Consumer Loan Rates Surpass Bonds, Boosting Lending Club's Popularity

The company that aims to cut out the middle man is taking things one step further as investors flock to the service. Lending Club, the “safe alternative” to traditional banking, is beginning to attract investors who buy pieces of loans and receive higher returns than they would get from stocks or bonds, Bloomberg reports. Peter Thomson is particularly intrigued. He plans to invest $25 million in some of Lending Club's top-rated, 36-month loans. What attracted Thomson, the director of Thomson Reuters Corp. TRI, to Lending Club? It could be the fact that the firm has been growing 5% to 10% month-to-month. Or it could be the average earnings of 9.5%. By comparison, Bloomberg says that rates on two-year U.S. Treasuries are “near a record low” of 0.2%, while 30-year bonds yield somewhere around 3.3%. Meanwhile, investors have watched in horror over the past four years as the Standard & Poor's 500 Index dropped 18%. “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,” Stefan Clulow, who helps manage Thomson's personal funds in Toronto, told Bloomberg. “We can get better returns by going into products like the one offered by Lending Club.” In January, Benzinga spoke to Lending Club CEO Renaud Laplanche, who explained that absurd credit card rates helped inspire his firm. “If I'm paying 18%, that means someone on the other side is earning 18%,” he told us during our exclusive interview. “That's a very good investment opportunity in a very low-interest rate type of environment. That's really where I started the idea and that's what Lending Club is all about – cutting down on intermediary costs, on banking costs.” According to Bloomberg, Lending Club issues three- and five-year loans ranging from $1,000 to $35,000. The loans are then listed on its site, allowing investors to purchase (and profit from) the debt. Loans are rated by the borrower's credit score; consequently, less than 10% of applicants are accepted. This is good for investors though, as it provides a degree of security in knowing they are likely to profit from their investment. Jeff Crowe, a partner at Norwest Venture Partners in Palo Alto, California, told Bloomberg that there's a “big opportunity to offer better rates to prime consumers who want to borrow.” Norwest Venture Partners first invested in Lending Club in 2007. But while Laplanche considers his Lending Club portfolio to be his best investment, Bloomberg says that the company has yet to turn a profit. This can be blamed on the firm's operating expenses, which were $5.89 million in the second quarter – trumping Lending Club's revenue of $2.79 million. But that revenue figure is more than double what Lending Club achieved in the previous quarter. If the company can reduce its operating expenses while continuing to increase revenue, it won't be long before a profit is within reach. Follow me @LouisBedigian