+ Most successful under $50 per loan
+ LC collects 1% of payments (0.7% red in NAR)
+ As for Lending Club, they say the best and most stable rate of return comes from a portfolio of 800 notes ($20,000 at $25 apiece).
2009 cohort analysis:
– $47M of funded loans, 4700 loans
– 10% of loans by value written off to date, $4.8M of loan value
– Simple interest to date of $10.5M, average of 10.6% per year
– Net return to 12/31/2011 of 5.9%
Loan purpose analysis:
– Do not invest in (1) education, (2) small business, or (3) renewable energy. By loan purpose, these are the top 3 defaulting categories (15%, 12%, and 9.55% default rate, respectively). For some reason, these loans have not panned out over time. Granted education and renewable energy has small sample size bias (400 total loans to date).
– Safest categories: credit card, home improvement, car, wedding, major purchase, and debt consolidation. All have current / fully paid rates between 94-96%.
EB analysis and strategy:
+ NS hammered in aftermarket note pickup
Well, based on some pretty basic analysis, I determined that D-rated paper had the highest return with the lowest default rate out of every grade offered. So I’ve gone heavier into D-rated paper over the past year. I still buy other grades (the only grades I will not buy are A and B because the return just isn’t worth the risk IMO), but I concentrate on the D paper. In fact, I might as well just show you guys my secret sauce:
Here is my criteria for investing in Lending Club loans:
• Loan amount $5,000 or less
• 36-month term
• No derogatories (late or missed payments) on borrower’s credit for previous 24 months
• Loan payment represents less than 10% of borrower’s gross monthly income
• Loan purpose is debt consolidation and loan amount must represent 80%+ of borrower’s total revolving debt (in other words, I want the money I’m loaning him/her to clear their debt load – I won’t lend someone $5,000 if they have $25,000 in credit card debt)
• Just so there’s no confusion, I’m not loaning anyone $5,000 – I only invest $25 per note
• It is my belief that people are more reluctant to default on a smaller loan amount ($5,000) than they are a larger loan amount ($35,000)
• I dump the loan at the first sign of trouble. To my way of thinking, there is absolutely no excuse for a late or missed payment when you owe me money.
FL analysis and strategy:
– Average non-performing loan rate in Lending Club: 6.4% (e.g. 6.4% of loans at time of data pull were in default, late, grace, etc. This was by # of loans, not $ of principal value or balance outstanding)
– D, E, and F rated loans showed similar risk – non-performing loans were 10.3%, 9.9%, and 10.4% of loans issued. Assuming the sample is reliable, the lower rated F loans likely have better risk-adj return than slightly better rated loans.
– Loans for education and small business have high risk. Education loans showed 16.7% non-performance, or 2.6 times more likely to be at risk. Small business loans were at 13.4%, double the portfolio average. Surprisingly, car loans had lowest non-performance at 3.8%, or almost half the portfolio average. Credit card and debt consolidation loans were slightly below average at 4.6% and 6.3%.
– Size matters – interestingly enough, loans funded for smaller amounts were more likely to default. Loans under $4000 had non-performance rate of 7.3%, whereas loans funded at $5000+ were in line with portfolio average.
– Mortgage is good – borrowers who had a mortgage had lower non-performance at 5.3% vs renters and home owners at 7.4% and 7.5%, respectively.
– Debt burden – if loan amount was less than 15% of the borrowers reported income, non-performance rate was 5.4%, debt burden above 15% increased non-performance to 7.4%, Obviously those with debt burdens greater than 25% of their income have limited ability to repay.
– Rich people = low risk- a bit of a no duh stat, but borrowers with incomes greater than 80K a year showed lower credit risk than those with low income.
– Credit score – such an obvious metric. High credit score did result in low credit risk. Above 700 credit score reduces credit risk to 4.5%, or 30% less than portfolio average.