The End of FICO Scores – AND sub-8% Unsecured Loans???
Vantage Scores. TransRisk Scores. Plus Scores. There are many online credit scores but in the world of credit scoring the ten thousand pound gorilla is the FICO Score. FICO’s are what most lenders use as a key ingredient of their underwriting process. Today, Bloomberg ran a story on one of the latest companies to enter the credit scoring race. It’s called ZestCash. It made me think of companies like On Deck Capital and IOU Central. These companies all have proprietary algorithms that are designed to evaluate risk.
One of the companies ZestCash is partnering with is Lending Club. I want to be clear that I have nothing against Lending Club. Lending Club offers unsecured personal loans through their peer to peer lending network. I actually like what they are doing and think they are a great company…but I’m very suspect of this quote from the Bloomberg article that says Lending Club “offers interest rates that are less than half the average credit-card rate.” I guess words can be deceiving but I would love someone to tell me more about Lending Club’s “average” interest rates rather than some low-end rate that only one-tenth of 1% of the applicants qualify for. According to creditcards.com the “national average” credit card rate is 14.95% as of Jan, 2012. So does this mean that Lending Club offers rates that are less than 7.5%? As I said, I’m probably a lot more interested in what their “average” rates are and not some bogus rate that doesn’t really exist.
There have been a lot of startup companies looking for small business loans or some form of business credit who have turned to Lending Club. They don’t issue business loans although they do allow personal loans that may be obtained for business purposes. I would love to know your experience but I’m guessing the majority of the loans they issue are in the 12-25% range. That’s a long ways from 7.5%.
It’s possible that I would be categorized as a skeptic on these two – I wish the best to the great folks at ZestCash but they are 75 people against a Minneapolis company who does over $500 million a year in Revenue. Honestly, it’s got the making of a heck of a story and I would gladly write another blog about not being a believer if ZestCash manages to take a bite out of FICO’s market dominance. As for Lending Club, they may not issue unsecured business lines of credit but they do offer a 3rd cousin to that – unsecured personal loans. That’s great…but if you do an application there then – despite what Bloomberg proclaims – just don’t expect an interest rate in the single digits.
Your assumption is correct. Lending Club has a small number of borrowers who qualify for interest rates less than half the average credit card rate – interest rates start at 6% and go up to 24%. But the average Lending Club interest rate over the last two years is around 12.9%. Still less than credit card rates but certainly not 50% less.
Having said that, I am a happy investor in Lending Club as well as their competitor Prosper. My returns have been excellent (over 8% in 2011) and there if you know what you are doing you can mitigate the risks.
Thanks Peter and sorry for the delayed response. We were having some website issues that impacted the comments section of the blog. The 12.9% average isn’t much (if any) lower than credit card rates according to creditcards.com averages but I think we can agree that the article I was referencing was quite mistaken in their depiction.
Thanks again Peter!