A Short History of Lending Club Rates

Today, for the third time in 6 months, Lending Club has raised the interest rates charged to borrowers.

Doomsayers will proclaim this as a sign of troubling times; the highest interest rate is now a staggering 30.99%.
Others will consider it just business as usual. After all, Lending Club has routinely changed its rates: more than 50 adjustments have been made since the company’s inception in June 2007.

Graphing the evolution of interest rates for all Lending Club rates provides for some interesting insight, the most notable of which is the ‘spread’, or the difference between the highest and the lowest interest rates.

lc_rates

While the average interest rate (represented by the black line in the graph above) have multiplied by 1.45 in 9 years, the difference between the highest and lowest rates have multiplied by an impressive 2.39.

Yes, it has become increasingly expensive to borrow on Lending Club for people without a stellar FICO score. However, for the super-prime borrowers, it has become significantly cheaper to take out a loan.

This is also apparent if we graph the changes of interest rates per grade over time:

lc_rates23

The red colors correspond to a decrease in interest rates, while green indicate an increase. Grades A to C show mostly red, meaning a succession of decreases in rates, while E to G is mostly green, as those grades have seen mostly increases in rates.

Lending Club has shown adaptability in updating its rates in response to current economic conditions, and now provides more differentiated investment options than a few years ago. Both should be welcome by investors.

2016 in 6 Numbers

4 Comments

  1. Lincolnf says:

    Can you comment about LendingClub’s 8-K SEC filing of yesterday where they state they increased rates “to provide more loss coverage to investors in the event of a possible slowdown in the economy”? Even more worrisome, what are your thoughts about their statement, “In some higher risk grades in early 2016, we identified some underperforming pockets of loans and made modifications to pricing and credit policies accordingly”? This resulted today in a dramatic change in their projected returns for C, D, and E grades from 6.62%, 7.75%, and 8.05% to 5.67%, 5.74%, and 5.78% respectively. Clearly their underwriting has had to take another hard look at their methodology and are working to eliminate the problem. What impact do you think this will have on LendingRobot’s ability to generate alpha, and do you expect that the returns of LR users will decline commensurately with LendingClub’s new projections that are based on larger defaults that anticipated? Do you see any problem with LR relying in part on historic analysis of completed loans, when recent loans are exhibiting comparative underperformance? Thank you.

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