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How Much Money Should You Borrow at Lending Club?

by Peter Renton on October 24, 2011

Most borrowers, when applying for a loan on Lending Club, don’t give much thought to their loan amount. They have a need and they just apply for a loan to obtain money to meet that need.

However, depending on a borrower’s FICO score there is an optimum loan amount to borrow. Go above that amount and you will be paying a higher interest rate. All this information is contained on Lending Club’s site on their How We Set Rates page.

Consider the table below.  Keep in mind that Lending Club uses credit scores from Transunion so if you find out your score before applying for a loan you can know your optimum loan amount. Keep in mind you can only apply for loans in $25 increments.

Loan GradeFICO ScoreOptimum Loan Amount
A1770+ $17,475
A2747-769 $14,975
A3734-746 $12,475
A4723-733 $9,975
A5714-722 $7,475
B1707-713 $7,475
B2700-706 $7,475
B3693-699 $7,475
B4686-692 $7,475
B5679-685 $7,475
C1675-678 $6,225
C2671-674 $6,225
C3668-670 $6,225
C4664-667 $6,225
C5660-663 $6,225

Let’s take an example to illustrate the impact that loan amount has on interest rates. You are a borrower with a Transunion credit score of 701. This puts you in the B2 loan grade with an optimum loan amount of $7,475. Assuming the rest of your credit report is good this loan amount will be at an interest rate of 10.65% for a three-year loan term.

However, you really wanted to borrow $25,000. That is ok, but it is going to impact your interest rate. Lending Club has what they call “risk modifiers” which means they consider any loan above the optimum loan amount as higher risk and they adjust the interest rate accordingly. A $25,000 loan amount will send this loan down six loan grades, so a B2 loan becomes a C3 loan. The interest rate is now 14.65% (again for a three-year loan) or exactly 4% more than a $7,475 loan.

It is these risk modifiers that bring the lower loan grades (D-G) into play. There are several factors, including loan amount, that can cause your loan grade to drop into these lower grades. I will be detailing more about this in a future post.

Don’t Borrow in Round Numbers

Everyone likes round numbers when borrowing money. But this can cost you when applying for a loan at Lending Club. Here is another example to illustrate this point. Let’s take our B2 borrower with a 701 credit score again. Say this person really wants to borrow just $15,000. At $15,000 the loan grade drops to C1 with an interest rate of 13.49%. However, reduce the loan amount by $25 to $14,975 and the loan grade is B4 with an interest rate of 12.42%.

All this information is publicly available on Lending Club’s site but when I look at the loans on the platform I see very few borrowers realize this. Almost all the loans are for round numbers. With a little bit of homework borrowers could save hundreds or even thousands of dollars in interest over the life of their loan.

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{ 18 comments… read them below or add one }

Charlie h October 24, 2011 at 6:15 pm

That’s an expensive 25 $.

In other news don’t borrow money for consumer debt.

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Dan B October 24, 2011 at 10:25 pm

Charlie………..Huh?

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Bilgefisher October 25, 2011 at 7:31 am

Good post Peter. If you have to borrow money, why not be smart about it. I would say plenty of folks on these platforms haven;t done there diligence in the first place. There are many cheaper loans out there for those willing to look.

I’m never sure why a AA borrower goes to prosper when they can get 4-5% rates with a local credit union or even 2-3% rates for cars at the same credit union.

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Peter Renton October 25, 2011 at 9:57 am

@Charlie, That extra $25 in the example above will end up costing about $278 in extra interest.

I am also not sure what you mean by “don’t borrow money for consumer debt”. Isn’t that what every borrower is doing?

@Bilgefisher, My guess is that most borrowers are simply not that sophisticated, even the AA ones. If someone has a credit score of 750+ I think there are plenty of places to go for cheaper loans such as credit unions as you suggest. For those C-HR borrowers (or D-G on Lending Club) I think p2p lending may be their best (or only) bet for getting a loan.

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Roy S October 25, 2011 at 10:54 am

@Jason/Peter, I would have to disagree with you both. From looking at my bank’s website, they don’t appear to offer personal loans. I also have an account at a credit union where they state on their website that the lowest interest rate for a personal loan is 11% (and they offer a much lower interest for a savings account than my bank does). In addition, both my wife and myself have received a pre-approval for a Discover personal loan with “an APR as low as 7.99%.” Looking on bankrate.com for personal loans, LC is actually listed (I wonder why Prosper isn’t on there) on there and came in at the lowest rate–bankrate.com doesn’t seem particularly useful for personal loans, however, since there were only 4 institutions listed. I think interest rates for both LC and Prosper may be coming more in line with other financial institutions, and I only see the trend continuing as their UW gets better. Trying to get funding for a car or a house, p2p lending doesn’t seem a very practical solution. But for a personal loan, p2p lending may be(come) the route to go.

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Charlie H October 25, 2011 at 11:49 am

@Dan B
Borrowing $15,000 Instead of $14,975 (An extra $25) cost the borrower almost $300 additional dollars in interest.

My other comment is just a general statement that using debt to finance non-durrable goods, IE Connsumer debt, is stupid.

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Charlie H October 25, 2011 at 11:52 am

@Roy S

I would guess that the majority of A rated borrowers who come to lending club would Normally have used a HELOC in years past.

With so many people underwater, they have no equity to borrow against and banks are hesitent to open new HELOC even if you do have a fair amount of equity.

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Roy S October 25, 2011 at 1:17 pm

@Charlie, I haven’t heard very much about home equity loans in the past two years that I completely forgot that those loans used to be used a lot for people consolidating a lot of credit card and other types of debt in addition to home improvements. With so many people underwater in their mortgages, I would think that you are correct and that is only adding to the number of people heading over to LC and Prosper.

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Bilgefisher October 26, 2011 at 10:14 am

I agree with Peter on higher risk borrowers. Roy, while I can’t speak for all banks, my credit union has some pretty good deals. I can only assume they are not the best out there. A bit of shopping around is always required when getting a loan. I would love to see what % of folks only look at one lender. Small banks and credit unions have many very surprising deals.

Helocs are still out there. I have seen as high as 90% LTV, but most banks are south of 80%. Fixed rate helocs can be obtained for 1% over current mortgage interest rates. A 30 year fixed is currently at 4.2% according to bankrate.com. According to the Aug 19, 2010 census release 32% of owner occupied homes are free and clear. Realtor.org reports home ownership rate is ~66.4%. That a lot of households with a lot of equity.

My wife has a car loan at 2.5% fixed. Her credit is Mid to high 700′s. There are many borrowers out there with near or above 800 credit scores apply for car loans via these sites. I do think they could do better with a bit of research.

Jason

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Peter Renton October 26, 2011 at 11:27 am

@Roy, I still see plenty of credit card transfer offers where you can effectively a one year loan at 0%. Of course, you need excellent credit but for people in that boat I see no reason to apply for even a 10% for a loan. But let’s face it most of the borrowers, particularly at Prosper, do not have excellent credit (750+ FICO scores). These folks with a score below 700 have limited choices today which is why I think many of them turn to p2p lending.

@Charlie, So by what you are saying do you think it is a bad idea for someone to take out a loan at 20% in order to payoff a debt that is at 30%? That sounds like the opposite of a stupid idea to me.

@Bilgefisher, Interesting. While there is still a huge amount of equity in homes and maybe some banks are still doing HELOCs I think most people whose homes are free and clear are not looking for a loan period. They have an emergency savings account that they raid if there is an unexpected expense.

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Charlie H October 26, 2011 at 11:58 am

@ Peter

Of course not. If you can lower your rate of interest that ussually a good idea. Some would question the sanity of taking unsecured debt and turning it into secured debt.

I am saying that it is not smart to borrow money to pay for non-durrable goods. I am very happy to profit from people who borrow from tomorrow income to pay for things today.

@Bilgerfisher
Just to echo what Peter said, if you own your home, you are most likely not in the market for a HELOC.

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Bilgefisher October 26, 2011 at 12:27 pm

I do not have facts on how many free and clear home owners need loans I have marketed to these homeowners in the past to see if they want to sell. There are many folks that are house rich (ie paid off) and cash poor. I follow an real estate investor blog that tracks every lead he has. As many as 10% (rough guess) of his leads are from owners with free and clear homes. They are desperate to sell (you must be desperate if your willing to call a number on a little sign on the side of a road). Its easy to suggest that folks with free and clear homes are well off financially. In my experience, this is not always true.

Not sure the point of my own rambling here, but I would suggest that 800 credit score and free and clear home does not automatically qualify someone for being financially savvy or with a lot of cash laying around.

Jason

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Roy S October 26, 2011 at 2:00 pm

Good point with the 0% cc offer, Peter. I feel like I’m trying to defend high credit score borrowers who take out a loan on Prosper and LC, which I don’t want to be doing since I don’t know anything about them–but maybe I should try to figure that out since I am lending to them? I think Jason does make an excellent point, though: Having a 750+ credit score does not automatically qualify someone for being financially savvy.

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Peter Renton October 26, 2011 at 2:20 pm

@Charlie, I completely agree that it is unwise, stupid possibly, for people to take on new debt for things they don’t really need. But we live in a society that is not very good at delayed gratification. But that is a whole other topic.

There are two good reasons someone would take on secured debt to get rid of unsecured debt (by paying of credit cards with a HELOC for example). One, the rate should be much lower and two, you can deduct the interest. Of course, you have to qualify for a HELOC which is not easy these days.

@Bilgefisher, Good point. I probably assume wrongly that someone with a high credit score understands finances. One can achieve a high score by just doing the basics – always paying your monthly payments on time and having plenty of available credit. By doing that you show financially responsibility but you may still not be very knowledgeable on financial matters.

@Roy, Sometimes I wish I could just call these people to chat. Such as this borrower:
https://www.prosper.com/invest/listing.aspx&listingID=531153

He has an 800+ credit score and says he “has the funds available but would rather take out an installment loan to establish more credit.” Wow. At 30.49% that is a heck of a way to establish more credit. This guy looks great on paper, no delinquencies, no revolving credit. I invested $50 but I am still left wondering why. Why did he take out this expensive loan? I have no answer even though I invested in the loan.

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Dan B October 26, 2011 at 5:27 pm

Peter…………..It’s not that surprising. Here’s a possible explanation. This is a guy who has spent most of his adult life living a bit under the radar. He’s in his mid 40′s, he rents & has 2 active credit cards, the same Mastercard & Visa that he’s had since he became an adult in the mid 80′s. He received a number of large credit increases in the 1990-2007 period but the banks took most of it back after 2008 since he pays the balance off every month & never used most of the available credit anyway.

Pursuit of money has never been a big priority for him & though he has a decent job, he probably puts in fewer hours a week than you Peter. He’s got mid 5 figures in the bank & that’s always been plenty for someone like himself who has had zero responsibilities.
But now he’s decided to get married…………to a substantially younger woman from, let’s say Russia, Ukraine or perhaps Thailand. And his expenses are about to go up substantially, but he doesn’t want to touch that safety blanket at the bank. But he has almost no credit to pay for a modest wedding & at the same time buy the things that some married people buy, but a lot of single individuals don’t necessarily own. You know, like the furnishings that are featured in old copies of Better Homes & Garden that his soon to be wife has looked at or stuff she has seen on tv about life in America.

What to do? So here comes Prosper to the rescue. He figures he’ll pay it off early anyway & build some credit while he’s at it. There you have it Peter, all the answers you want.

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Peter Renton October 27, 2011 at 6:16 am

@Dan, Fascinating. You should be a Hollywood script writer. Sounds like we have the seeds of a sitcom or even a reality TV show. You may well be close to the truth here.

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UltimateSmartMoney October 30, 2011 at 6:59 pm

HELOC is a great way to borrow money with low interests right now. That is if you currently own a house. Although the interest is variable, it should stay low for next several years minimum.

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Peter Renton November 7, 2011 at 2:54 pm

@Dan, A postscript to the loan I referenced above. It was fully funded by investors but the borrower did not live up to Prosper’s standards. It was canceled during a pre-funding review. Maybe the wedding was canceled…..

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