Student lender CommonBond (profiled here last year) has created a first in the p2p lending industry: an adjustable rate loan. Adapting the popular adjustable rate mortgage loan from the real estate industry their new 10-year loan product has both a fixed and a variable component.
The CommonBond Hybrid Loan
CommonBond is calling it a “Hybrid Loan” because for the first five years the loan has a fixed interest rate and for the second five years it is variable. I caught up with CEO and Co-Founder David Klein earlier this week to discuss this new product and more.
“The new ‘Hybrid Loan’ was designed to provide borrowers with more options to help them better match their student loan payment goals with their personal financial situation,” said Klein. “It was created based on borrower feedback”.
The lowest interest rate on a 10-year fixed interest rate loan at CommonBond is 4.74%. On the hybrid loan the lowest fixed interest rate is 4.14% but that rate only remains fixed for the first five years. After that time the loan’s rate is pegged to the one-month London interbank offered rate (LIBOR). The interest rate could rise to as high as 10.99% over the last five years of the loan.
So the borrower is certainly taking a risk here given that it is highly likely in five years time that interest rates will be higher than they are now. When I asked Klein about this risk to the borrowers he pointed out that the typical borrower at CommonBond pays off their loan in six to seven years.