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> Given that LC is not a depository institution, the only way I see them providing lower interest rates is they have figured out a cheaper source of funding...

> Given that LC is not a depository institution, the only way I see them providing lower interest rates is they have figured out a cheaper source of funding... Yes, the source of funding is private investors, both retail and institutional, many of whom are chasing yield. When the market shifts and investors are forced to reprice risk, lending $10,000 at 13% to someone who has a credit score of 660-665, 55% revolving credit utilization and a gross income of under $2,000/month might be a lot less appealing.

radmuzom 12y ago
Ok so they are operating at lowest end of the prime range (at least, in your example) - assuming > 660 is prime, 620-660 Alt-A and below 620 as subprime. How do I reconcile the rate quoted by you with the parent comment that I replied to? (13% is comparable to a standard bank and does not appear much cheaper)
- nether 12y ago
  https://www.lendingclub.com/public/how-we-set-interest-rates.action https://www.lendingclub.com/public/how-we-set-interest-rates...
- 7Figures2Commas 12y ago
  You're missing the point, which is that in the search for yield, investors are mispricing risk. I would venture a guess that the vast majority of people who own a note tied to the loan of the aforementioned borrower either couldn't tell you what a similar borrower would have paid for the same loan in, say, 2005, or they don't care what a similar borrower would have paid for the same loan historically. They care more about the current interest rate in relation to other yield-producing instruments than they do about the actual risk they're buying and how that risk has historically been priced. One additional thing to note: there are tons of investors (retail and institutional) snapping up junk in this market, but there are also many savvy people in the debt markets who are playing it cool because they know that you make money by pricing risk appropriately, not by buying the instrument with the most appealing yield.
  - radmuzom 12y ago
    I agree with your point on mispricing risk - I build credit risk models for a living, though not for US banks and have limited understanding of the US market. On a broader note, even the sub-prime business was highly profitable and attractive to investors till the GFC. Only time will tell if these companies have a sustainable business model.

radmuzom 12y ago

Ok so they are operating at lowest end of the prime range (at least, in your example) - assuming > 660 is prime, 620-660 Alt-A and below 620 as subprime. How do I reconcile the rate quoted by you with the parent comment that I replied to? (13% is comparable to a standard bank and does not appear much cheaper)

nether 12y ago
https://www.lendingclub.com/public/how-we-set-interest-rates.action https://www.lendingclub.com/public/how-we-set-interest-rates...
7Figures2Commas 12y ago
You're missing the point, which is that in the search for yield, investors are mispricing risk. I would venture a guess that the vast majority of people who own a note tied to the loan of the aforementioned borrower either couldn't tell you what a similar borrower would have paid for the same loan in, say, 2005, or they don't care what a similar borrower would have paid for the same loan historically. They care more about the current interest rate in relation to other yield-producing instruments than they do about the actual risk they're buying and how that risk has historically been priced. One additional thing to note: there are tons of investors (retail and institutional) snapping up junk in this market, but there are also many savvy people in the debt markets who are playing it cool because they know that you make money by pricing risk appropriately, not by buying the instrument with the most appealing yield.
- radmuzom 12y ago
  I agree with your point on mispricing risk - I build credit risk models for a living, though not for US banks and have limited understanding of the US market. On a broader note, even the sub-prime business was highly profitable and attractive to investors till the GFC. Only time will tell if these companies have a sustainable business model.