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 – 3.5%. 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.