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Five Things New P2P Lending Borrowers Should Know

by Peter Renton on June 16, 2011

I have been getting a few emails lately from borrowers wanting suggestions that will help get their loan approved on Lending Club or Prosper. Unfortunately many of these potential borrowers do not meet the minimum requirements and most had no idea their recent actions were hurting their chances of securing a loan.

An informed borrower will have a far greater chance of getting their loan on to the platform. Here are the five most important points that every new borrower should know before applying for a loan at Lending Club or Prosper.

1. A High FICO Score is Important

On Lending Club the minimum credit score you need before your loan application will be considered is 660. But even if your score is higher than that you may still have some problems. For example, if your FICO score is between 660-719 you need a debt to income ratio (excluding mortgage) below 25% and for those borrowers with a score of 720 or higher that maximum is 30%. There are also other requirements that Lending Club imposes that you can read here.

On Prosper the lowest FICO score is 640 but for borrowers with lower credit scores (640-660) the interest rates start to get pretty high, up to 31.99%. Prosper assigns every borrower a rating and that rating is what determines the interest rate. You can see a table with a complete listing of Prosper’s interest rates here.

2. Don’t Shop Around for Credit

The number of times a borrower has applied for credit recently (within the last six months) can have a dramatic impact on your interest rate and whether you are approved for a loan at all. For example at Lending Club if you have a FICO score below 740 and have more than three credit inquiries in the last six months then your loan application will be rejected outright. Prosper doesn’t disclose an exact formula like this but I would guess they have a similar rule.

3. Don’t Apply for More Than You Need

If you need $10,000 don’t apply for $20,000 because having the extra money would be nice. Only apply for what you need. Lending Club and Prosper have slightly different approaches here. On Lending Club if you have a low credit score (660-678) then you will pay a lot more interest for any loan greater than $10,000. For example a hypothetical $10,000 loan to a C-grade borrower might be at 13.99% but if that same borrower bumps the amount to $20,000 or more then the rate goes up to 18.79%.

Prosper’s approach is to have a sliding scale of the maximum borrower amount allowed. Only AA and A rated borrowers can borrower the maximum of $25,000; B, C and D rated borrowers are limited to $15,000; E ratings have a $7,500 limit and for HR it is $4,000.

Keep in mind, too, that both Prosper and Lending Club charge origination fees that come out of your loan total, so if you really need $10,000 then apply for $10,500.

4. You Will Get a Lower Rate on a Shorter Term Loan

At Prosper most borrowers you can apply for a one-, three- or five-year loan with one-year loans always carrying the lowest interest rates. The average difference between a one-year and three-year loan is 1%, but between a three year loan and a five year loan the difference is around 3%. For example if you have a Prosper rating of B and have had no previous loans on Prosper then your interest rate will be 14.99% for a one year loan, 15.99% for a three year loan and 18.99% for a five year loan.

On Lending Club you only have the choice of three and five year loans and the interest rate difference between them is 2 Р3.5%. If  we take the hypothetical C-grade borrower with a $10,000 loan the rate would go from 13.99% for a three year loan to 16.49% for a five year loan. Bottom line is you will always save in interest when choosing a shorter term loan.

5. You must live in a state that allows borrowing

Lending Club allows borrowers from 42 of the 50 states – the states that are excluded are Iowa, Idaho, Indiana, Maine, Mississippi, North Dakota, Nebraska, and Tennessee. Prosper has a broader reach allowing borrowers from 47 of the 50 states – the unlucky three states are Iowa, Maine and North Dakota.

I encourage all would be borrowers to read through the information provided on Lending Club and Prosper. Lending Club provides a detailed explanation of all the factors that go into determining their credit grade. Prosper does not divulge their secret sauce that determines a borrower’s credit grade and the resulting interest rate but it would still behoove every borrower to spend some time reading through the help section on Prosper on applying for a loan.

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Moe June 16, 2011 at 12:48 pm

I would like to add, that with a smaller loan request, you also have a much better chance of getting it funded than a bigger loan. You will rarely see a $10,000 loan not funded.

It’s also important to write a thorough description of your loan, which should include: Purpose of loan, list of current debt with their interest rates, source of income, monthly expenses. And if you had any defaults explain them.

@Peter, just one correction, there is a big difference between the LC credit score which uses FICO than Prosper which uses Experian, 640 of Experian is less than 600 on the FICO system.

P2PNoob June 16, 2011 at 2:14 pm

Hi Peter,

Is the table of prosper’s interest rates in %APR? Because if otherwise, it might make a big difference. If it is not in %APR, I can help you change the table into %APR (using their fee information)

Matthew Paulson (P2P Lending News) June 16, 2011 at 10:28 pm

This is a nice bootcamp for borrowers. Good work Peter!

Peter Renton June 17, 2011 at 11:34 am

@Moe, Good point on the funding part, I should have mentioned that as another reason to only ask for what you need.

I didn’t there was that big a difference between the Experian Scorex Plus system that Prosper uses and the FICO score. I will have to do some more digging there. Thanks for the heads up.

@P2PNoob, I have included just the interest rates here, not the APR’s. The table I linked to also includes just the interest rates. I realize the APR’s will vary I was really providing the information here just for comparison.

@Matthew, Thanks.

Moe June 17, 2011 at 3:51 pm

@Peter, the Scorex Plus might be different, I know the regular Experian score is way lower than Fico. How about you try them both out, submit a loan request and see your score on each, then cancel… This won’t effect your credit because they both only do a soft credit inquiry which doesn’t show on your record.

Peter Renton June 17, 2011 at 4:01 pm

@Moe, You know it is funny I have actually decided to do just that. The borrowing process is something that has remained a bit of a mystery to me because I have never done it. In the next couple of weeks I am going to apply for a loan at Lending Club and Prosper and actually take out a loan so I can fully understand the process. I will probably do a screencast video and put it on the blog so prospective borrowers can learn something.

Moe June 17, 2011 at 4:23 pm

@Peter, Very cool, I would love to see that, and i’m sure many investors would love it. I remember once trying it on Lending Club, and I then understood why most borrowers don’t write a descpription of the loan. That’s because the form to fill out is just one page and I thought there would be many more pages to fill out and would leave the description for later but before you know it the loan is listed and I was approved… But I never went thru with the loan till the end.

Just bare in mind, that when taking out a loan on LC and repaying shortly that it would cost investors. If you take out a 8% loan and repay it in one month, the lender will get .67% interest for the month, but will pay a 1% fee on the “entire” payment received from you… Therefore it would be right to keep the loan for a few months before paying off. However, with Prosper the fees are different and they won’t lose.

Peter Renton June 17, 2011 at 4:32 pm

@Moe, I am fully aware of that. I will not be paying off either loan for at least three months. Partly, I want to see the entire process including the repayment process and I want my fellow investors to get something out of it.

Fred June 18, 2011 at 8:53 am

@Peter & @Moe:

Can either of you explain how Proper assign its “Proper Rating” (A – HR) and “Prosper Score” (1 – 10)?

I know they base their calculation on historical data of the loans in their database, but I still do not know how 2 borrowers with the same “Prosper Score” can have diferrent “Prosper Rating”, and vice versa. What does each try to measure?

Also, I know for a fact that both Prosper Rating and Prosper Score can have wild discrepancies with the “Credit Score” (from Experian). For example, the borrower of listingID = 510774 has Credit Score of 800 – 819, which is very good. However, the Prosper Rating is E, and Prosper Score is only 3.

Moe June 19, 2011 at 1:03 pm

@Fred, the Prosper rating is based on both the Prosper Score and the Credit Score. The Prosper Score is Prosper’s own statistics of borrowers if they will default or not. For example, the credit score gives alot of weight to credit utilization, but Prosper may find in ther statistics differently, and they may rather consider length of employment more relevant. As for listing 510774, that’s because of his high revolving credit balance. And by the way, with the Fico score he would never have anything over 680 with a 71% utilization.

Peter Renton June 20, 2011 at 9:21 am

@Fred, As far as my understanding goes Moe has it right. I would just add one thing. The Prosper score is based on borrower history at Prosper. They have 5+ years of credit history so when a new borrower comes a long they compare their credit information with other borrowers on the platform and determine what is their likelihood to default.

P2PNoob June 20, 2011 at 3:15 pm

Thanks for the reply!

It turns out that – once you’re not an AA borrower grade- the %APR for 1-year is actually greater than the %APR for a 3-year loan and 5-year loan. Just something to keep in mind if you’re not comparing interest rates. For example:

for an A grade loan, the 1 year %APR is 16.51% , the 3 year %APR is 13.52% and the 5 year %APR is 16.29%

I wish this stuff were easier to find on the Prosper page!

Peter Renton June 20, 2011 at 4:17 pm

@P2PNoob, The reason the %APR is so high for the one year notes is because it includes the origination fees. It doesn’t make a big difference for AA rated notes because the fee is only 0.5%, but for A rated notes that same fee jumps to 3%. With a one year note that fee can only be amortized in for one year – hence the big jump in %APR.

Keep in mind, though, you will still pay much less total interest with a one year loan than with a three year or five year loan despite the higher APR.

Paul July 25, 2011 at 4:47 pm

Does using a P2P loan negively impact your FICO? I have excellent credit and do not want to jeapordize it if this type of loan impacts it. If it does, could my FICO lower at application, origination or while the loan is outstanding? I will make all the payments when due and will likely never default.

Peter Renton July 26, 2011 at 8:31 am

@Paul, Both Lending Club and Prosper do a “soft pull” of your credit report when you apply for a loan. This will not impact your credit score at all. But once the loan is originated all activity is reported to the credit bureaus. So, this may impact your credit score but no more than obtaining another kind of loan or new credit card would. And your payment history with your p2p loan will also be reported to the credit bureaus which should help you as long as you always pay on time.

Mike August 1, 2011 at 2:03 pm

Is there anything active that can be done by the borrower once the listing is posted, or is it just a sit & wait process at that point?

I’ve got a listing on right now to try to fund an engagement ring purchase and based on what I’ve seen in your filters posted on the blog, my employment history hurts (1yr 11mo certainly not hitting your 4 years, but also probably just missing some folks set at 2 years), but I’m hitting on all cylenders otherwise for a B grade.

Its kind of painful having fundings trickle in right now not knowing if it’ll get fully funded. So, if there’s advice on how to improve my chances at this point I’m all ears.

Do groups play any role in the process? Since I’m only 2 days in to my request, I’ve considered withdrawing, joining a group and then re-listing, but I haven’t seen any indication from your blogs that would impact anything for the automated investors.

Thanks for the blog. Even though I’m on the other side of the fence at the moment, it makes for some good reading and sounds like an interesting investment opportunity long-term.

Peter Renton August 2, 2011 at 2:16 pm

@Mike, First off let me say that not all investors invest like I do – with a strict filtering process. Some people will read the loan description carefully before making any decision, so that is always the best place to start. Make sure you sell yourself and your story there and also make sure you have no spelling or grammar mistakes there.

As for selling your loan – you should certainly post it on Facebook or contact friends. It sounds like this is a Prosper loan and one of the things you can do is join an active Group. Believe it or not this really helps and groups such as LendersClub and Socorro Capital Partners have loyal investors who will fund a good portion of each loan. It may be too late for this loan but if you fail to get funding please keep that in mind for next time. Lending Club does not offer groups – this is something unique to Prosper.

Good luck – I hope you get your loan funded.

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