Lending Club Introduces 5-Year Notes
Until now, all the notes issued by Lending Club have the same term. Even if the borrower wants to have a longer term loan at the expense of higher interest, there was just no such an option when they borrowed money through Lending Club. Unlike other traditional loans that come with different terms such as 3-year, 5-year, or 10-year, etc., all Lending Club loans have the 36-month term, regardless the loan amount or the borrower’s qualification. That has just changed.
Yesterday, Lending Club, the peer-to-peer social lending platform operator, announced that it starts to offer 60-month, or 5-year, unsecured personal loans to qualified borrowers. What the change means to borrowers is that for the same amount of loan, the monthly payment will be reduced as the result of the longer loan term, potentially making paying monthly due more manageable, even though it also means a higher interest rate than the same 36-month loan and, thus, more interests for the full term of the loan. For lenders like me, the benefits are twofolds:
- Lower service fee: The service fee for the new 5-year loan is at 0.45% of the loan amount vs. the 0.71% for the current 36-month loans. A reduced service charge then leads to higher overall return.
- Higher interest rate: Just as any other traditional loan, when the term gets longer, the interest rate gets higher. With the new 60-month loans, investors can earn up to 1.85% more in interest than the same 36-month loans. There’s, however, an exception. For Grade A loans, with interest rates from 6.39% to 7.88% for its 5 sub-grades, there’s no extra yield for 60-month notes.
I have been investing with Lending Club for more than a year now (see my Lending Club review for details on how to invest with Lending Club) and have accumulated more than 200 notes so far in my account. While the number of loans has increased steadily, the overall return is going to the other direction. Right now, my net annualized return is only a little over 8%, for those loans that I acquired after moving to VA last September (loans that I bought on the secondary market before were not included in the calculation). One of the reasons that the return went down from some 11% to 8% is that I now use stricter rules to select what loans to invest after seeing the number of defaults (5 so far) and late loans (total 7) increased significantly since last summer.
As for the new 60-month loans, I am not sure how much it will improve the return, even though the interest rates are higher. As the Lending Club default rate vs. loan age graph shows, the older the loan, the higher the percentage of default, except for Grade A loans. If the trends for other loan grades hold, then investing in 60-month, low grade loans may not result in better overall return as the number of defaults will also increase. While I like the extra 1.85% yield from 60-month Grade B or lower loans, I am concerned about the possibility of higher default rates. And since 60-month loans are new, there’s no statistics to support the claim of better return.
Despite the concern, I think I will fund some 60-month loans if there’s any available. If you are interested in becoming a lender on Lending Club, check out how you can get $25 ign up bonus to start lending.
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