Lending Club Corp.'s new partnerships show that its model, wherein borrowers seek loans funded by individuals rather than financial institutions, can be a consumer's first choice rather than a last resort.
Even amid the fanfare of its early days, peer-to-peer lending was cast as an extreme choice — the place to go for people who just did not fit the mainstream lending space. But experts say Lending Club's recent moves suggest consumer perception of the industry is changing.
"This just marks another step in peer-to-peer lending's evolution, the fact that it can now rest side-by-side with other lending options," said John Grund, a partner at First Annapolis Consulting in Linthicum, Md. "It's still a niche when you put it into the context of consumer loans as a whole, … and the adoption of it on a widespread national basis is still to be determined, but when they start forming partnerships like this, it's another notch in the bedpost."
Lending Club's latest partnership, announced Thursday, is with Credit Karma Inc., a San Francisco company that offers free credit scores and matches consumers with credit card offers. Credit Karma's audience can now be referred on its site to a personal loan through Lending Club.
In many ways, the pairing says a lot about the current state of peer-to-peer lending, which has been making a comeback. Companies like Lending Club and rival Prosper Marketplace Inc., as well as a handful of new entrants, are exploring ways to revamp their businesses and become sensible lending alternatives in the aftermath of the credit crisis.
Lending Club's agreement with Credit Karma came after a similar one it made with Intuit Inc.'s Mint in July. Loans facilitated through Lending Club are now promoted as part of Mint's Goals feature, which encourages people to get out of debt and save money. Lending Club also has partnerships with the personal financial management companies Pageonce Inc. and Credit Sesame Inc.
Rob Garcia, the senior director of product strategy at Lending Club, said the Redwood City, Calif., company has deals in the works with five other sites, including one with the start-up Readyforzero.com.
"It's more than marketing partnerships," Garcia said. "There's seamless integration to the customer as well. It's not just throwing out leads at people."
Kenneth Lin, the founder and chief executive of Credit Karma, said the partnership with Lending Club lets his company give its nearly 2.5 million members another option.
"Our belief is in transparency and giving consumers as many options as possible," he said, adding that peer-to-peer lending is "becoming a great alternative, if you have good credit."
There was a lot of buzz when peer-to-peer lending first came on the scene in 2006 with the start-up of Prosper. The premise was that anyone — no matter their qualifications — could come online and make their pitch to individual investors seeking to lend money based, in part, on a desire to help their fellow humans.
Prosper quickly tweaked its model to eliminate the bottom tier of borrowers, since no amount of human compassion seemed enough to motivate investors to fund loans to the riskiest borrowers. The industry then faced its greatest setback when the Securities and Exchange Commission required Prosper and Lending Club to seek registration approval. For several months, the companies weren’t allowed to facilitate loans between investors and borrowers. Lending Club, however, did fund some loans on its own.
Now, credit experts say, the companies have a second chance to become more mainstream as interest rates from traditional lenders remain high and consumers look for ways to get out of debt.
"There were plenty of folks, when it first came out several years ago, who said this is doomed to die," Grund said. "The recessionary forces have probably worked in its favor as consumers have become disenfranchised with traditional financial institutions and credit card regulation has on average driven up APRs, or interest rates, not down."
Bob Lawless, a professor at the University of Illinois College of Law specializing in consumer credit, agreed, saying, "There's a sense … the word 'credit card' has gotten a really bad reputation. I think that's driving people to alternative lending generally."
This is not the first time Lending Club has worked with Credit Karma. In early 2009, Credit Karma agreed to help promote Lending Club's Uncrunch America, a website used as a marketing vehicle for its services. But with Uncrunch, the pitch was geared more toward investors than borrowers. It was a short-lived marketing campaign; the website went offline after a few months.
Currently, Lending Club is promoting the website Shredyourcreditcard.com, which offers people who send in a video of themselves destroying their credit cards the chance to win cash prizes.
These are "campaigns that come and go," Garcia said. "This is part of what we do to get the word out to make it interesting and fun and more appealing to people."
But partnerships with websites like Credit Karma are one of the best ways for peer-to-peer lending companies to reach potential borrowers, experts said, especially when most borrowers are using Lending Club loans as a way to pay off higher-interest debt.
"Partnerships are an excellent way to leverage and combine product distribution and brand strength of different organizations," said Craig Focardi, a senior research director focused on consumer finance at TowerGroup.
But Lending Club must walk a fine line to attract enough borrowers and investors to create a balanced marketplace.
Lending Club's latest efforts seem to focus more on expanding its borrower pool than on investors. (Rival Prosper, too, is trying to attract borrowers. On Thursday it reduced the interest rate on a one-year loan for borrowers with pristine credit to 4.99%, from 6.65%.) But Garcia insisted that Lending Club is working to attract both.
"As the company expands, it's lost the luxury of focusing on one or the other," he said.
He admitted, however, that the company has had a lot of success in attracting investors simply through word of mouth.
"Our most successful program has been investors inviting investors," he said.