Monday, August 13, 2012

Lending Club Loan Amount: Defaults for Credit Grade A Loans

The updates on this blog have become less frequent. I am experiencing summer slowdown in my analysis of Lending Club historical loan data. As Mrs. RT is becoming more involved with loan selection, she asked me to automate some aspects of loan selection to reduce the time she needs to spend on filtering loans. I am currently working on implementing the features she requested in our loan selection process, which is taking time away from loan analysis and blog.

36 Month Loans

The chart below shows the loan status for grade A 36 month loans in relation to loan amount buckets since 2007.

We can safely ignore the results for 2007 as less than 100 loans were listed with grade A. Comparing with the financial meltdown of 2008 when most stock markets fell almost 50%, the results for grade A loans issued in 2008 don't look that bad. The worst result of one out of five loans defaulting was for lenders who invested in 36 month grade A loans with loan amount between $15,000 and $19,999. This result can be considered anomaly as only five loans were issued in this loan amount bucket and one of them was charged off. Assuming that loan issued in 2009 took into consideration the 2008 financial meltdown, the results for grade A loan issued in 2008 are not that much different from 2009.

One interesting pattern is that loans with amount below $4,999 have consistently higher charged off and defaults.  For example, there are 1.58% (20 loans) issued in 2011 with loan amount less than $5,000 that are already charged off compared to only 1.18% (27 loans) for next loan amount bucket of $5,000 - $9,999. This trend is puzzling as I didn't observe any patterns in other parameters that provide clue to why highest quality loans with lowest loan amounts have higher default rate.

Another interesting pattern is that the loans with highest amount have higher charged off and defaults. The 2010 loans with loan amount $15,000 have 2.87% (5 loans) loans with charged off status. The loans with loan amount above $25,000 started to be issued since 2011. 2.27% of 2011 loans with loan amount $35,000 is charged off, which is only one loan among total 44 loans issued.

60 Month Loans

The chart below shows the loan status for grade A 60 month loans in relation to loan amount buckets. The 60 month loans started to be issued since 2010.

One observation that right away jumps out is the lack of 60 month loans issued since 2011 with charged off, default and late status. It appears that in first 6 to 18 months, the borrowers of such loans are very diligent in regularly making payments and paying off loans. After 18 months, the percentage of loans with charge off, default, and late status rise significantly and one much higher than comparable 36 month loans.

Key Takeaways

  • Grade A loans with amount less than $4,999 and 36 month term appear to have higher default rate.
  • Lenders may need to keep an eye on the status of highest amount 36 month loans issued with credit grade A for potential charge offs and defaults.
  • Investing in 60 month Grade A loans and selling them off within two years on secondary market may be a good strategy to avoid defaults and late payments.
Help Peter rebrand his blog, vote on the logo for his blog. My favorite logo is the one on the left. This design on left communicates "people oriented" and "peer to peer", "Lend" word shows focus on lending between people, and "Academy" word shows focus on education.

Other logos just look like variation of L and A from Lend Academy word and don't communicate anything more than just Lend Academy. May be after rebranding, he can let me have his current logo or this one if he decides not to use it for his venture. :-)

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