Peer to Peer Lending – How Interest Rates Are Set by Lending Club
With any investment or loan there needs to be an interest rate charged. Lending Club uses a formula that takes into account several factors, but it really begins with the assigning of a loan grade.
The first step in getting any peer to peer loan on Lending Club is borrowers must apply for a loan. Upon this request, Lending Club begins to evaluate the potential borrowers’ credit standing. This information is taken and used to assign the borrower a loan grade. These grades range from A to G with A being the highest and G the lowest. To further narrow down grades, each letter grade has sub classes. These are numbered from 1 to 5 with 1 as the highest. These loan grades will then be used in every part of the Lending Clubs formula for calculating interest rates.
The formula is made up of two distinct parts. They are the based rate and the adjustment for risk and volatility. The sum of these equals the interest rate charged. Read the rest of this entry »
