If you are thinking about getting a personal loan at Lending Club or Prosper, you may be wondering about the interest rates and fees. After all, almost nothing is free in this world. Lending Club and Prosper are both private companies who need to turn a profit to stay in business, so how do they get paid when you get a loan?
Check your rate at both, go with the better offer
Won’t affect your credit score.
In today’s post, we will break down how Lending Club and Prosper make money off your loan. In short, they make money from borrowers in two different ways: the origination fee and the interest rate. There are some random fees besides these, but those are main two. By the end of this article, I think you will discover these fees to be both both simple and affordable.
Origination Fees at Lending Club & Prosper
If you take out a peer to peer loan, you will be charged something called an origination fee. The word ‘origination’ comes from the word originate, which basically means ‘to begin’. So this is the fee Lending Club and Prosper charge to simply create your loan. Think of it like the loan’s activation fee, like the fee a cellphone company charges when you first sign up for their service.
The fee is charged in a very simple way. If you get a company like Lending Club to approve your loan of $20,000, and their origination fee is 4%, they won’t actually charge you a fee up front. Instead, they take 4% out of the lump sum they deposit into your bank account. So for a $20,000 loan with a 4% origination fee, they would simply deposit $19,200 into your bank account at the beginning of the loan process. The “fee” is them simply withholding $800.
For example, I took out a Prosper loan for $2,350. The origination fee was 1.95%. When I got approved for the loan, Prosper deposited $2,304 into my checking account, taking $46 as an origination fee. I got a Lending Club loan for the same amount ($2,350). My Lending Club origination fee was 4.0%. So I had $2,256 deposited into my checking account, with Lending Club keeping $94.
In short, both Lending Club and Prosper simply kept back a small percentage of the loan before I even began repayments. This was the origination fee.
Lending Club and Prosper generally charge a 5% origination fee
The origination fee you pay for your loan will depend on your loan rate. The safest borrowers with the best credit pay the lowest origination fees, while mostly everybody else pays a 5% fee. You can see the origination fees for both platforms in the table below:
This fee is important to consider when you apply for a loan. For instance, if you need an exact amount, like $10,000, and your origination fee is 5%, then you should ask for $10,526. $526 will be taken in the origination fee, leaving you with the full $10,000 amount.
Interest Rates at Lending Club & Prosper
The other way that these companies charge borrowers is through the interest rates on the loans they issue.
How important is a good interest rate?
Loans at Lending Club and Prosper amortize, similar to a home mortgage, so amortization calculators around the internet can all show how repayment happens. For example, let’s say Lending Club assigns your $10,000 3-year loan an interest rate of 9%. If you go to a site like Amortization-calc.com, this will mean you make 36 payments of $318, eventually paying $1,448 in interest over the loan’s three-year term.
When I got a $2,350 loan at Lending Club, the interest rate they assigned me was 12.99%. For three years, this meant I would pay 36 payments of $79.17. See my loan below:
Everybody’s interest rate can be different, but getting a lower interest rate matters a great deal. Let’s say the 3-year $10,000 loan mentioned above had a 19% interest rate instead of a 9%. Instead of $1,448 in total interest, you would pay $3,196 in interest over three years. That is a difference of $1,748 for the exact same loan. Obviously, this interest rate is really important to consider if you would apply for a peer to peer loan.
Interest rates at Lending Club and Prosper
At both platforms, your credit worthiness will be looked at, and you will be given a grade. Safer borrowers with excellent credit may be given an A-grade loan. Those with less than perfect credit scores may be given a D-grade. This grade is tied to your interest rate, so getting a higher grade loan means you will pay less total interest.
Generally, both companies offer the same interest rates. Lending Club offers borrowers an APR between 6% and 28%. Prosper offers rates between 6% and 34%. Basically, borrowers with the best credit have a rate closer to 6%, and the average borrower at both Lending Club and Prosper has an interest rate of 15%.
How to qualify for a lower interest rate
The way Lending Club and Prosper assign you an interest rate is complicated. People looking for a loan often ask how to get the lowest interest rate possible. A quick answer is to have (1) a great credit score and (2) lots of income, but there are actually hundreds of variables that go into a credit score (see this breakdown).
That said, here are three strategies you can use to help lower your Lending Club or Prosper interest rate:
- Only apply for as much as you need (bigger loans have higher rates)
- Choose three year loans instead of five year loans (longer loans have higher rates)
- Wait for recent inquiries on your account to age
The first two are simple. The larger the loan, the higher the interest rate you will be charged. Next, try to only take out a three year loan, as these carry a lower interest rate.
The third suggestion, waiting for recent inquiries to age, is a little more complicated. Each time you apply for a line of credit, whether a loan or a credit card, your account receives a hard inquiry (also called a hard credit pull). The more hard inquiries you have on your account, the higher an interest rate you may be charged on a peer to peer loan. It might be a good idea to wait for a few months so as to let any credit inquiries become older than 6 months, whereupon you can apply for a peer to peer loan with a lower possible interest rate.
But as I said earlier, the best way to get a better interest rate is to improve your credit score. Check your credit report regularly (using sites like this), making sure your report is free from late payments or errors. Consolidate and pay down your debts. If you need a starting point, this article has some helpful hints. Borrowers with excellent credit receive the very best rates when taking out a peer to peer loan.
Compare your rate at both Lending Club and Prosper
When I applied for a $2,350 loan with both, Prosper gave me a rate of 8% while Lending Club offered me 13%. Obviously there is a big difference between those two numbers, so I suggest you check your rate with both companies and go with whichever is lowest.
Other Fees: Failed Payments, Late Payments, and Check Cashing
There are just a few remaining fees within a peer to peer loan, and these are special fees that you are charged if your account has trouble.
$15 Late Fees at Lending Club & Prosper
Each month you are required to make on-time payments on your loan. Typically these payments are automatically taken from your bank account. However, if your account runs into trouble and your payment arrives over 15 days late, the platform will charge you a fee of $15. For instance, if your bank account has insufficient funds and your payment eventually comes in three weeks late, you will be charged a $15 late fee.
Failed Payment Fees
Additionally, the platforms may charge you a fee for every failed payment. For example, if you close your bank account and forget to update your account at Lending Club with the number of a different one, the electronic payment will fail and Lending Club will charge you a $15 fee.
Check Cashing Fees
Finally, the platform may charge you a fee for paying with a personal check. Lending Club, for example, charges borrowers $15 for loan payments paid with a check, obviously preferring people to make the payments electronically through a bank account.
Conclusion: Peer to Peer Loans Have Simple Costs
Compare this list to something like the terms and conditions of a credit card, and you will marvel at the difference. For example, credit card companies often raise the rates of people who are late on their payments. And if you do not pay off the interest, it will be added to the amount you owe, so will have to start paying interest on the interest! How confusing.
Peer to peer loans, in contrast, are remarkably simple in their rates and fees:
- A one-time origination fee (typically 5%)
- An interest rate (typically 14-15%) that can never go up, even if you are late on a payment
- A $15 fee for things like late or failed payments
That’s it! One fee, one rate, and a reasonable late fee, further proof that peer to peer loans are simpler and cheaper alternatives to getting a loan through a bank.
Check your rate at both, go with the better offer
Won’t affect your credit score.