Thursday, July 12, 2012

Lending Club Loan Amount and Defaults

I have refreshed historical loan data file. All analysis from this date forward is being performed using the latest Lending Club historical loan data file captured on July 1, 2012.

Loan Volume

The chart below shows the percentage of loans issued as a function of loan amount funded and loan length for past three years of loan listings. I made the following observations from this chart and associated data:
  • Lending Club didn't start issuing loans for the amount greater than $25,000 until 2011. I expect default rate to show up much lower for loans with amount greater than $25,000 because such loans haven't aged enough yet.
  • In 2011, 60 month loans for the amount greater than $25,000 were issued almost two-and-a-half times more than those with 36 month term (4.63% for 60 month term versus 1.82% for 36 month term). In 2012, it is no longer true that much more loans are issued for loan amount greater than $25,000 with 60 month term than that with 36 month loans (4.68% for 60 month term versus 4.11% for 36 month term).
  • Lending Club issued 20.8%, 18.08%, and 3.82% of total loans for amount less than $15,000 with 60 month term in 2010, 2011, and 2012 respectively. This downward trend seems to indicate that Lending Club's reliance on partners in originating loans is declining as Lending Club doesn't issue 60 month loans for amount less than $15,975 unless originated through a partner as mentioned in the prospectus [PDF]:
"Notes from $1,000 to $15,975 are only issued with three (3) year terms, unless the loan request comes from a partner that allows borrower members to select the amount and term, which selections will be honored."


Default Rate

The chart below shows the loan status as a function of loan amount funded and loan length since 2007. The bars show actual number of loans with axis on the left. The line shows percentage of total loans with axis on the right. I made the following observations from this chart:
  • It may appear that both 36 month and 60 month loans with loan amount funded greater than $25,000 have very low default. As I mentioned above, Lending Club didn't start issuing such loans until 2011 thus these loans haven't aged enough. As the age of loan has greatest impact on default, I expect these loans will have much higher default with age.
  • It may appear that the default rate profile for both 36 month loans and 60 month loans is similar. We need to be cognizant of fact that none of the 60 month loans have aged to maturity yet as Lending Club introduced them in 2010. Also, the default profile of 36 month loans has loans with full maturity for 2007, 2008 and first two quarters of 2009. The default profile of 36 month loans is more likely to be closer to expected default rate.
  • Loans for very low amounts seem to have higher default rate for both 36 month and 60 month loan terms. Loan amount below $2,000 for 36 month loans and below $5,000 for 60 month loans have exceptionally high default (greater than average plus one standard deviation).
  • Loans for high amount (greater than $24,000) seem to have higher default rate for 36 month loan term. Currently there is no such pattern for 60 month loans. Based on the high percentage of loans with status of In Grace Period, Late, and Performing Payment Plan for higher loan amounts, I expect with aging such 60 month loans will show similar patterns as 36 month loans.


The chart below shows the loan status as a function of loan amount funded for 36 month loans listed in 2009. Why did I select year 2009? Because the loans listed in the first two quarters of 2009 have fully matured and loans from the last two quarters of 2009 are very close to maturity. The defaults for 36 month loans from these quarters provide a very good indication of the default rate we can expect to see in our 36 month loans to full maturity. In this chart, I assumed that the loans that have status of In Grace Period, Late, and Performing Payment Plan are going to be charged off and combined such loans with loan status of Charged Off and Default.
  • Based on average default rate for loans listed in the first two quarters of 2009, we can assume expected default rate to maturity for 36 month loans to be about 16.73% without considering loan credit grades. We need to remember this default rate is number of loans that may default and not the dollar amount lost by lenders. It should be considered as worst case default rate.
  • Even though, the expected default rate to maturity may seem quite high, the loans that go into default at later part of maturity tend to have lower impact on losses to the lenders in dollar terms. When I review the variables associated with loan repayment in historical loan data file, I will be better able to quantify default rate in dollar terms.


Key Takeaways

  • Much more loans of both 36 month and 60 month term are being issued for large loan amounts.
  • Lenders may want to consider avoiding loans for extreme amounts, either very small amounts, i.e. less than $2,000 or very large amounts, i.e. more than $24,000.
  • Default rate to maturity of 16.73% is a reasonable estimate for expected default rate of 36 month loans in the future.
A few P2P lenders and bloggers posted updates on their portfolios, check them out to see real returns from P2P lending platforms:
Always have your stuff when you need it with Dropbox. Send us your email address through Contact Us page for a code that you can use to get 100GB for your Dropbox for three months, free! Only 100 trial invitations expire August 15, 2012.

2 comments:

  1. Here is my update...
    12K Invested, around 600 notes, been invested since march-ish of 2009. Heavy in C, light in B and D. A few A's from my first few months. LendStats has my ROI on all of my 2009 notes at around 4%. All of my 2010 notes at 7.3%, 2011 notes at 8.9%, 2012 notes at 8.9%. I have pretty strict criteria (no defaults ever, <15% DTI, >4500 in income, <20K loan amount, more than 4 years employed, etc.).

    Overall, I think 5-7% is the ACTUAL return from the average diversified portfolio over the lifetime of matured notes. Obviously you can't trust lendingclubs ROI as it includes notes from 3 months and on (and as we all know ROI is crazy high in the first 3-9 months).

    ReplyDelete
    Replies
    1. I am not sure how LendStats calculated ROI but the ROI for 2009 sounds pretty low. The analysis for my post indicated that 2009 loans had charged off rate of 10.92%. What percentage of your 2009 loans defaulted or charged off?

      Delete