LendingClub's IPO Suggests Interest Rates Will Keep Falling
Now that LendingClub has $870 million in its war chest, we can expect that its will become even more aggressive with marketing and growth. Whenever there is a successful IPO, we can expect copycats to appear. And the boring personal loan marketplace has become crowded with companies looking to be the next big thing. With these new entrants looking for customers, you can expect interest rates on personal loans to continue getting lower as they try to win your business. If you have credit card debt, it should only become easier to refinance that debt at a lower interest rate. But we should also expect growth in two other areas: small business lending and student loan re-financing. All of this is good for consumers.
Refinancing Credit Card Debt
There is more than $800 billion of credit card debt in the U.S. And, the average interest rate is a shocking 17 percent. In a recent interview, the CEO of LendingClub revealed that the average rate for a credit card refinance loan is 12.5 percent. If you have $10,000 of credit card debt and want to pay it off in five years, than you would need to pay $248 a month. At 12.5 percent, you only need to pay $225 per month. Over five years, you would end up paying $1,412 less interest. However, the real temptation with a credit card is the you spend more and pay less, sometimes only the minimum due. A credit card is just an enormous temptation. With a personal loan, you can't spend more, and you are forced to pay enough to be out of debt in three or five years, rather than 30 years with a credit card minimum payment.
LendingClub and Prosper were the original lenders looking to eliminate banks. But there are now some other players out there looking for business. Whereas Prosper's lowest rate is 6.73 percent and LendingClub's lowest rate is 6.78 percent, new entrants are going even lower. Vouch, a recent entrant to this space, starts at 5 percent. And CircleBack Lending, which starts at 6.63 percent, is just a bit lower than Prosper.
We are starting to see competitive pricing between the new entrants. Now 6.63 percent may seem like an odd price point, but it makes sense when you see that it wants to be lower than the market leaders. At MagnifyMoney, we have created a marketplace where the cheapest provider will always rise to the top. And the good news is that we see continued competition on pricing. If you have good credit and are looking to pay down credit card debt more quickly, you can dramatically reduce your interest rate and take years off your debt repayment.
Student loan debt is now bigger than credit card debt, and some new companies are looking to refinance student loan debt. These new players are also looking at things that traditional creditors ignore. Rather than looking at your credit score, some lenders are looking at where you graduated, what you studied, how long you have had a job and your total income level. If you are in financial difficulty, these loans are typically not for you. But, if you have a good job and are making good income, than you may be able to find a way to refinance your debt.
The company making the biggest splash is Sofi, who has decided to charge fixed interest rates as low as 3.63 percent. These are shockingly low interest rates. Competitors don't know how it does it. But, for a borrower, you don't need to worry about that. Just take advantage of the low rates. To get the best rates, you will need to appear very low-risk to Sofi, which means a great degree and a great job.
But if Sofi does not approve you, don't give up. There are a number of Sofi copycats, and even credit unions are dramatically expanding their student loan refinance business. We have put together a list of places where you can refinance student loans.
Small Business Loans
The same business model used by LendingClub has been brought to small business loans as well. There are a few new entrants that are trying to make it easier for small businesses to get the capital that they need to grow, while providing investors with better return on their investments. Two examples include FundingCircle and OnDeck.
Investors are looking for yield, and borrowers are paying too much for their loans. This problem has an almost obvious solution, and the fact that so many new entrants are looking to cut rates for borrowers is good news for consumers.
Nick Clements is the co-founder of MagnifyMoney, a price comparison website that helps you find the best deals in banking. He spent nearly 15 years in consumer banking, and most recently he ran the largest credit card business in the U.K.