BTCJam is changing the way interest rates are set in order to improve the experience for both borrowers and investors. Starting today, BTCJam will set the borrower’s interest rate automatically based upon their credit score. The higher the borrower’s credit score, the lower their interest rate.
Automatically calculating the interest rate based upon credit scoring is known as risk-based pricing and is a well known and time proven methodology within the financial services industry. Interest rates are set by a combination of the borrower’s credit rating (using BTCJam’s proprietary credit rating system) and the duration of the loan. Borrowers who are less likely to default will receive lower interest rates. Since BTCJam has all of the information about the borrowers, we are in a better position to determine the likelihood of the borrower paying back the loan and will adjust the interest rate accordingly. Risk-based pricing makes investing easier because when a lender invests in an A-rated loan, they know that the borrower will be paying an A-level interest rate.
When borrowers are allowed to set their own interest rates, it is far too tempting for them to set a low interest rate and see if investors will accept lower returns. While a borrower who receives a very low interest rate usually pays back their loan, it does not provide the investor any cushion against possible defaults. With risk-based pricing, the interest rates for all loans will be standardized, ensuring that investors are able to offset possible losses from defaults.
We are confident that this change will improve BTCJam and allow us to continue to maintain the highest repayment rates in peer-to-peer lending (as high as 98% for A-rated borrowers), as well as increase overall returns to investors.
Risk Based Pricing (automatic interest rates) Q&A
Q: What will happen to loans that were created before the change to Risk Based Pricing?
A: Loans created prior to the adoption of Risk Based Pricing (automatic interest rates) will continue until they have either been funded or have expired. BTCJam will identify the old loans and will separate them so they will be only be accessible using filters.
Q: The system sets a rate that is too high for me and I won’t be able to repay it. What should I do?
A: If the interest rate on your loan is too high you should verify more documents and add more information to your profile. By verifying more information, you will increase your credit score and receive a lower interest rate.
Q: Do I still have the option of doing a loan tied to a local currency?
A: Yes you will still be able to choose between a Bitcoin loan and a loan tied to local currencies. Learn more about currency types.
Q: Why did BTCJam choose to change the way that interest rates are determined?
A: BTCJam changed to risk-based pricing for a number of reasons. One reason being investor and borrower security. By setting the interest rates automatically it simplifies the risk assessment for both borrowers and lenders. Learn more about risk-based pricing.
Q: Will there be a set standard for interest rates based upon credit rating? For example, will all C rated borrowers have loans set at a standard 5.5% interest regardless of profile completeness?
A: Yes, every credit score grade will now come with a set interest rate that is the same for all borrowers that have the same credit score. However, rates will change also according to the loan term. That means, a C loan for 30 days will have lower rates than a 1 year loan for a C rated borrower.
Q: Can I pay more than the recommended interest rate?
A: No. The interest rates are now automatically linked to your credit rating. This change protects our investors from loans that are “too good to be true” and that the borrower never intends to repay. We took into consideration both borrowers and investors when making this change.