Monday, February 04, 2013

Lending Club Borrower's Revolving Credit Utilization, Loan Purpose and Defaults

While reviewing the loan volume with borrower's revolving credit utilization, I became curious to know how the revolving credit utilization of borrowers impact their reasons for borrowing on peer to peer platform. My initial thought was that borrowers with high revolving credit utilization most likely borrow for credit card refinancing purpose.

Loan Purpose

The chart below shows the cumulative loan volume % by loan purpose as a function of borrower's revolving credit line utilization. The findings here don't surprise me. The percentage loan volume for credit card refinancing and debt consolidation purposes is much higher (steepest slope) for borrowers with high revolving credit line utilization. The borrowers with low revolving credit utilization are more likely to borrow for house buying, major purchase, and educational purposes.

Lending Club Loan Volume by Purpose and Borrower's Revolving Credit Line Utilization

Loan Status

The chart below shows the moving average of loan volume by loan status as a function of borrower's revolving credit line utilization. There is not much of a surprise here either. In general, the loan defaults and charged off rise with rising revolving credit line utilization of borrowers. Even though the volume of fully paid loans declines with rising revolving credit line utilization, the volume of fully paid loans appears to be somewhat constant for lower revolving credit line utilization.

Lending Club Loan Volume by Status and Borrower's Revolving Credit Utilization

The chart below is similar to the one above. In this chart, the revolving credit line utilization is divided into buckets. Each bucket (bin) is 10% wide. For example, the first bin includes all loans issued to borrowers who have revolving credit line utilization between 0 and 9.99%. The loans issued to borrowers who have revolving credit line utilization either below 10% or above 90% seem to default much more.

Lending Club Loan Status and Borrower's Revolving Credit Line Utilization

Higher number of loans are fully paid off that were issued to borrowers with revolving credit line utilization below 20%. This observation leads to the question of whether borrowers with low revolving credit line utilization tend to pay off loans early.

The chart below shows the loans that were charged off or fully paid for issued year 2009 through 2012 as function of revolving credit line utilization. The ratio of loans charged off to fully paid appears to be about 7 for borrowers with lower revolving credit line utilization, i.e. such loans are seven times more likely to be paid off early than charged off.

Lending Club 2009-2012 Loan Status and Borrower's Revolving Credit Line Utilization

Another observation worth highlighting is that unlike the earlier chart above, this chart doesn't show that defaults and charged off are higher for loans issued to borrowers with very low revolving credit utilization. The reason of discrepancy may be due to much higher loan volume in recent years that skews the default rate in the earlier chart.

Key Takeaways

  • The borrowers with high revolving credit line utilization are more likely to borrow on Lending Club platform for debt consolidation and credit card refinancing purposes.
  • The default rate of loans rises with rising revolving credit line utilization of the borrowers. In contrast, the loan pay off rate declines with rising revolving credit line utilization of the borrowers.
  • The borrowers with low revolving credit utilization are seven time more likely to pay off loan early than to default on the loan.


2 comments:

  1. Great post.

    This sentence confused me, isn't it pretty much redundant?

    The default rate of loans rises with rising revolving credit line utilization of the borrowers. In contrast, the loan pay off rate declines with rising revolving credit line utilization of the borrowers.

    Loving Peer Cube, hope to see big things from you in the future.

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    Replies
    1. Both statements may appear redundant but I wanted to be explicitly state that while default rate rises, fully paid loans decline with rising revolving credit utilization. In addition to defaults and fully paid status, loans can also have other status of Late, Issued, Current , etc.

      Thanks for encouraging words on PeerCube. Your thoughts on what else can be included on PeerCube are always welcome.

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