Why would interest payment be nearly double that of principal on a LendingClub loan

A friend of mine took a loan from LendingClub last year so as to pay off some credit cards and other debt and to have just a single payment to make each month.

Admittedly the interest rate offered by LendingClub was not particularly low: it's 21.18% (APR is 24.21%) on a 60-month loan.

Today he asked me if it was normal that the bulk of a payment towards the loan would go towards the interest. The payment history on his loan looks like as shown in below screen shot.

(He has made 8 payments so far; the first payment was the one made in May last year.)

So for example their latest payment was for \$868.96 and out of this a whopping \$525.17 was applied to the interest.

It looks crazy but I was not sure if there is some reason or situation in which this is somehow normal(?)

Shouldn't the amount that is applied toward the interest be considerably less than the amount applied toward the principal?

Update: My wife brought up that when I had a loan from LendingClub, the payments toward interest were never higher than the payments toward the principal. The payment history of my loan is shown .

A difference with my friend's loan is that mine was a 36-month loan for a lower amount, with a slightly lower rate: 17.58% with an APR of 21.31%

Is it these differences in the total loan amount and payment terms that could have caused the differences in how much goes toward the interest?

No, this is perfectly normal and correct. At the start of the loan, the balance outstanding is the full amount, and so the interest makes up the bulk of the payment. As the balance shrinks, the interest shrinks, and so more of each payment goes to paying off the balance instead.

Consider it the other way around, if the capital repayment was the same every month. Then the total payment would be very much higher in the first month than the last, as there would be a lot of interest in the first month and practically none in the last month.

• Thanks Mike Scott, that does make sense what you are saying. I have a question though that my wife brought up about my own loan I had with LendingClub (this is what brought up this question actually in our minds the first time). On the loan that I had, a larger percentage of the payments was always allocated toward the principal (I updated my question with a screen shot of how the payment history of that looked like). Is this some kind of side effect of the loan amounts and payment terms? Jan 22 '17 at 15:40
• The longer the loan duration, the slower the principal gets paid off and the more of the initial payments goes towards interest. Standard fixed-payment loan amortization. Jan 22 '17 at 15:43

A difference with my friend's loan is that mine was a 36-month loan for a lower amount, with a slightly lower rate: 17.58% with an APR of 21.31%

Is it these differences in the total loan amount and payment terms that could have caused the differences in how much goes toward the interest?

Yes. The principal payments are more spread out in the longer loan, but the interest payments are nearly the same.

There are some advantages to this. Your friend can make two principal payments in a month and save the interest on the second payment. This would shorten the loan by a month for only about \$350 now. Towards the end, that would be more like \$900. You would never have been able to pay less than \$500. Note that this assumes that they allow you to pay early.

Even smaller payments can add up over time. For example, paying \$75 extra for five months would probably add up to about a month's principal payment for your friend. The earlier you are in the loan, the more impact extra payments have.

The interest is so high because your friend has about the most expensive loan that he could find. 21% interest is huge. “LendingClub” sounds friendly, but they are bleeding him dry.

Apart from the excessive interest rate, their calculation seems alright. It’s just that 21% of \$30,000 is about \$6,300 a year interest, or \$525 a month.

I’d very very strongly recommend that your friend does one of two things: Find a much cheaper loan (bank, mortgage, remortgage), or save any penny that he can find and use it to pay off the loan quicker. At the going rate he’ll pay over \$30,000 in interest until the loan is repaid, if he can find another \$340 a month it’s repaid twice as fast and he saves \$15,000 in interest.

• lendingclub rates start around 5-6%. If the friend is in the 21% tier for this loan, chances are other lenders will also see him as high risk and charge similarly high rates for an unsecured loan. Mar 2 '21 at 20:17