Loans for All Credit Scores: The Meaning of the OneMain Sale

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Citibank (C) this week announced the sale of OneMain Financial to Springleaf Financial (LEAF) for $4.25 billion. The combined business will be a subprime giant, with over 2,000 branches offering loans to people with less-than-perfect credit. Just a few years ago, Citi was trying to sell OneMain for $1 billion, and no one wanted to buy. Yet in 2015, Springleaf buys the business for much more money, and its shares jump 26 percent on the news. What does this acquisition mean? Quite simply: Americans are borrowing again, and lenders are looking forward to the earnings growth that will come from this expansion of lending.

We are seeing increased activity across all credit scores, with both old business models and new. This can be a good thing: too many people are paying far too much for their credit card debt. Finding new opportunities to refinance that debt at a lower interest rate would be prudent. If you are a small business, you may have found growth difficult after the financial crisis due to restricted lending from big banks, and these new providers are enabling you to grow your business.

However, there is also a risk that the availability of credit leads us down a path of excessive borrowing once again. I hope for the former, but fear the latter.

Here is a quick overview of some new (and old) entrants that are trying to grow their loan portfolios. If you are trying to find a smart way to cut your interest rate or grow your business, keep reading. If you are just looking for some instant money to buy that next flat-screen TV, please don't.

Super-Prime Customers

For people with excellent credit (a FICO score of 700 or higher), there are now plenty of options to borrow. And interest rates are racing towards historic lows, with incentives being piled on top. It really is a borrowers market.

SoFi is a new online lender that can help people refinance their student loans, with rates starting as low as 3.50 percent. It has just expended into personal loans, and it is bringing its low-rate swagger with them. Interest rates start at 5.50 percent, and only go up to 8.99 percent. Even better, there is no origination fee and no prepayment penalty.

If you have $10,000 of credit card debt at an 18 percent rate (which, believe it or not, is close to the national average), you could save nearly $2,000 of interest by paying off your debt at SoFi. To qualify, you need a score of 700 or higher. And, if you apply via MagnifyMoney (we do not receive any payments from SoFi) during March, it is paying a $100 bonus to customers after the loan closes. For super-prime customers, it will be hard to find a better deal. SoFi is widely regarded as the next Internet lender to go public.

Not Quite Prime

If your score is below 700, you still have some amazing options. Payoff will lend to people with a score as low as 660, and its rates start at 10 percent. Payoff is focused on helping people get out of debt, and it has built a business around getting people debt-free. It does not want the Payoff loan to increase your total debt, because its primary goal is for you to have less debt in 12 months than you have today.

LendingClub (LC) is one of the original Internet lenders, and it is active all the way down to a 620 credit score. I poured through its investor prospectus and borrower data to get a good understand of its approval criteria, and that's share at MagnifyMoney. In summary, it is looking for people who have credit card debt, but almost always paid on time. It doesn't like collection items on your credit report or many missed payments. So, if you are responsibly paying but just want to get out of debt faster, it may be the right option for you. LendingClub generated a lot of headlines over its wildly successful December IPO.

The good news about SoFi, Payoff and LendingClub is that you can see if you are approved and what interest rate you could get without hurting your credit score. All use "soft pulls" on your credit report. The smartest move is to apply to all 3 lenderthree and go for the lowest interest rate.

Small Businesses

After 2008, it became incredibly difficult for small businesses to get access to affordable credit. Just as Internet lenders have been making it easier for people to borrow, the same innovation has come to the small business market.

FundingCircle is a leading small business marketplace lender, and it is on target to issue more than $1 billion of loans this year. It looks to make loans between $25,000 and $500,000 to profitable small businesses looking to grow or finance inventory. The process feels like the opposite of bank lending. You apply online, answering just a few key eligibility questions, including your time in business, your business revenue, profits and the FICO score of the owners (which must be higher than 620). It can close loans in a week.

I spoke with the owner of a wine shop in New York, who benefited from FundingCircle. Before 2008, the renewal of his credit facility was routine. But, in 2008, everything changed. Even though his business was doing better (people must have been drinking a lot of wine in those days), the big banks just wouldn't lend. When he Googled for an answer, he found FundingCircle and was able to get the loan arranged in a week.

Back to Where We Started, With OneMain

If you visit a OneMain branch, you can get a loan issued in under 30 minutes. It goes deep with FICO scores (as low as 550), but its prices are higher (up to 35 percent). OneMain is a much better alternative to payday and title lending, but it can also be a more expensive form of credit card borrowing.

The business has been booming over the last few years and was making hundreds of millions of dollars for Citi. Combined with Springleaf, we can expect further growth, including more aggressive online loan distribution alongside their branch network.

OneMain was a pioneer of subprime installment lending in 1912 (under its original name, Commercial Credit). And that should give us all a wakeup call. The business models and technology may be new, but the core business is as old as time. They are all money lenders. In the last crisis, we thought we had become so smart that we could use analytics and securitization to give people loans they couldn't afford. Right now, we don't see signs of excess. But as the competition for loans heats up, this new batch of lenders will be under pressure to relax lending criteria. Let's just hope that this time is different.

Nick Clements is the co-founder of MagnifyMoney, a price comparison website that helps you find the cheapest bank accounts, and the lowest interest rates on your savings and your debt. He spent nearly 15 years in consumer banking, and most recently he ran the largest credit card business in the U.K. You can follow him on Twitter @npclements
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