Effective on February 4, 2015, Lending Club made changes to their interest rates across most sub-grades for consumer loans. The last time they made such a change was on October 29, 2014, which by most standards was not too long ago. What has changed? Here’s what we found:
- The largest relative changes were for low risk loans, sub-grades A3 through B5, where interest rates have fallen significantly relative to the total interest rate.
- Surprisingly, the interest rate for riskier loans from sub-grades D2 through D4 increased moderately by about 0.5%. The increase in interest rate is surprising given a relatively strong economic condition and 5 Yr U.S. Treasury Notes have fallen 0.3% since the last interest rate adjustment in October 29, 2014.
- Moderately lower interest rates of about 0.33% across the medium risk-grades C1 through D5. This change is not as surprising and has relatively small impact to net returns given the higher overall interest rates.
- Finally, there were no interest rate changes to sub-grades F1 through G5. Volume for this category has been pretty low and interest rate spread between these ten sub-grades is only 3% (2% between F2 and G5). We believe these two sub-grades will soon be consolidated into one subgrade in the future given the risk spread and the low volume of origination.
Correction: Removed assumption that LC lowered some of the interest rates because default rates are expected to be lowered. Based on their latest estimates of future charge offs, they are expecting it to be higher, thus this means that they’re squeezing the overall expected profitability from the investors in order to expand origination volume growth. More on the investor squeeze is available in the next post.