raises rates again

Refinance with prosper.comIt seems like only last month that raised rates for borrowers.  At the time, I noted that Prosper appeared to be suffering from an imbalance of borrowers to lenders.  Put simply, there were more borrowers than lenders.  Prosper has attempted to fix this imbalance with lender rebates of 1 to 4%, but the simple fact of the matter is that the market was yelling loud and clear – the rates are too low.

The result, is that Prosper has again raised borrower rates and even notes:

In response to rapidly growing borrower demand in all risk categories, interest rates are increasing by as much as 2% for AA-, A-, B-, C-, D-, and E-rated Prosper Notes, effective today.

Today’s rate change affects the highest Prosper scores the most, with AA and A getting bumped a full 1% increase, while E is not touched at all.  The other key change is that the rate for returning borrowers is up almost 2% across the board.  This is probably due to people abusing the strategy of taking out small loans and immediately paying them off, only to get a new loan within a month or two at a much better rate.

In my mind, this is good news for lenders and ok news for borrowers.  For lenders the reasons are obvious, the lender gets a potentially higher rate of return and a nip more reward for the risk they are taking.  For borrowers, this is also ok news – primarily because it means your loan is more likely to be funded.  This is important because the old saying “time is money” holds true.  Of course having a lower rate would be nice, getting your loan funded at all is even nicer.

Refinancing now, even at a 1% higher rate, can still save you a hundred dollars or more over having to wait an additional month or two.

This takes some explaining, but to show that time is money,  please consider the following example:

  • You have $10,000 in credit card debt at 29.99%
  • Not counting any additional bank fees
  • You do not make any additional charges and start a payment plan to pay the card off in 36 months
  • Over this time you will pay approximately $5280 in interest

To compare, let’s assume you could have gotten a loan at 10.99%, and pay it off using the same 36 month plan:

  • Not counting any additional fees
  • Over this time you will pay approximately $1784 in interest
  • Thus the loan would have saved you approximately $3,496 in interest over 3 years.

Finally, lets compare what happens if you instead get a loan at 1% higher (11.99%), but get it now, or you have to wait 2 more months to refinance your credit card because your loan was not funded:

  • Your new loan at 11.99% would cost you approximately $1955 in interest
  • Paying your credit card off over 38 months instead of 38, would cost you $5604 in interest.
  • This is still a savings of $3,649 in interest.
  • The difference between the loan is $171 more interest, but the credit card results in $324 in interest… thus save $153 by getting your loan funded 2 months sooner, even at a higher rate.

My prediction is that lending rates will probably remain steady for the rest of the summer, but this fall, as other interest rates rise, I expect that Prosper and other P2p lending sites will once again have to raise rates.  If you agree that interest rates and fees are going to rise, it makes sense to refinance your higher interest debt now by getting a fixed 3 or 5 year loan via Prosper or LendingClub or anywhere else you can get a competitive interest rate and fixed term.

Personal loan, debt consolidation


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