Loan Length

The Loan Length, or Loan Term, is how many months the borrower will have to payoff the loan. LendingClub offers 36 and 60 months (3 and 5 years) loans.

From a credit standpoint, longer term loans are easier to pay, as the monthly installment is smaller, but they have a higher interest burden, with each installment carrying more interest than a shorter term loan with the same interest rate. For example, a 10,000 dollar loan with a 36-month term and 20% interest rate will have an installment of $371.64, and the same loan with a 60-month term will require a installment of $264.94. Both installments will have a charge of around $166 only in interest in the first month. That mean the 36-month loan installment will have 44% of interest in the first month (and therefore 56% amortization), while the 60-month loan will have 63% of interest in that first month (only 37% amortization).

From an investor standpoint, the yield of a 60-month loan is greater than its 36-month counterpart, but the risk is higher: not only 2 more years for the borrower to default on their obligation, but also we have to consider that if a borrower chose to pay more interest for the same amount just so they would be able to pay the installment every month, it means their budget is tight.

But in the context of LendingClub, the highest source of risk in 60-month loans is the fact that there is no enough history to predict how this type of loan will perform after its first 26 months (the oldest 60-month loan in the site was issued in May 2010).  The predictions are optimists, as default rates are much higher in the first months of a loan, and tend to stabilize as it matures, but we will have to wait to see.

Added to that, LendingClub’s Prospectus states that any payment received from borrower after the first 5 years after issued is not paid to lenders. Hopefully this will be immaterial as only very few loans will be late in the end of their lives, but, again, we will have to wait to see.

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4 thoughts on “Loan Length

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