Background
What is Lending Club | How Does the Application Work | What Information Do They Have | Literature Review
What is Lending Club?
Lending Club (LC) is a marketplace that connects individual borrowers and investors through a simple online process with less overhead than traditional financial institutions. As a borrower you may be able to lower the interest rate you currently pay on for example your credit cards or a car loan by refinancing with LC. LC is quite successful given that they have already issued over $40 billion in loans.
How Does the Application Work?
The application process happens entirely online and you get a decision within seconds after entering some personal information. The actual interest rate you pay is dependent on how likely LC thinks you are to pay off the loan in full and on time. Through a ‘proprietary’ algorithm they assign you a grade of A to G, and even a subgrade that further divides up each grade into five subgrades resulting in 35 subgrades ranging from A1 to G5, which are also expressed numerically as a 1 to 25 ‘model rank.’ Your subgrade determines your interest rate. You can find the current rates for each subgrade here.
As you can see the difference in interest rates between subgrades A1 and B1 is more than 4% because of what they refer to as ‘adjustment for risk and volatility.’ The difference in interest between the best possible grade and the worst possible grade is over 25%. Therefore it is in your best interest to know which factors go into LC’s secret algorithm that determines your subgrade.
What Information Does Lending Club Know About You?
Even though LC does not publish the algorithm they use to decide your loan grade, they do publish the information they have collected for each loan that have issued and publish the information on their website in a non-personally identifiable way. This reveals that they store nearly 150 variables about you ranging from your FICO score to the length of your employment.
Literature Review
Ehrbeck, Tilman. “G20 Leaders' Plan To Bring Financial Services To Poor.” The Huffington Post, TheHuffingtonPost.com, 1 Sept. 2012, www.huffingtonpost.com/tilman-ehrbeck/the-importance-of-financial-access_b_1642725.html.
“Peer to Peer Lending & Alternative Investing.” Peer to Peer Lending & Alternative Investing, www.lendingclub.com/.
Kwofie, Charles, et al. “Predicting the Probability of Loan-Default: An Application of Binary Logistic Regression.” Research Journal of Mathematics and Statistics, vol. 7, no. 4, 2015, pp. 46–52., doi:10.19026/rjms.7.2206.
Skantzos, Nikolaos. “Credit Scoring | Deloitte | Case Study, Data Analytics.” Deloitte United States, 26 Apr. 2016, www2.deloitte.com/be/en/pages/financial-services/articles/credit-scoring.html.