Bart Sadowski/E+/Getty Images

Bart Sadowski/E+/Getty Images

For the second time this year, marketplace lender Prosper is increasing interest rates on some of its personal loans. The rate increase announced Tuesday will impact borrowers who are seen as a bigger risk.

The move comes 2 weeks after an industry expert warned me that rate hikes were coming, as marketplace lenders look to offer higher returns in an effort to entice the investors critical to funding marketplace loans.

A number of lenders in recent months have seen institutional investors grow skittish about buying the loans these online firms originate. The drumbeat against these personal loan operators has only gotten louder following the ouster of the CEO of Lending Club this month over loan improprieties.

In announcing the rate increase, Prosper’s chief risk officer said the hikes were designed to satisfy investors and were done in anticipation of a possible short-term interest rate hike next month by the Federal Reserve.

“We believe that these proactive changes are necessary for us to continue providing a compelling fixed-income product relative to the many alternatives available to our investor community,” Prosper’s Brad Pennington wrote on the firm’s website.

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Who does this affect?

Rates will rise by 0.29 percentage points on average, according to Prosper’s announcement. But borrowers with good to excellent credit won’t be affected. Based on the company’s ratings, this would include borrowers with an average FICO credit score of at least 700.

Prosper interest rate increases
Prosper rating Average FICO score Current rate New rate Difference
AA 745 6.88% 6.88% 0
A 714 9.23% 9.23% 0
B 700 12.20% 12.20% 0
C 689 16.27% 17.05% 0.78 percentage points
D 677 21.58% 23% 1.42 percentage points
E 666 26.61% 28% 1.39 percentage points
HR 657 30.84% 31.10% 0.26 percentage points
Average 698 14.30% 14.59% 0.29 percentage points

Source: Prosper

New loans issued to borrowers with FICO scores below 700 will see an interest rate hike as high as 1.42 percentage points.

Among those impacted are borrowers in Prosper’s sweet spot. Since 2009, the firm has issued nearly one-quarter of its loans to borrowers in Prosper’s C ratings band. Those borrowers are characterized as having an average FICO score of 689.

But the highest interest rate hikes are reserved for borrowers in the D and E band. Roughly 16% of Prosper loans go to this group of borrowers.

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