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.
Klein pointed out that the hybrid loan can really be beneficial to borrowers who otherwise would have only had the 5-year fixed option to consider. Compared to the 5-year fixed loan options, hybrid loan borrowers can stretch their 5 year fixed payments over the hybrid’s 10 year term. That means borrowers’ monthly payments during the first 5 years of the hybrid product would be much lower than those of the 5-year fixed product. Klein mentioned that the average CommonBond borrower refinances about $100,000 worth of loans. When comparing the low end fixed rate of the hybrid to that of the 5-year fixed loan, a typical CommonBond borrower saves up to $800/month with the hybrid loan.
Who is this borrower?
A typical borrower at CommonBond is 31 years old, has an average FICO score of over 750, makes over $130,000 a year and has a debt-to-income (DTI) ratio of 32%. These borrowers are typically business school graduates with an MBA degree. Although today, CommonBond’s loans are offered in law, medical and engineering programs as well.
CommonBond is currently offering loans in 109 programs across the country. That number is up from 25 programs at the end of last year.
Zero Delinquencies and Zero Defaults
These super-prime borrowers have excellent credit and strong finances. This is demonstrated in the CommonBond loan book. While their loan portfolio is admittedly still young CommonBond has never had a default or even a delinquency. Every single loan they have made is still current, although some loans are in a deferment period for students still in school.
First Adjustable Rate Loan for P2P Investors
One of the driving forces behind the decision to introduce hybrid loans is for the investor side of the equation. Investors can now invest in a 10-year loan but only take on five years of fixed interest rate risk. No other loan in the p2p lending space offers that kind of flexibility.
While CommonBond started out with primarily individual alumni investors they have now moved into a combination of individual and institutional investors. Some of the institutional capital comes in the form of a warehouse line and they expect to complete a securitization or whole loan sale in the “$100-150 million range” in the first half of next year.
CommonBond is now moving to what they call a “forward flow” model on the investor side of their business. This is where loans are allocated in advance to large investors, allowing them to scale their business more rapidly.
CommonBond Has Issued More Than $100 Million in Loans
Just recently CommonBond crossed $100 million in total loans funded in their first full operating year. And they intend to keep growing rapidly from here. By the end of 2016, they expect to have crossed $1 billion in total loans .
“Growth is important, and being methodical about that growth is one of the smartest things you can do.”said Klein. “Scaling quickly leads to profitability faster.
A Community-Driven Company
At CommonBond it is not just about rapid growth and financial return. They are a values-driven company that believes in doing social good as part of their mission. CommonBond is also the first company to bring the “1-for-1” model of social good to education and finance. For every degree fully funded on the company’s platform, CommonBond funds the education of a student in need abroad for a full year through a partnership with Pencils of Promise.
You can get a sense of what drives the company by watching Klein’s presentation at LendIt earlier this year. You can see the passion Klein has for not just CommonBond but for the difference his company is making in people’s lives. This kind of passion is rare in financial services and should serve the company well as it continues to grow.