Monday, July 23, 2012

Lending Club Loan Amount: Default of Loans with 8% and higher Interest Rates

This post is continuation of my analysis of loan amount for different interest rate bucket from previous post Lending Club Loan Amount: Defaults for Loans with <8% Interest Rate.

8 - 9.99% Interest Rate

The chart below shows the loan status for different loan amount bins at 8% interest rate bucket (contains loans with interest rate of 8% and higher but below 10%). The left axis and stars show the actual number of loans. The right axis and bars show the percentage of loans. The 36 month loans are separated from 60 month loans. The loans listed before 2009 are excluded from this analysis.

I keep on being amazed that, at lower interest rate, there is no trend between loan amount and default rate. I had expected to see trend of rising defaults with rising loan amount for the same interest rate bucket. The 36 month loans listed in 2009 do show the rising default on percentage basis with loan amount; however the number of loans in this interest rate bucket is so few for results to be meaningful.

As with the 6% interest rate bucket discussed in the last post, what stands out right away in this chart is that there are no 60 month loans with charged off, default, late and in grace period status that were listed in 2011 and after. The default rate for 60 month loans listed in 2010 is comparable or worse than 36 month loans issued during the same time period. This may indicate that 60 month loans take 18 months or more before defaults and late payments start to occur.


10 - 11.99% Interest Rate

The chart below is similar to the one above for loans with interest rate of 10% and higher and below 12%.

Finally, the expectation of rising default with loan amount for the same interest rate bucket have started to materialize. Except for very small loan amount, the default of loans in 10% interest rate bucket appears to be rising with rising loan amount. So, it appears that default of loans with less than 10% interest rate may be driven by factors other than borrower's inability of making regular monthly payments.

Another notable change in pattern found in this interest rate bucket is the appearance of 60 months loans listed in 2011 with loan status of charged off, default, late, and in grace period. The default rate of 60 month loans is comparable or worse than that of 36 month loans listed during the same time frame. It appears that  the 10% interest rate is the magic threshold beyond which the monthly payments start to impact the borrower's ability of making regular monthly payments.


12 - 25.99% Interest Rate

As the patterns for different interest rate buckets for 12% interest rate and higher are very similar, I decided to combine all the buckets for interest rate 12% and higher. The chart below shows the loan status of different loan amount for interest rate buckets with 12% interest rate and higher.


If any reader is interested in a particular interest rate bucket, please comment below and I will post the chart in my future blog posts. The table below also shows (click on the image to zoom) the number loans with different status for different loan amount buckets and interest rate buckets, separately for 36 months and 60 months loans.


Takeaways

  • Similar to previously discussed 4% and 6% interest rate buckets, there is no trend of rising default of loans with loan amount for loans of 8% interest rate bucket. Only beyond 10% interest rate, the larger the loan amount, higher the default of loans.
  • Purchasing new 60 month loans in 8% interest rate bucket and selling them off at par or at premium within 18 months on secondary market may be a potential interest harvesting strategy. Of course, impact of transactions fees need to be considered to assess viability of such strategy.

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