How Much Money Should You Borrow at Lending Club?

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.

Loan GradeFICO ScoreOptimum Loan Amount
A1770+ $17,475
A2747-769 $14,975
A3734-746 $12,475
A4723-733 $9,975
A5714-722 $7,475
B1707-713 $7,475
B2700-706 $7,475
B3693-699 $7,475
B4686-692 $7,475
B5679-685 $7,475
C1675-678 $6,225
C2671-674 $6,225
C3668-670 $6,225
C4664-667 $6,225
C5660-663 $6,225

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.

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Charlie h
Charlie h
Oct. 24, 2011 6:15 pm

That’s an expensive 25 $.

In other news don’t borrow money for consumer debt.

Dan B
Dan B
Oct. 24, 2011 10:25 pm

Charlie………..Huh?

Bilgefisher
Oct. 25, 2011 7:31 am

Good post Peter. If you have to borrow money, why not be smart about it. I would say plenty of folks on these platforms haven;t done there diligence in the first place. There are many cheaper loans out there for those willing to look.

I’m never sure why a AA borrower goes to prosper when they can get 4-5% rates with a local credit union or even 2-3% rates for cars at the same credit union.

Gabriel
Gabriel
Jan. 7, 2015 3:57 am
Reply to  Peter Renton

Renton

“I am also not sure what you mean by “don’t borrow money for consumer debt”. Isn’t that what every borrower is doing?”

Consumer debt = Consumption i.e. Cars, Boats, Credit cards, eating out, clothing….etc. A much better cause is like….I need 15k to fix my roof or kitchen, then I can sell my house for an extra 20-25k. or my car needs 1k in paint and will sell for 2k more or what I paid for it 3 years ago…

Roy S
Roy S
Oct. 25, 2011 10:54 am

@Jason/Peter, I would have to disagree with you both. From looking at my bank’s website, they don’t appear to offer personal loans. I also have an account at a credit union where they state on their website that the lowest interest rate for a personal loan is 11% (and they offer a much lower interest for a savings account than my bank does). In addition, both my wife and myself have received a pre-approval for a Discover personal loan with “an APR as low as 7.99%.” Looking on bankrate.com for personal loans, LC is actually listed (I wonder why Prosper isn’t on there) on there and came in at the lowest rate–bankrate.com doesn’t seem particularly useful for personal loans, however, since there were only 4 institutions listed. I think interest rates for both LC and Prosper may be coming more in line with other financial institutions, and I only see the trend continuing as their UW gets better. Trying to get funding for a car or a house, p2p lending doesn’t seem a very practical solution. But for a personal loan, p2p lending may be(come) the route to go.

Charlie H
Charlie H
Oct. 25, 2011 11:49 am

@Dan B
Borrowing $15,000 Instead of $14,975 (An extra $25) cost the borrower almost $300 additional dollars in interest.

My other comment is just a general statement that using debt to finance non-durrable goods, IE Connsumer debt, is stupid.

Charlie H
Charlie H
Oct. 25, 2011 11:52 am

@Roy S

I would guess that the majority of A rated borrowers who come to lending club would Normally have used a HELOC in years past.

With so many people underwater, they have no equity to borrow against and banks are hesitent to open new HELOC even if you do have a fair amount of equity.

Roy S
Roy S
Oct. 25, 2011 1:17 pm

@Charlie, I haven’t heard very much about home equity loans in the past two years that I completely forgot that those loans used to be used a lot for people consolidating a lot of credit card and other types of debt in addition to home improvements. With so many people underwater in their mortgages, I would think that you are correct and that is only adding to the number of people heading over to LC and Prosper.

Bilgefisher
Oct. 26, 2011 10:14 am

I agree with Peter on higher risk borrowers. Roy, while I can’t speak for all banks, my credit union has some pretty good deals. I can only assume they are not the best out there. A bit of shopping around is always required when getting a loan. I would love to see what % of folks only look at one lender. Small banks and credit unions have many very surprising deals.

Helocs are still out there. I have seen as high as 90% LTV, but most banks are south of 80%. Fixed rate helocs can be obtained for 1% over current mortgage interest rates. A 30 year fixed is currently at 4.2% according to bankrate.com. According to the Aug 19, 2010 census release 32% of owner occupied homes are free and clear. Realtor.org reports home ownership rate is ~66.4%. That a lot of households with a lot of equity.

My wife has a car loan at 2.5% fixed. Her credit is Mid to high 700’s. There are many borrowers out there with near or above 800 credit scores apply for car loans via these sites. I do think they could do better with a bit of research.

Jason

Charlie H
Charlie H
Oct. 26, 2011 11:58 am

@ Peter

Of course not. If you can lower your rate of interest that ussually a good idea. Some would question the sanity of taking unsecured debt and turning it into secured debt.

I am saying that it is not smart to borrow money to pay for non-durrable goods. I am very happy to profit from people who borrow from tomorrow income to pay for things today.

@Bilgerfisher
Just to echo what Peter said, if you own your home, you are most likely not in the market for a HELOC.

Bilgefisher
Oct. 26, 2011 12:27 pm

I do not have facts on how many free and clear home owners need loans I have marketed to these homeowners in the past to see if they want to sell. There are many folks that are house rich (ie paid off) and cash poor. I follow an real estate investor blog that tracks every lead he has. As many as 10% (rough guess) of his leads are from owners with free and clear homes. They are desperate to sell (you must be desperate if your willing to call a number on a little sign on the side of a road). Its easy to suggest that folks with free and clear homes are well off financially. In my experience, this is not always true.

Not sure the point of my own rambling here, but I would suggest that 800 credit score and free and clear home does not automatically qualify someone for being financially savvy or with a lot of cash laying around.

Jason

Roy S
Roy S
Oct. 26, 2011 2:00 pm

Good point with the 0% cc offer, Peter. I feel like I’m trying to defend high credit score borrowers who take out a loan on Prosper and LC, which I don’t want to be doing since I don’t know anything about them–but maybe I should try to figure that out since I am lending to them? I think Jason does make an excellent point, though: Having a 750+ credit score does not automatically qualify someone for being financially savvy.

Dan B
Dan B
Oct. 26, 2011 5:27 pm

Peter…………..It’s not that surprising. Here’s a possible explanation. This is a guy who has spent most of his adult life living a bit under the radar. He’s in his mid 40’s, he rents & has 2 active credit cards, the same Mastercard & Visa that he’s had since he became an adult in the mid 80’s. He received a number of large credit increases in the 1990-2007 period but the banks took most of it back after 2008 since he pays the balance off every month & never used most of the available credit anyway.

Pursuit of money has never been a big priority for him & though he has a decent job, he probably puts in fewer hours a week than you Peter. He’s got mid 5 figures in the bank & that’s always been plenty for someone like himself who has had zero responsibilities.
But now he’s decided to get married…………to a substantially younger woman from, let’s say Russia, Ukraine or perhaps Thailand. And his expenses are about to go up substantially, but he doesn’t want to touch that safety blanket at the bank. But he has almost no credit to pay for a modest wedding & at the same time buy the things that some married people buy, but a lot of single individuals don’t necessarily own. You know, like the furnishings that are featured in old copies of Better Homes & Garden that his soon to be wife has looked at or stuff she has seen on tv about life in America.

What to do? So here comes Prosper to the rescue. He figures he’ll pay it off early anyway & build some credit while he’s at it. There you have it Peter, all the answers you want.

UltimateSmartMoney
Oct. 30, 2011 6:59 pm

HELOC is a great way to borrow money with low interests right now. That is if you currently own a house. Although the interest is variable, it should stay low for next several years minimum.

Liz
Liz
Jul. 12, 2014 8:10 am

I’m surprised no one has mentioned the biggest, and to me, the most important difference between p2p lending and a home equity loan/HELOC – p2p loans are unsecured ,meaning they can’t take your house if you don’t pay. Why would anyone want to take out a secured loan to pay off unsecured debt? That’s too big a risk.

Larry
Larry
Jul. 17, 2014 11:30 am

Peter, I note most of your comments are from 2011. Have you done any articles lately on Prosper vs Lending Club, for either investors or borrowers? Thanks

Corutney
Corutney
Jun. 24, 2016 6:42 pm

Do any of you know where I can borrow money with a bad credit score, which I am working on but I was laid off for a year and behind on bills, I can make the monthly payment now that I have a better paying job. I am needing this ASAP. Please let me know if you now of anything. Thank you