Interest Rates and How We Set Them
Lending Club's interest rates take into account credit risk and market conditions. 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 designed to cover expected defaults and provide higher risk-adjusted returns for each loan grade increment from A1 to G5.
The loan grade is the result of a formula that takes into account not only the borrower's credit score, but also a combination of several indicators of credit risk from the borrower's credit report. All loans have either a 36- or 60-month term, with fixed interest rates and equal payments.
Table 1. Loan Grades
| Loan Grade | Sub-Grade | Lending Club Base Rate | Adjustment for Risk & Volatility | Interest Rate |
|---|---|---|---|---|
| A | 1 | 5.05% | 0.98% | 6.03% |
| 2 | 5.05% | 1.57% | 6.62% | |
| 3 | 5.05% | 2.57% | 7.62% | |
| 4 | 5.05% | 2.85% | 7.90% | |
| 5 | 5.05% | 3.85% | 8.90% | |
| B | 1 | 5.05% | 4.71% | 9.76% |
| 2 | 5.05% | 5.69% | 10.74% | |
| 3 | 5.05% | 7.07% | 12.12% | |
| 4 | 5.05% | 8.06% | 13.11% | |
| 5 | 5.05% | 8.62% | 13.67% | |
| C | 1 | 5.05% | 8.94% | 13.99% |
| 2 | 5.05% | 9.60% | 14.65% | |
| 3 | 5.05% | 10.26% | 15.31% | |
| 4 | 5.05% | 10.76% | 15.81% | |
| 5 | 5.05% | 11.24% | 16.29% | |
| D | 1 | 5.05% | 12.22% | 17.27% |
| 2 | 5.05% | 12.94% | 17.99% | |
| 3 | 5.05% | 13.20% | 18.25% | |
| 4 | 5.05% | 13.50% | 18.55% | |
| 5 | 5.05% | 14.17% | 19.22% | |
| E | 1 | 5.05% | 14.94% | 19.99% |
| 2 | 5.05% | 15.45% | 20.50% | |
| 3 | 5.05% | 15.94% | 20.99% | |
| 4 | 5.05% | 16.43% | 21.48% | |
| 5 | 5.05% | 16.92% | 21.97% | |
| F | 1 | 5.05% | 17.40% | 22.45% |
| 2 | 5.05% | 17.73% | 22.78% | |
| 3 | 5.05% | 18.08% | 23.13% | |
| 4 | 5.05% | 18.21% | 23.26% | |
| 5 | 5.05% | 18.28% | 23.33% | |
| G | 1 | 5.05% | 19.15% | 24.20% |
| 2 | 5.05% | 19.28% | 24.33% | |
| 3 | 5.05% | 19.47% | 24.52% | |
| 4 | 5.05% | 19.71% | 24.76% | |
| 5 | 5.05% | 19.84% | 24.89% |
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 the following credit risk indicators:
- Requested loan amount
- Number of recent credit inquiries
- Credit history length
- Total and currently open credit accounts
- Revolving credit utilization
- Loan maturity: 36 or 60 months
By adding the modifiers to the base sub-grade, we arrive at the final sub-grade.
Table 2. Initial Loan Sub-Grade Assignment
| FICO® Score | Loan Grade |
|---|---|
| 770+ | A1 |
| 747-769 | A2 |
| 734-746 | A3 |
| 723-733 | A4 |
| 714-722 | A5 |
| 707-713 | B1 |
| 700-706 | B2 |
| 693-699 | B3 |
| 686-692 | B4 |
| 679-685 | B5 |
| 675-678 | C1 |
| 671-674 | C2 |
| 668-670 | C3 |
| 664-667 | C4 |
| 660-663 | C5 |
Table 3. Guidance Limits by Loan Grade
| Loan Grade | Guidance Limit |
|---|---|
| A1 | $35,000 |
| A2 | $30,000 |
| A3 | $25,000 |
| A4 | $20,000 |
| A5 - B5 | $15,000 |
| C | $12,500 |
Table 4. Loan Amount vs. Guidance Limit Risk Modifier
| Loan Amount/Guidance Limit Ratio | Risk Modifier |
|---|---|
| 0-24% | 0 |
| 25-49% | 0 |
| 50-74% | -2 |
| 75-99% | -2 |
| 100-124% | -4 |
| 125-149% | -4 |
| 150-174% | -6 |
| 175%-199% | -8 |
| 200% or more | -10 |
Table 5. Recent Inquiries Risk Modifier
| # Inquiries in the Last 6 Months | Risk Modifier |
|---|---|
| 0 | A +1, B +2, C +3 |
| 1-3 | 0 |
| 4 | -1 |
| 5 | -2 |
| 6 | -4 |
| 7 | -6 |
| 8 | -10 |
| 9 or more | Decline |
Borrowers with 4 or more credit inquiries in the last 6 months and a credit score below 740 will be declined.
Table 6. Credit History Length Risk Modifier
| Credit History Length (months) | Risk Modifier |
|---|---|
| 60 or more | 0 |
| 55-60 | -1 |
| 49-54 | -2 |
| 43-48 | -3 |
| 37-42 | -4 |
| <36 | Decline |
Table 7. Total and Open Accounts Risk Modifier
| Open Accounts | Sub-Grade Modifier |
|---|---|
| 0-1 | Decline |
| 2-3 | -4 |
| 4 | -2 |
| 5 | -1 |
| 6-21 | 0 |
| 22 | -2 |
| 23 | -3 |
| 24 | -4 |
| 25 | -8 |
| 26 or more | -12 |
Table 8. Revolving Credit Utilization Risk Modifier
| Utilization | Risk Modifier |
|---|---|
| <5% | -1 |
| 5-84.99% | 0 |
| 85-89.99% | -1 |
| 90-94.99% | -2 |
| 95-97.99% | -4 |
| 98-99.99% | -8 |
| 100% or more | Decline |
Table 9. Loan Term Modifier
| Loan Term (Maturity) | Loan Grade | Risk Modifier |
|---|---|---|
| 36 months | A - G | 0 |
| 60 months | A - B | -5 |
| 60 months | C - G | -6 |
As an example, let's assume a borrower member requests a 60-month $20,000 car financing loan, showing the following credit data points:
- FICO score of 700
- 10 open accounts
- 3 credit inquiries in the last six months
- 50% utilization of credit limit, and
- First credit line opened 7 and a half years ago.
We start by assigning this borrower a B2 sub-grade (10.74% interest rate) based on the borrower's FICO score of 700. Next, we make no sub-grade modification for open accounts, because 10 open accounts is greater than 6 and less than 21 and because borrower has had only three credit inquiries in the last six months. We make no sub-grade modification for 50% utilization of credit limit, since it is greater than 5% but lower than 85%, and we make no sub-grade modification for length of credit history, because the borrower member shows more than 60 months of credit experience.
Now, let's look at the requested loan amount: since $20,000 is between 125-149% of the guidance limit of $15,000 for B loan grades, the borrower's credit grade is reduced by an additional four sub-grades to C1. Finally, we lower the sub-grade five more levels to a D1 based on the loan term of 60 months that results in an APR of 19.68% for the borrower and an interest rate of 17.27% for the investor.
