Lending Club Blog

Consumer Credit Interest Rates: The Cash Cow of Most Banks

Many things have changed since the early 1980’s including the fact that interest rates have dramatically dropped.  It is simply amazing to contemplate that in 1981 U.S. citizens looking to purchase a home were actually facing the prospects of paying a mortgage interest rate of close to 20%!   Obviously, part of these high interest rates was offset by high inflation and things are quite different now.  Mortgage rates are the lowest they have been since the 1950’s and the U.S. Government is paying lower interest rates than at any other period in post-WW II history.

Consumer credit, however, hasn’t experienced the blessings of this dramatic interest rate drop, down only slightly since 1981.  Why?  Many speculate it’s because of the higher risk associated with consumer credit.  But that surface analysis doesn’t hold much water.  Yes, aggregate consumer credit charge-offs soared to record highs in the 2008 crisis, reaching over 10%.  Yet almost all forms of private credit suffered huge jumps in delinquencies and charge-offs.  (A little known fact is that mortgage delinquencies are currently higher than unsecured consumer credit!)

Even accounting for the large surge in charge-offs an investor still would have earned a competitive total return.  More importantly, the aggregate numbers do injustice to the fact that the top 20% of credit worthy customers had substantially lower charge-offs than the average but still paid excessively high relative interest rates because most credit cards issuers do not offer risk-based pricing.  This dichotomy points to the structural inefficiency of the consumer lending markets and represents why we believe Lending Club offers a compelling value proposition to both credit worthy borrower and investor.

For more on this topic, read on:

Why Is Consumer Credit Still So Expensive?” by Daniel Indiviglio, on TheAtlantic.com

Chart of the Day, Consumer Credit Edition” by Felix Salmon, on Reuters.com

Off the Chart” on CBCNews

Wednesday, September 29th, 2010 at 7:20 am

Comments (1)

  1. Vibha:

    Loan companies are looking to be loaning just as before, or at
    least would prefer us to think so. Northern Rock was in the papers
    this morning promising 10% mortgages – with very high interest
    rates needless to say, but at least their is a attempt in direction
    of lending again – however small it turns out. Essentially instead
    of motivating lending, it might merely help maintain house prices
    at the absurdly high levels they’ve been for the past 10 years.
    INSANE.

    March 6th, 2011 at 10:44 am

Recommended

Welcome Home

Lending Club named #5 on Forbes’ Most Promising Companies List

Get ready for tax season with Lending Club’s Tax Form Guide

New Adjusted Return Metric

See more
Lending Club Awards
  • Archives z

Recent Posts

A Recap: Credit Strength on the Lending Club Platform

We are proud of our… Read More »
July 14, 2016

A Message to Investors from our President and Acting CEO

Today, our President and acting… Read More »
May 19, 2016

Lending Club Receives Tribeca Disruptive Innovation Award

Disruptive innovation comes in many… Read More »
April 29, 2016

Lending Club Business Financing Review

One of the biggest challenges of owning a small… Read More »
April 27, 2016

Lending Club partners with Funding Circle and Prosper to launch Marketplace Lending Association

Read More »
April 7, 2016

Lending Club Welcomes Maryland and North Dakota Investors!

We’re now open to retail… Read More »
February 23, 2016

What is Lending Club?

More than one million Americans have achieved their financial… Read More »
February 16, 2016

Get ready for tax season! Lending Club Now Offering TurboTax Integration for Form 1099s

Read More »
February 12, 2016

Lending Club Success: Surpassing $16 Billion in Loans

Founded in 2007, Lending Club’s… Read More »
February 11, 2016

Credit Performance Update

Summary: Credit performance of our standard program is coming… Read More »
February 7, 2016

2014

We went public today!

Ringing the bell this morning at the New York… Read More »
December 11, 2014

New and Improved Statistics Page

We recently redesigned our Loan Statistics page to make… Read More »
November 13, 2014

Lending Club Honored with Economist Innovation Award

This month I was honored… Read More »
October 15, 2014

Welcome Vermont Investors!

Today, we’re thrilled to welcome residents of the state… Read More »
September 4, 2014

We filed to go public today

We filed a registration statement with the SEC today… Read More »
August 27, 2014

Our Billion Dollar Quarter

We’re excited to announce  that we’ve facilitated over $5… Read More »
July 8, 2014

Is Lending Club Available in My State?

Is Lending Club available in my state? That is… Read More »
July 7, 2014

Lending Club Joins Senator Cory Booker to Discuss Improving Access to Capital for Small Businesses

Read More »
June 20, 2014

Lending Club Named a CNBC Top 50 Disruptor for a Second Year

For the second year in… Read More »
June 17, 2014

PRIME is now Automated Investing

Lending Club is excited to announce that PRIME has… Read More »
May 14, 2014
View All w