Thursday, July 19, 2012

Lending Club Loan Amount: Defaults for Loans with < 8% Interest Rate


Charged Off and Defaults

The chart below shows the percentage of loans with status of charged off, default, late, in grace period, and performing payment plan (size of red dot) for loans listed in 2010, the earliest year when 60 month loans were issued. I made the following observations:
  • In general compared to 36 month loans, higher percentage of 60 month loans have status of charged off, default, late, in grace period, and performing payment plan.
  • There is no discernible pattern of loan status with respect to loan amount and interest rate.


As we can see from above chart analyzing loans for loan status with all combinations of loan amount funded and interest rate can become quite unwieldy. Similar to previous post Lending Club Loan Amount and Interest Rate, I'll analyze data by small chunks. The following analysis divides the loan amount funded into $5,000 buckets (8 buckets or bins) and the interest rate into 2% buckets (11 buckets or bins). The analysis is only performed for loans listed in 2010 and after.

4 - 5.99% Interest Rate

The chart below shows the loan status for different loan amount bins in 4% interest rate bucket (contains loans with less than 6% interest rate). 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.

What stands out right away in the chart is that, for 36 month loans listed in 2010, there were no charged off and defaults and only one loan in grace period and one loan 31 - 120 days late in payment. Overall, 36 month loans in this bucket appears to have much lower defaults, especially for loan amount less than $20,000.

A definite conclusion can't be made for 36 month loans with amount higher than $20,000 and for 60 month loans due to smaller number of loans. No new 60 month loans have been issued since the beginning of 2011 with interest rate less than 6%.


6 - 7.99% Interest Rate

The chart below is similarly drawn as the one above but for the loans with interest rate of 6% and greater but below 8%. The loans listed before 2010 are excluded from the analysis for clarity, unusual financial events, and changes in Lending Club underwriting process. I made the following observations:
  • For 36 month loans, the charged off and defaults for loan amount less than $5,000 is higher than loans for greater amount. Supposedly, the loans with low interest rates are issued to higher creditworthy borrowers. The default rate for such loans seem to indicate impending unusual change in their financial situation rather than to their ability to payback unsecured loans.
  • The charged off and defaults are declining as the loan amount is rising for 60 month loans. There are no charged off and defaults for 60 month loans listed in 2010 for amount greater than $15,000. This trend seems to give credence to my theory, put forward in previous post Lending Club Loan Length: Best 60 month spread with B4 Grade Loan, that longer length loans for smaller amounts are being issued to meet the lower monthly payment requirement of the borrowers. When I review loan purpose and revolving credit balance in the future, I expect to find much more loans issued in this category for purposes other than debt consolidation or for loan amount less than the revolving credit balance.
  • Another interesting observation in this interest rate group is that while some of the 36 month loans listed in 2011 have status of charged off, default, in grace period, or late in payment, none of the 60 month loans listed in 2011 have such status. All 60 month loans listed in 2011 are either Fully Paid or Current. This is highly unusual and remains to be seen whether 2011 vintage 60 month loans similar to such 2010 vintage loans.


Key Takeaways

  • Borrowing small amounts by high creditworthy borrowers may signal the impending change in financial situation of the borrowers.
  • All 60 month low interest rate loans of 2011 vintage with either Fully Paid or Current status is very unusual. Are 60 month loans with low interest rate at higher loan amount better deal? I can not answer this question until I see at least another year of performance for such loans.

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