P2P Loan (Peer-to-Peer Loan) Amortization

Posted by Mike Smith :: October 1, 2007 @ 6:12 am

In a recent post, I discussed different methods of amortization and the dangers of loans that do not require full amortization payments. Now, let’s look at the amortization of a P2P loan on Lending Club.

By having a fixed interest rate, the amount that you’ll pay each month is known in advance. You can plan for your repayment just as you would with any other regular monthly bill. With rates much lower than a typical credit card, your monthly payments should be much more manageable.

To see how payments would work out for a typical loan, let’s use a recent loan request as an example. The user was requesting $4,100 at a rate of 9.33% to purchase a motorcycle from a private party. The monthly payment for this loan would be $131.01. The table below shows how that monthly payment would amortize the $4,100 over the three-year term of the loan.

(Click Graphic to Enlarge)

As you can see, the monthly payment amount is the exact amount necessary to reduce the principal to zero at the end of the term. In this case, the user will pay $616.34 in interest over the life of the loan. If the person had decided to make this purchase with a credit card, the interest would likely have been much higher. Using a typical credit card with an interest rate of 18% and making payments of $131.01 each month would cost $1,477.29 in interest and take an extra six months to pay off! Depending on the terms of the card, monthly payment minimums may even require higher initial payments, despite the fact that it’s charging more interest. Regardless, most credit cards push cardholders to pay the minimum amount, adding years of payments and thousand of dollars in interest to the loan.

With the potential for lower monthly payments, a huge savings in interest charges, and a significantly shorter payoff period, it’s no wonder that more and more people are using Lending Club. If low, fixed payments that save you money sound good to you, then a fully amortized person-to-person loan from Lending Club may be just what you’re looking for.