Are LendingClub’s Troubles Bigger Than Just One Company?

fintech

The spin factory is working extra shifts these days.

No, I’m not talking about the upcoming presidential election. Rather, I’m referring to the surprisingly quick and robust efforts on the part of financial services industry advocates to regain control of the narrative following a so-called FinTech (financial technology) poster child’s fall from grace.

LendingClub Corporation was the first peer-to-peer finance company to have an initial public offering. Given the breathtaking $8.5 billion valuation it garnered at the time of its 2014 debut on the New York Stock Exchange, it’s clear that expectations for the company, and the edgy sector of financial services it represents, were high.

Although the firms that share space in FinTech vary in their approaches to the consumer and small-business demographics they target, the two things they have in common are super-fast online processing (thanks to algorithmically based credit underwriting) and limited regulatory oversight because none are depository institutions—no savings and checking account balances are at risk. At least not yet.

Lately, these two commonalities have begun to attract negative attention for reasons I’ll discuss in a moment. At first blush though, it appears as if the LendingClub scandal involves an isolated instance of alleged impropriety on the part of some members of senior management.

Until you take a closer look.

LendingClub’s CEO Renaud Laplanche resigned after the company disclosed that it had misrepresented key characteristics of the loans that were sold to an institutional purchaser. Bulk-loan purchase agreements are specific about what constitutes a so-called eligible contract — such things as bona fide, legally enforceable documentation and the timely receipt of installment payments to the point of sale.

So the $22 million question (the value of the subject transaction) is: Why would a company the size of LendingClub allegedly jeopardize the reputation it has with customer-borrowers, institutional and retail investors that trade in its stock, and the sources on which it depends to fund the loans it originates, all for a deal that represents less than 1% of the loan volume the company booked in just the first quarter of 2016?

The answer could be the canary in the FinTech coal mine.

Are There Problems With the Credit Underwriting Process?

I learned three important lessons the hard (costly) way during the slow-motion train wreck of the Great Recession: Sell when the company builds a corporate Taj Mahal, when the CEO leaves for any reason other than dropping dead at his desk, or when senior management speaks nihilistically about “new economy-related paradigm shifts.”

FinTech companies — along with the private equity firms and venture capitalists that have pumped billions of dollars into their operations — seem to believe they are the future of low-dollar-value lending. Thanks to the advent of big data-driven algorithms, what once took a ridiculous number of weeks, if not months, for institutional lenders to complete is now accomplished within hours online. That the activities of these nonbank institutions aren’t subject to the same regulations as are their traditional banking counterparts doesn’t hurt either.

I believe this is the real story behind the news story.

The credit underwriting process isn’t singular — science vs. art — it’s binary, particularly in regard to transactions that involve borrowers who are unbanked (no institutional relationships and/or credit history) or under-banked (limited relationships and/or tarnished credit), both of which constitute FinTech’s demographic mainstays. That’s why any lender that believes it’s developed a magical mathematical mechanism (i.e., algorithm) to take all this into account but neglects to test its hypothesis by re-processing a statistically significant sample of credit failures that occurred at various points during an end-to-end business cycle (boom to bust to boom) is, in my opinion, kidding itself. Why go through all that trouble for a comparable result — or worse?

Considering that so many FinTech lenders didn’t appear on the scene until after the last meltdown, coupled with the fact that the historical credit-performance data they’d need to test their prospective underwriting methodologies reside within the very institutions they propose to supplant, one can’t help but wonder if the next credit cycle — which would be the companies’ first — may well be their last.

And then there’s the structure of these loan products.

Small-dollar, short-term lending is a tough business. There simply isn’t enough profit in a $1,000 loan that’ll be on the books for only a month or two. Not without automating the process, hyping the hell out of the rates of return (i.e., APRs, which mathematically combine interest rates and fees), setting up shop in accommodating jurisdictions (there’s a reason why many credit card companies call South Dakota home) and devising products that encourage repeat use (payday and merchant advance loans are good examples).

The Need for a Watchdog

That leads me to the second problem facing FinTech companies: The growing call for regulatory oversight at the federal level to override individual states.

So whichever comes first — an economic downturn or amped-up regulations — you can probably look forward to a frenzy of mergers and acquisitions to follow. My guess is that the old-economy banks will take the lead because they’d stand to pick up loan portfolios and tech platforms all on the cheap.

The question is, how will consumers and small business fare if this happens?

They’ll do well if the banks successfully translate what they learn from their nonbank counterparts into an ability and willingness to lend to the under-represented demographics upon which FinTech currently relies.

They’ll also do well if the surviving FinTech firms combine new- and old-school approaches for underwriting credits as they transform their existing loan products into ones that are more reasonably structured and priced.

Don’t hold your breath though. If history teaches us anything, it’s that the more likely outcome will be yet another credit crunch for small-time borrowers. That is, until the banks realize they need more business or a fresh crop of entrepreneurs come up with something new. Again.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

More Money-Saving Reads:

Image: IndypendenZ

The post Are LendingClub’s Troubles Bigger Than Just One Company? appeared first on Credit.com.

Personal Loans for People with Bad Credit

personal loan_lg

Updated May 19, 2016

When your credit is less than satisfactory, it can be difficult to find a lender willing to give you a personal loan. That doesn’t mean it’s impossible to find one – there are more options available now than ever before to get a personal loan with bad credit. What’s better is you can easily apply online to see the rates for which you qualify.

That’s thanks to lenders such as Springleaf, Avant, and Lending Club. They each have lower credit thresholds and none rely solely on your FICO score when deciding to lend to you, making it easier to qualify.

Even though you might have a poor credit score, your actual credit history may not be that bad. Your credit file could be thin because you didn’t start building any credit until recently, or maybe you’ve only ever had one open line of credit. Whatever the reason, just because your score is low doesn’t mean you’re not creditworthy, and these lenders know that.

Therefore, it’s worth making sure you’re still getting a decent deal on personal loan terms. It can be easy to think that because your score is low, you’ll be approved for a less than ideal interest rate, but you shouldn’t accept the first offer that comes your way.

Let’s take a look at what these three lenders offer so you know what terms are available to you.

Avant Personal Loan

You can borrow anywhere from $1,000 to $35,000 with a personal loan from Avant*. Specific rates and terms vary depending on your state of residence, but in general, terms offered are 2 to 5 years, and APRs range from 9.95% to 39.95%.

An example loan repayment: if you borrow $3,000 with an APR of 36.00% on a 3 year term, you’ll have a monthly payment of $137.41.

Applying with Avant doesn’t affect your credit score – it’s initially just a soft pull. On its FAQ, it states most customers have a FICO score ranging from 600 to 700, though you can still qualify with a score of 580.

Its customer service team is on staff seven days of the week to assist you in case you have any questions. It’s also possible to receive your funds as soon as the next business day.

Avant’s personal loans are currently offered in all states except West Virginia, North Dakota, Iowa, and Maine.

There is no prepayment penalty or origination fee. However, if you’re 10 days past due on a payment, you’ll be charged a $25 late fee. Avant does mention it offers late fee forgiveness, though.

If your payment is returned unpaid, you’ll be responsible for a $15 fee each time your payment fails to go through.

Avant_Logo

Apply Now

*referral link

Lending Club Personal Loan

Lending Club* is different than Springleaf and Avant because it’s a peer-to-peer lender. Individual investors can choose to put their money toward your loan – the money isn’t coming from a bank.

As with Avant, you can borrow anywhere from $1,000 to $40,000 with Lending Club. You can borrow for up to 5 years. Its APR ranges from 5.99% to 35.89%.

For example, if you borrow $20,000 on a 5 year term at an APR of 8.91%, your monthly payment will be around $185.24. That’s including an origination fee of 3% (or $600), so the total amount you receive would be $19,400.

There’s no prepayment penalty, but you need to watch out for the origination fees. These range from 1% to 6%, depending on your loan grade. Remember to factor this in when receiving offers, because being charged an origination fee lessens the amount of money you actually receive.

To be eligible for a loan with Lending Club, you must be 18 years or older and have a verifiable bank account. You must be a U.S. citizen, permanent resident, or have a valid long term visa. Your credit score should be at least 600 to qualify.

Lending Club does not offer loans in Iowa and West Virginia.

When determining creditworthiness, it takes the following into consideration:

  • Debt-to-income ratio
  • Credit score
  • Length of credit history
  • Number of open accounts
  • Usage and payment history
  • Other credit inquiries over the past 6 months

It has an A+ rating with the BBB and has been accredited since 2007.

LendingClub

Apply Now

*referral link

Springleaf Personal Loan

Springleaf offers personal loans ranging from $1,500 to $10,000. You can apply for a secured or unsecured loan. You can also apply online and have a decision within a day.

Springleaf has been around for over 90 years, has an A+ rating with the BBB. It is a brick-and-mortar bank with over 800 branches across 27 states. Unfortunately, that means it’s limited to those with branches nearby, as you need to physically sign for the loan.

Its website has minimal information on APRs, terms, and fees for loans, but from the calculator provided, we know the APR range is 15.99% to 39.99%, and 2 to 5 year terms are offered.

Springleaf also has a track record for working with borrowers who have low credit. You need a minimum credit score of 550 to qualify.

What would an example loan look like? If you borrow $4,000 on a 3 year term, at an interest rate of 30%, your monthly payment will be around $169.81.

You can check to see if Springleaf has a pre-qualified offer for you, as it doesn’t affect your credit score. If you do accept its offer, then a hard credit inquiry occurs.

Springleaf

Apply Now

*referral link

Which Lender is the Best Choice?

It’s largely going to depend on the rates you receive. Luckily, with Avant and Lending Club, you’re able to apply without a hard inquiry on your credit, which allows you to shop around without worry. It’s smart to start with these two lenders and see which of the two offers you better terms.

Here’s a side-by-side comparison of the rates and terms offered by all 3 lenders:

Criteria Springleaf Avant Lending Club
Amount Borrowed Up to $10,000 Up to $35,000 Up to $40,000
APR Range 15.99% – 39.99% 9.95%-39.95% 5.99% -35.89%
Length of Loan Up to 5 years Up to 5 years Up to 5 years
Min. Credit Score 550 550 600

Your best option is to shop around. You can apply to Lending Club, Prosper and Avant without hurting your score. We recommend you start there first.

If you need the money today and live near a Springleaf branch, that is your best option. But if you can wait a day, Avant is able to get the funds to you in one business day.

 

promo-personalloan-wide

 * We’ll receive a referral fee if you click on the “Apply Now” buttons in this post. This does not impact our rankings or recommendations You can learn more about how our site is financed here.

The post Personal Loans for People with Bad Credit appeared first on MagnifyMoney.