusted for losses. Another avenue that LendingClub is capturing is the small investor market, as investors can invest into LendingClub loans with as little as $25. In fact with just $25 you can partially fund more than 250 loans to diversify your risk pool. The industry is new however so investing in this could be risky and your investments are not covered by FDIC insurance like your savings account would be.
For those using LendingClub to borrow, they can obtain a much lower interest rate than that offered by either banks, credit unions or credit card companies. Many borrowers use LendingClub to consolidate there credit card debt into one loan, there by cutting down there interest rates by as much as half. Borrowers can even check to see if they are approved to borrow money without needing to have a hard inquiry appear on their credit report. Most consumers get a far better deal by going through LendingClub instead of the older more traditional lending routes such as banks and credit cards. Business for LendingClub has been so brisk and demand so high for this service that over night it seems a host of competitors have appeared. The future is looking bright for platforms like LendingClub however, and these platforms could in theory challenge banks to change the way they do business.