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.
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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.