Loan LengthLending Club issues loans with two different maturity lengths - 36 months (3 years) and 60 months (5 years). The loans with 60 month term were first introduced to Lending Club platform in May 2010, a little over two years ago. In 2011, the loans with 60 months term became very popular as more than 50% of the loans listed on Lending Club had 60 month loan repayment term. The chart below shows the number of loans listed every quarter with 36 and 60 month terms. It appears fewer loans with 60 month term are being listed in 2012.
Default RateThe chart below shows the percentages of loan with 36 and 60 month terms in either charged-off and default status or in grace period, late and performing payment plan status. As the chart shows, the charged-off and default rate for 60 month term loan is almost twice the default rate for 36 month term loan for the same quarter of loan listing date.
Originally, I assumed that fewer borrowers may default with longer maturity of loan as borrowers will have smaller monthly payment. The chart shows this not to be the case. In fact, the borrowers are twice as likely to default with loans of longer maturity.
This observation is inline with Michael's real-life experience of much higher default rate with 60 month notes as described in his blog post Balancing Your Portfolio by Loan Term - 36/60 Month. A quick back-of-the envelope calculation for his portfolio default and late payment rate is shown below. It will also help some readers who requested examples of using default rates.
Assuming Michael has portfolio of 100 notes with 76% of portfolio in 60 month notes and all notes were listed in second quarter of 2010.
Number of 60 month notes in portfolio = 76% * 100 = 76From the above chart, the default rates for 36 month and 60 month notes are 6.24% and 11.45% respectively. Similarly, the late payment rates are 3.36% and 3.61% respectively.
Number of 36 month notes in portfolio = 100 - 76 = 24
Default and late payment rate for 36 mo. notes = 6.24% + 3.36% = 9.60%Michael reported 95% of his notes in default or late are 60 month notes. Considering our assumptions of all notes issued in same quarter, we came up pretty close with 83.2% of notes in default or late should be 60 month notes.
Default and late payment rate for 60 mo. notes = 11.45% + 3.61% = 15.06%
Number of 36 mo. notes in default or late = 9.60% * 24 = 2.304
Number of 60 mo. notes in default or late = 15.06% * 76 = 11.4456
Percentage of notes in default or late that are 60 mo. notes = 11.4456 / (2.304 + 11.4456) = 83.2%
Days between Loan Listing and Issued DateThe chart below shows the number of loans issued as function of days between loan listing and issued date between 2010 and 2012 for both 36 month term and 60 month term.
The chart below shows the percentage of loans with status charged-off and default or in grace period, late, and performing payment plan for both 36 month term loans and 60 month term loans for 2010 and 2011. The default rate for 36 month term loan is much higher when such loans were issued about 3 weeks after being listed. The default rate for 36 month term loans rises when it takes longer to issue loans after being listed. The default rate for 60 month term loan shows very different pattern. The 60 month term loans issued within four days of listing have much higher default rate.
- Reducing the monthly repayment amount by lengthening the loan maturity doesn't reduce the risk of borrower default. In fact, the borrowers are more likely to default with longer maturity debt.
- The coat-tailing strategy, described in my previous post Days Between Listing and Issuance of Lending Club Loans - Rush at Listing Expiration, may be a good strategy to invest in 36 month notes.
- Personally, I have stopped investing in 60 month notes until I further understand the mechanics of setting interest rates for such loans and able to observe the default rate of 60 month loans to maturity.
Interested in Data Visualization, check out The Visual Display of Quantitative Information and New Perspectives on Microsoft Excel 2010: Comprehensive.