August 11, 2016 in Loans

Personal loan rates remain at rock-bottom lows, but there is new evidence it has become tougher for some borrowers to qualify.

Lending Club, the largest online originator of personal loans, announced this week it had funded 29% fewer loans in the 2nd quarter compared with the first 3 months of 2016. A slowdown was expected, given the disastrous spring the San Francisco-based company had, but Lending Club for the first time offered specifics on the type of borrower most directly impacted.

“We reduced approval rates for certain targeted segments to eliminate roughly 9% of the higher risk personal loan borrowers that have exhibited a propensity to accumulate debt and could have the most exposure to an economic slowdown,” Lending Club CEO Scott Sanborn said Monday in a conference call with market analysts.

That’s not good news for some hoping to enjoy personal loan rates at their lowest level in nearly 1½ years.

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In Bankrate’s national survey of interest rates from banks and thrifts for Aug. 10, 2016, the rate on personal loans remained unchanged for the 2nd consecutive week at 10.89%.

This week’s average rate is down nearly half a percentage point from its 2016 high. A year ago, interest on the average personal loan was 11.12%.


It could have been worse

The Lending Club news wasn’t as bad as it could have been for borrowers, according to some analysts.

The decrease in loan volume was “better than expected,” Mark Palmer and Giuliano Bologna, analysts for the financial services firm BTIG, wrote in a note to investors. The pair had estimated Lending Club would fund $1.84 billion in loans. Instead the lender originated $1.96 billion during the second quarter, or $112 million more than expected.

“Moreover, management said loan origination volume had gained during June and that origination momentum had continued during July,” Palmer and Bologna wrote.

Still, Lending Club plans to continue to fund fewer loans for the remainder of the year than it had originally planned. And that means would-be borrowers with lower credit scores and higher debt loads will continue to be shut out from the big online lender.

“Given our more modest near-term volume ambitions and our decision to really boost the attractiveness of the assets, this was the right decision for now,” Sanborn said.

With other non-bank lenders also struggling, it’s unclear if there are enough other players to fill in where Lending Club has exited.


Who gets Lending Club loans?

Nearly 75% of loans during the second 3 months of 2016 went to borrowers with FICO scores between 660 and approximately 740, according to Lending Club. A much smaller portion of loans went to borrowers with the highest credit quality and borrowers with a FICO score of between 600 and 659.

The company cut in half loans to its riskiest borrowers, those who would be charged an average interest rate of close to 30%.

The company says its average interest rate is 13.8%.

“This average rate remains a very attractive one of unsecured consumer credit,” Sanborn said.

Shut out from a loan?

When online lenders tighten credit restrictions, that could make it harder for borrowers with damaged credit to get loans because banks and credit unions traditionally have already excluded this group of consumers. 

Greg McBride, CFA, Bankrate’s chief financial analyst, says if you’ve been rejected for a loan, shopping around for another option probably isn’t the best idea anyway.

“If bad credit is limiting your borrowing options, then you need to focus on improving your credit,” he says. “The best way: Stop borrowing and focus on paying down debts.”

If you establish a record of paying bills on time and reducing the amount of debt you have relative to the amount of credit available to you, you’ll improve your score and become more attractive to lenders.

“Making timely payments and paying down your debt are the low-hanging fruit of improving your credit score,” McBride says.