Author Topic: Inflation / Will LC raise Rates?  (Read 4913 times)

SBryantMS

  • Jr. Member
  • **
  • Posts: 95
    • View Profile
Inflation / Will LC raise Rates?
« on: May 22, 2014, 03:17:59 PM »
Everything I read says that inflation shows signs of breaking out. 

One of my core assumptions is that Lending Club will raise rates due to inflation to compensate the lender (cost of money).  I expect these rate increases to trail the inflation rate by about  six months.

Currently, LC has been adjusting rates based on <your opinion goes here>.  Some rates have been lowered while others have been raised. 

Do you think that inflation will force LC to raise their lender rates in the future. 

Opinions?

   

Emmanuel

  • Full Member
  • ***
  • Posts: 157
    • View Profile
    • LendingRobot
Re: Inflation / Will LC raise Rates?
« Reply #1 on: May 22, 2014, 05:18:40 PM »
Yes, inflation means higher interest rates in general, which in turn will impact the rates on Lending Club. The duration of peer loans is relatively small since their term is short and the rates are high, but it has to have an impact nonetheless*.

First, because with other rates going up, the peer lending marketplaces can hike theirs as well and remain attractive to borrowers. Second, it's necessary to continue attracting investors. If inflation is 17% and banks (generously) return 17.01% on savings accounts, there's no point in investing in LC at 13%.

Incidentaly, the lack of an efficient secondary market means that when interest rates go up, peer lending investors are stuck with the low rates of the loans they previously invested in. But it's ok: on a secondary market the price would go down accordingly, anyhow.

* Duration, which is the average time before repayment, also indicates the sensitivity to rates. If you're paid back tomorrow for a loan, you don't care what the Feds decide, but if you have 10 years left you do!

rawraw

  • Hero Member
  • *****
  • Posts: 2756
    • View Profile
Re: Inflation / Will LC raise Rates?
« Reply #2 on: May 22, 2014, 07:10:45 PM »
Depends on the duration measure you are using.  Maculay duration is blah anyway

LC mitigates rising rates through its structure as well.  Monthly amortizing means reinvestment occur at new market rates, assuming they adjust with inflation.

yojoakak

  • Hero Member
  • *****
  • Posts: 766
    • View Profile
    • Check out my Greasemonkey/Tampermonkey script for LendingClub here
    • Email
Re: Inflation / Will LC raise Rates?
« Reply #3 on: May 22, 2014, 08:16:09 PM »
Everything I read says that inflation shows signs of breaking out. 


I sure hope so!

Arthur Laffer has been predicting inflation for 5 years now and if it doesn't show up soon I'm afraid he's going to look like an idiot.

"Get Ready for Inflation and Higher Interest Rates: The unprecedented expansion of the money supply could make the '70s look benign.
By ARTHUR B. LAFFER
Updated June 11, 2009"
http://online.wsj.com/news/articles/SB124458888993599879

rlv99

  • Full Member
  • ***
  • Posts: 194
    • View Profile
    • Email
Re: Inflation / Will LC raise Rates?
« Reply #4 on: May 22, 2014, 09:35:41 PM »
Besides increasing interest rates, inflation will also decrease the number of Fully Paid since the borrower won't be able to refinance his existing  loan after a few months at a lower rate. 

Thatguybil

  • Newbie
  • *
  • Posts: 39
    • View Profile
Re: Inflation / Will LC raise Rates?
« Reply #5 on: May 22, 2014, 10:08:08 PM »
Core CPI might say we have low inflation.
My grocery, electric and health insurence all say core CPI is wrong.

I am spending 22% more on food on average in Jan-March 2014 then I did in 2011.
My electric rates are 30% higher this Aprilthen last April on a kwh basis
My health insurence went from 62$ ever two weeks to $145 every two weeks. Oh and my deductible went from 1k to 2.5k.

I guess since my house dropped in value by $90,000 my over all rate of inflation is low because my theoretical price to rent went down.

Peter

  • Administrator
  • Hero Member
  • *****
  • Posts: 754
    • View Profile
    • Lend Academy
    • Email
Re: Inflation / Will LC raise Rates?
« Reply #6 on: May 22, 2014, 10:22:54 PM »
Renaud Laplanche has said several times lately that in a rising interest rate environment Lending Club would adjust their rates accordingly. I presume this to mean increasing rates when the prime rate increases but there will likely be some lag involved.
Publisher of the Lend Academy blog

See my returns here: http://www.lendacademy.com/returns

Fred

  • Hero Member
  • *****
  • Posts: 1421
    • View Profile
Re: Inflation / Will LC raise Rates?
« Reply #7 on: May 22, 2014, 10:38:50 PM »
Here is a chart of LC Interest Rates -- from https://www.lendingclub.com/info/demand-and-credit-profile.action;



And here is the corresponding Fed 1-yr Rates for the same period -- from http://www.federalreserve.gov/releases/h15/data.htm
(Market yield on U.S. Treasury securities at 1-year constant maturity, quoted on investment basis):



Simple eye-ball analysis seems to indicate a negative correlation.

Fred93

  • Hero Member
  • *****
  • Posts: 2102
    • View Profile
Re: Inflation / Will LC raise Rates?
« Reply #8 on: May 23, 2014, 04:20:06 AM »
That's all the assurance I need right there.  Those curves look exactly alike.  ;D

Booleans

  • Jr. Member
  • **
  • Posts: 74
    • View Profile
    • Email
Re: Inflation / Will LC raise Rates?
« Reply #9 on: May 23, 2014, 10:58:38 AM »
Everything I read says that inflation shows signs of breaking out. 

Massive inflation is always right around the corner!

thezfunk

  • Sr. Member
  • ****
  • Posts: 316
    • View Profile
Re: Inflation / Will LC raise Rates?
« Reply #10 on: May 23, 2014, 03:13:38 PM »
Core CPI might say we have low inflation.
My grocery, electric and health insurence all say core CPI is wrong.

I am spending 22% more on food on average in Jan-March 2014 then I did in 2011.
My electric rates are 30% higher this Aprilthen last April on a kwh basis
My health insurence went from 62$ ever two weeks to $145 every two weeks. Oh and my deductible went from 1k to 2.5k.

I guess since my house dropped in value by $90,000 my over all rate of inflation is low because my theoretical price to rent went down.

This always has pissed me off.  If it doesn't effect core CPI then it's not inflation!  All the things they throw out to determine core CPI are the things that I spend the most on.  I don't buy a refrigerator every six months or a new car every six months but I pay my electric bill every month and I buy milk every couple of weeks.  Things are more expensive than they were a few years ago, no question.  All the money that has been dumped into the economy has to go somewhere and it sure isn't into my pay check.

P2PFact

  • Jr. Member
  • **
  • Posts: 91
    • View Profile
Re: Inflation / Will LC raise Rates?
« Reply #11 on: May 23, 2014, 03:28:36 PM »
Here is a chart of LC Interest Rates -- from https://www.lendingclub.com/info/demand-and-credit-profile.action;

You are comparing apple to orange here. LC rate is credit risky while treasury yield is risk free (hopefully this is true btw). The downward trend of treasury yield is due to recession and fed QE. The upward trend of LC rate may well be driven by increase of credit riskyness of borrowers or adjustment of LC model.

Don't think the negative correlation pattern here is a good predictor for the future movement of the two.




Fred

  • Hero Member
  • *****
  • Posts: 1421
    • View Profile
Re: Inflation / Will LC raise Rates?
« Reply #12 on: May 23, 2014, 04:23:15 PM »
You are comparing apple to orange here. LC rate is credit risky while treasury yield is risk free (hopefully this is true btw)...

It is a common practice in credit risk world to compare any yield curves (LIBOR, Mortgage, Swaps, LC, etc.) against those of Treasuries.  The difference (i.e., the spread) is one the main outcomes that shows the risk "premium";  and the correlation is another important outcome.

AnilG

  • Hero Member
  • *****
  • Posts: 1081
    • View Profile
    • PeerCube
Re: Inflation / Will LC raise Rates?
« Reply #13 on: May 23, 2014, 10:50:31 PM »
I don't know if Lending Club still list in their recent prospectus the detailed procedure of how they set the interest rate but you can review older prospectus to figure out how LC sets interest rate.

From my blog post couple of years ago on this topic http://andirog.blogspot.com/2012/06/lending-club-base-interest-rate-excess.html

"The starting point for base interest rate is the middle of the spread between the interest rate for unsecured consumer credit as published in Federal Reserve Board Consumer Credit G.19 Release and the average interest rate for 6-month certificates of deposit as published in Federal Reserve Board Selected Interest Rate H.15 Release."


You are comparing apple to orange here. LC rate is credit risky while treasury yield is risk free (hopefully this is true btw). The downward trend of treasury yield is due to recession and fed QE. The upward trend of LC rate may well be driven by increase of credit riskyness of borrowers or adjustment of LC model.

Don't think the negative correlation pattern here is a good predictor for the future movement of the two.
---
Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
PeerCube https://www.peercube.com

rawraw

  • Hero Member
  • *****
  • Posts: 2756
    • View Profile
Re: Inflation / Will LC raise Rates?
« Reply #14 on: May 24, 2014, 11:39:50 AM »
You are comparing apple to orange here. LC rate is credit risky while treasury yield is risk free (hopefully this is true btw)...

It is a common practice in credit risk world to compare any yield curves (LIBOR, Mortgage, Swaps, LC, etc.) against those of Treasuries.  The difference (i.e., the spread) is one the main outcomes that shows the risk "premium";  and the correlation is another important outcome.
Does that LC graph adjust for changing characteristics (i.e. volume of As in 2007 vs 2009)?  At any rate, I think that'd graph would be more interesting when you juxtaposed market rates with each LC Grade.  The correlation may be negative, but the R^2 looks like it may not be the most robust either.  Implies high degree of LC management discretion