recent tax return, and four or five days later, he had his money.
It was an OK rate—Uyaroglu was happy enough with it—
but not really a great rate. So while Wall Street observers and
analysts question whether Lending Club can ever make
enough loans to justify its outsize public offering, small-business owners are right to ask more practical questions:
Why are small-business loans so expensive, even for healthy
companies? How much of a difference can be made by the
faster technology and data-driven efficiency of the likes of
Lending Club? And how long will it be before the increasing
competition in this popular but still nascent market lowers
loan prices for more small businesses?
AMONG THE SORT OF people for whom disruption is a mantra, if not a business model, the Lending Club origin story makes the heart skip a beat. It was the summer of 2006, and Renaud Laplanche was on vacation. He’s not really the type to take vacations, actu- ally. But Laplanche, a French former securities lawyer, had just sold the nterprise-search software company he had founded, TripleHop, to Oracle, and
he had some free time on his hands. So he planned to fill six
months, maybe even a year, traveling with his family.
It wasn’t long before fidgeting set in. For Laplanche—
deliberate, intensively hands-on, and a professional financial
nerd—that took the form of reading the fine print on the
statements of his household bank accounts, something he
says he wouldn’t normally do. That’s when he found a big
discrepancy between his credit card interest rate— 16. 99
percent, “which I thought was really high,” he says—and the
rate the same bank was paying him on his savings account:
less than 1 percent. In banking terms, that was a big spread.
In business terms, Laplanche saw a big opportunity.
“The banking industry was either highly profitable—if all
that money was going into their pockets—or highly inefficient,
if that 16-point spread is all cost,” he says. Surely technology
could help him create a cheaper, faster way to move money
around: The right online system could split the difference in
that spread, offering borrowers cheaper debt than a credit card,
and offering ordinary investors a better return than a savings
account. He cut his vacation short and went to work immediately. In May 2007, Lending Club made its first loan.
Lending Club wasn’t the first U.S. peer-to-peer lender;
Prosper began making loans in 2006. But Laplanche, who
rounded up some of the top celebrities of the financial and
tech worlds to advise and fund his company, soon pulled
ahead. Google was a big investor, as were venture firms Kleiner
Perkins Caufield & Byers and Morgenthaler Ventures; board
members include White House stalwart Larry Summers, former Morgan Stanley chairman John Mack, and Kleiner partner
Mary Meeker. They’ve helped Laplanche build Lending Club
into a heavyweight of small-scale lending, and furnished it with
the big-data machinery to challenge traditional banks.
“Nobody has ever looked at banking as an engineering
What Sets Your Rate?
Figuring out how much you’ll pay for a
loan is like peering into a black box. In
its early days, Lending Club offered a
rare window into the process. Though
it’s now more opaque, its former guide-
lines still give a good idea of what to
expect when you’re loan shopping.
1THE INITIAL SORTING Your FICO credit score is the first thing most lenders look at. Lending Club sorted potential borrowers into buckets (below) by score, declining anyone below 640.
2THE REFINING Next, Lending Club looked at the fine print of each person’s credit history to decide if it should lower the initial grade. You got dinged if:
3THE INTERNAL CALCULUS It’s not just you—your lender’s needs (and how often it’s been burned by bad loans) also affect your rate. For example, Lending Club considered:
850-770 713-707 678-675 659-656
769-747 706-700 674-671 655-652
746-734 699-693 670-668 651-648
733-723 692-686 667-664 647-644
722-714 685-679 663-660 643-640
; Your credit history was
shorter than five years.
; You had too few (less than
six) or too many (more than 21)
open financial accounts.
; You had applied for any sort
of credit more than three times
in the previous six months.
; You asked for a loan that was
higher than what Lending Club
had initially set as your limit.
Each of these factors reduced your score, dropping
you into a new and lower bucket if necessary and
determining your final interest rate.
; The minimum annual
return it wanted to
; A risk adjustment
for each bucket of loans,
or roughly double the
estimated annual loss
rate. For example, for a
bucket with estimated
annual losses of 5. 5
percent, the risk pre-
mium became 11 percent.
Added to a base rate
of about 8 percent, the
borrower ended up with
an annual interest rate
of 19 percent.
You used more
MONEY 82 - INC. - MAY 2015
than 85 percent,
or less than 5
percent, of your
total credit line.