One longstanding criticism of personal loans, which have grown rapidly in popularity over the last decade, is that borrowers can spend the money for a different purpose than the one they stated in their loan applications, and ultimately wind up deeper in debt.
For instance, after a consumer applies for a debt consolidation loan, the lender often has no way of verifying that the recipient actually used the funds to pay off an existing credit card balance.
A new feature from LendingClub addresses the issue by enabling borrowers to ask that their loan proceeds be sent directly to their credit card company. The San Francisco company, which has been testing the feature for more than a year, announced its broader launch on Tuesday.
“If you get a balance transfer loan, you’ll list the creditors you’d like to pay and how much each one should get. All the money you didn’t use to pay debt goes into your bank account,” LendingClub’s website states.
The feature is optional for borrowers, which suggests that LendingClub may still have to contend with certain applicants who try to deceive the company about their intentions.
But LendingClub officials said that borrowers who agree to pay off their credit card balances directly may qualify for better terms than they would otherwise receive.
“We factor that into our credit decisioning and are often able to offer a better rate and lower their monthly payment,” LendingClub spokesman Anuj Nayar said in an email.
Another selling point to prospective customers is that the direct payoff option simplifies the process of consolidating card debt.
“This feature is directly in line with our mission of helping members improve their financial health and is an excellent example of how we’re innovating to make the experience simple and seamless,” LendingClub President Steve Allocca said in a press release.
Unlike balance transfer credit cards, which often feature introductory periods with 0% annual percentage rates, balance transfer loans from LendingClub have fixed terms and fixed APRs.
No matter how the borrower uses the funds, personal loans from LendingClub have three- to five-year terms and APRs between 6.95% and 35.89%.
LendingClub has facilitated more than $47 billion in loans in its 12-year history. The company reported loan originations of about $8 billion in the first nine months of last year, which was roughly 10% of the U.S. personal loan market, according to data from TransUnion.
At the end of the first quarter of 2019, 67% of the borrowers in LendingClub’s prime program reported using their loan proceeds to refinance existing loans or pay off their credit cards.
