Monday, December 10, 2012

Lending Club Borrower's Credit Age and Loan Defaults

In this post, I continue the analysis of borrower's earliest credit line and relationship with loan status. As Lending Club doesn't publish the age of borrower, in this analysis I use the year of earliest credit line, termed credit age, as proxy for borrower's age. I am particularly interested in finding out whether:
  • The finding from past consumer finance research of older borrowers being higher credit risk holds true for peer-to-peer lending platforms, and
  • The borrowers with recent earliest credit line are higher credit risk, as asserted by White Coat Investor in his blog post Peer to Peer Lending Club Update.
Personally, I believe that Lending Club borrowers with earliest credit line several decades old likely to be much higher credit risk. Such borrowers in need for loan with high interest rate are likely to be not very savvy in managing their finances.

Earliest Credit Line and Loan Status

The chart below shows the loan status as a function of the year of earliest credit line. The loans issued to borrowers who started their credit in early 70's or earlier seem to have higher charged off, defaults and late payments. With 40+ years of credit history, these borrowers are likely to be in their late 50's and early 60's.

It may appear from the chart that loans issued to young borrowers who started their credit history in 2007 and later seem to have lower charged off and later payments. Considering that the fully paid loans are also lower for such borrowers, I believe most of these loans were recently issued. Even though I didn't find any explicit statement, I believe Lending Club doesn't issue loans to borrowers who have less than three years of credit history.


The chart below shows the charged off and default loan status as a function of the year of earliest credit line by loan application year 2008 through 2010. The loans issued to borrowers that started their credit history in 1970's or earlier appear to have consistently higher charged off and default status. There is no such pattern for borrowers with recently established credit history.


Credit Age and Loan Status

The chart below shows the loan status as a function of credit age. The pattern of loans issued to borrowers with longest credit history (40+ years) with higher charged off and default loan status, observed in first chart appears to hold. Also, loans issued to borrowers with credit history less than four year old appears to have higher charged off and default loan status.


The chart below shows the charged off and default status as a function of credit for application year 2008 through 2010. While borrowers with long credit history continue to show higher tendency to have loans charged off and defaults, there is no such consistent pattern for borrowers with short credit history.


Key Takeaways

  • The borrowers with long credit history (40+ years) tend to have more loans charged off or defaulted. Risk averse lenders may benefit by avoiding older borrowers.
  • There is no consistent patterns of charged off and defaults with younger borrowers. Lenders may consider taking a cautious approach toward borrowers who have less than four years of credit history.

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