Interest Rates and How We Set Them
Lending Club's interest rates take into account credit risk and market conditions to ensure that rates are fair, commensurate to the level of risk, and attractive to both lenders and borrowers. The final interest rate for each loan grade is the result of the following equation:
Lending Club Base Rate + Adjustment for Risk & Volatility
The Adjustment for Risk & Volatility is currently twice the historical default rate; both it and the base rate are subject to change, depending on market conditions.
The loan grade is the result of a formula that takes into account the borrower's credit score, Debt-To-Income (DTI) ratio and loan amount.
All loans are 3-year installment loans with fixed interest rates and equal installments.
| Loan Grade | Sub-Grade | Assumed Default Rate | Lending Club Base Rate | Adjustment for Risk & Volatility | Interest Rate |
|---|---|---|---|---|---|
| A | 1 | 0.16% | 7.05% | 0.3178% | 7.37% |
| 2 | 0.32% | 7.05% | 0.6336% | 7.68% | |
| 3 | 0.47% | 7.05% | 0.9494% | 8.00% | |
| 4 | 0.63% | 7.05% | 1.2653% | 8.32% | |
| 5 | 0.79% | 7.05% | 1.5811% | 8.63% | |
| B | 1 | 0.95% | 7.80% | 1.8970% | 9.70% |
| 2 | 1.11% | 7.80% | 2.2128% | 10.01% | |
| 3 | 1.26% | 7.80% | 2.5287% | 10.33% | |
| 4 | 1.42% | 7.80% | 2.8445% | 10.64% | |
| 5 | 1.58% | 7.80% | 3.1603% | 10.96% | |
| C | 1 | 1.74% | 7.80% | 3.4762% | 11.28% |
| 2 | 1.90% | 7.80% | 3.7920% | 11.59% | |
| 3 | 2.05% | 7.80% | 4.1079% | 11.91% | |
| 4 | 2.21% | 7.80% | 4.4237% | 12.22% | |
| 5 | 2.37% | 7.80% | 4.7395% | 12.54% | |
| D | 1 | 2.53% | 7.80% | 5.0554% | 12.86% |
| 2 | 2.69% | 7.80% | 5.3712% | 13.17% | |
| 3 | 2.84% | 7.80% | 5.6871% | 13.49% | |
| 4 | 3.00% | 7.80% | 6.0029% | 13.80% | |
| 5 | 3.16% | 7.80% | 6.3188% | 14.12% | |
| E* | 1 | 3.32% | 7.80% | 6.6346% | 14.43% |
| 2 | 3.48% | 7.80% | 6.9504% | 14.75% | |
| 3 | 3.63% | 7.80% | 7.2663% | 15.07% | |
| 4 | 3.79% | 7.80% | 7.5821% | 15.38% | |
| 5 | 3.95% | 7.80% | 7.8980% | 15.70% | |
| F* | 1 | 4.11% | 7.80% | 8.2138% | 16.01% |
| 2 | 4.26% | 7.80% | 8.5296% | 16.33% | |
| 3 | 4.42% | 7.80% | 8.8455% | 16.65% | |
| 4 | 4.58% | 7.80% | 9.1613% | 16.96% | |
| 5 | 4.74% | 7.80% | 9.4772% | 17.28% | |
| G* | 1 | 4.90% | 7.80% | 9.7930% | 17.59% |
| 2 | 5.05% | 7.80% | 10.1089% | 17.91% | |
| 3 | 5.21% | 7.80% | 10.4247% | 18.22% | |
| 4 | 5.37% | 7.80% | 10.7405% | 18.54% | |
| 5 | 5.53% | 7.80% | 11.0564% | 18.86% |
*E, F and G grades can only be assigned to a loan as a result of a risk modifier.
Loan Grades and Risk Modifiers
Using the credit score as the basis of historical credit performance, we first assign each loan into a base sub-grade. We then modify the sub-grade using Debt-To-Income (DTI) ratio as a measure of both cash flow and repayment capacity, as well as the ratio of the requested loan amount to the Lending Club pre-determined guidance limit as an indication of leverage condition. By adding the modifiers to the base sub-grade, we arrive at the final sub-grade.
| DTI | Risk Modifier |
|---|---|
| 0-12.99% | 0 |
| 13-17.99% | -1 |
| 18-19.99% | -2 |
| 20-22.99% | -4 |
| 23-24.99% | -8 |
| 25-27.99% | -12 |
| 28-29.99% | -16 |
| 30%+ | Decline |
| Loan Grade | Guidance Limit |
|---|---|
| A | $15,000 |
| B | $12,500 |
| C | $10,000 |
| D | $7,000 |
| E | $4,000 |
| F | $3,000 |
| G | $2,000 |
| Loan Amount/Guidance Limit Ratio | Risk Modifier | Loan Amount/Guidance Limit Ratio | Risk Modifier |
|---|---|---|---|
| 0-24% | 0 | 175-199% | -8 |
| 25-49% | -1 | 200-224% | -10 |
| 50-74% | -2 | 225-249% | -12 |
| 75-99% | -3 | 250-274% | -14 |
| 100-124% | -4 | 275-299% | -16 |
| 125-149% | -5 | 300%+ | -18 |
| 150-174% | -6 |
For example, a borrower with a credit score of 700 and DTI of 15% who requests a $5,000 loan would start off with a B2 loan grade (Table 1), modified by -1 for DTI (Table 2). Because the loan amount is within 25-49% of $12,500, the loan is further modified by -1 due to the difference between the loan amount and the guidance limit (Tables 3 and 4). This loan would ultimately be dropped 2 sub-grades (based on the sum of the two modifiers) from B2 to B4 with a corresponding interest rate of 10.64% (Table 1). The following table shows the adjusted sub-grades.
| DTI | 5% | 15% | 20% | ||||
|---|---|---|---|---|---|---|---|
| Requested Amount | $1,000 | $5,000 | $20,000 | ||||
| Loan Grade | Sub-Grade | Modifier | Interest Rate | Modifier | Interest Rate | Modifier | Interest Rate |
| A | 1 | 0 | 7.37% | -2 | 8.00% | -9 | 10.96% |
| 2 | 0 | 7.68% | -2 | 8.32% | -9 | 11.28% | |
| 3 | 0 | 8.00% | -2 | 8.63% | -9 | 11.59% | |
| 4 | 0 | 8.32% | -2 | 9.70% | -9 | 11.91% | |
| 5 | 0 | 8.63% | -2 | 10.01% | -9 | 12.22% | |
| B | 1 | 0 | 9.70% | -2 | 10.33% | -10 | 12.86% |
| 2 | 0 | 10.01% | -2 | 10.64% | -10 | 13.17% | |
| 3 | 0 | 10.33% | -2 | 10.96% | -10 | 13.49% | |
| 4 | 0 | 10.64% | -2 | 11.28% | -10 | 13.80% | |
| 5 | 0 | 10.96% | -2 | 11.59% | -10 | 14.12% | |
| C | 1 | 0 | 11.28% | -3 | 12.22% | -14 | 15.70% |
| 2 | 0 | 11.59% | -3 | 12.54% | -14 | 16.01% | |
| 3 | 0 | 11.91% | -3 | 12.86% | -14 | 16.33% | |
| 4 | 0 | 12.22% | -3 | 13.17% | -14 | 16.65% | |
| 5 | 0 | 12.54% | -3 | 13.49% | -14 | 16.96% | |
| D | 1 | 0 | 12.86% | -3 | 13.80% | -20 | Decline |
| 2 | 0 | 13.17% | -3 | 14.12% | -20 | Decline | |
| 3 | 0 | 13.49% | -3 | 14.43% | -20 | Decline | |
| 4 | 0 | 13.80% | -3 | 14.75% | -20 | Decline | |
| 5 | 0 | 14.12% | -3 | 15.07% | -20 | Decline | |
| E | 1 | -1 | 14.75% | -6 | 16.33% | -22 | Decline |
| 2 | -1 | 15.07% | -6 | 16.65% | -22 | Decline | |
| 3 | -1 | 15.38% | -6 | 16.96% | -22 | Decline | |
| 4 | -1 | 15.70% | -6 | 17.28% | -22 | Decline | |
| 5 | -1 | 16.01% | -6 | 17.59% | -22 | Decline | |
| F | 1 | -1 | 16.33% | -7 | 18.22% | -22 | Decline |
| 2 | -1 | 16.65% | -7 | 18.54% | -22 | Decline | |
| 3 | -1 | 16.96% | -7 | 18.86% | -22 | Decline | |
| 4 | -1 | 17.28% | -7 | Decline | -22 | Decline | |
| 5 | -1 | 17.59% | -7 | Decline | -22 | Decline | |
| G | 1 | -2 | 18.22% | -15 | Decline | -22 | Decline |
| 2 | -2 | 18.54% | -15 | Decline | -22 | Decline | |
| 3 | -2 | 18.86% | -15 | Decline | -22 | Decline | |
| 4 | -2 | Decline | -15 | Decline | -22 | Decline | |
| 5 | -2 | Decline | -15 | Decline | -22 | Decline | |
