Credit Grade

The Credit Grade is normally the first attribute in a loan you will be looking at or filtering by.

LendingClub determines the Credit Grade of a loan based on the FICO score of the borrower and some loan attributes such as the loan term and the amount requested.

The Credit Grade is a letter followed by a number, in a scale that goes from A1 to G5, where A1 is the most creditworthy borrower and G5 is the grade with the highest indication that there is a risk of default on the borrower’s part. LendingClub claims to turn down around 90% of the borrowers on the basis of credit risk, so even G5 loans made through a narrow cut by the site. The grade also determines the interest rate of the loan, A1 having the lowest rate and G5 having the highest.

Your only objective in P2P lending could be summarized this way: finding the loans that were “incorrectly” classified, i.e., they were assigned a high interest rate but the borrower is not defaulting on the loan.

The interest rates for each of the grades fall in the following ranges:

A: 6.03% to 8.90%
B: 10.16% to 14.09%
C: 14.33% to 17.27%
D: 17.77% to 19.72%
E: 20.49% to 22.47%
F: 22.95% to 23.83%
G: 24.70% to 24.89%

For a detailed list of grades and interest rates, visit https://www.lendingclub.com/public/how-we-set-interest-rates.action

Given that you will account for some loss in your portfolio due to defaults, it is very hard to get a return rate close to the nominal interest rate of the loan. That is why investors should consider only C-grade loans or lower accomplish 10% returns, and, if possible at all, E-grade loans or lower to get close to 15%.

Advertisements

4 thoughts on “Credit Grade

  1. Pingback: Loan Purpose | Interest Radar Blog

  2. Pingback: Quick Start Guide | Interest Radar Blog

  3. Pingback: My Portfolio – Portfolio History | Interest Radar Blog

  4. Pingback: Trading Platform Screener | Interest Radar Blog

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s