Thursday, March 21, 2013

Lending Club Loans Issued Since 2010 - Principal Paid Back and Months of Payment

This post is the last in the series of posts discussing when default of loans start to peak (Part 1, part 2, part 3, and part 4).

Months of Payment

The chart below shows the percentage of 36 month and 60 month loans defaulted as a function of months of payment for loans issued since 2010. By reviewing both 36 month and 60 month loans issued in same time frame, we may be able to better compare such loans. While the default patterns are very similar for first 10 months of payment, the rate of defaults increases rapidly for 60 month loans after 10 months of payment. 50% of defaults for both 36 month and 60 month loans occurred within 8 months or so, the 80% of defaults for 60 month loans occurred within 13 months compared to 15 months for 36 month loans.


Principal Paid Back

Similar chart for Principal paid back is shown below. It is clear from the chart that while 50% of loans of both maturities defaulted within 8 months, the 60 month loans paid back (9%) only half of principal compared to the principal paid back by 36 month loans (18%). Can the 60 month loans that continue to make payment make up for this extra loss in principal with longer repayment duration and/or higher interest rate?


Another interesting observation from above chart is the increasing difference in principal paid back between loans of 36 month and 60 month maturities. For example, the 20% of defaulted 60 month loans paid back 4% of principal little more than half of 7% principal paid back by 20% of defaulted 36 month loans. In comparison, the 80% of defaulted 60 month loans paid back 16% of principal less than half of 37% principal paid back by 80% of defaulted 36 month loans.

The chart below shows the scatter plot of Principal paid back and Months of payment for 36 month and 60 month loans issued since 2010. A second order polynomial trend line is shown on the chart separately for 36 month and 60 month loans. As the principal portion in monthly repayments for 60 month loans is much smaller than that for similar 36 month loans, the increasing difference between principal paid back with months of payment is understandable.


Key Takeaways

  • In the end, the months of payment is much more straightforward method to determine when defaults peak.
  • For 36 month loans, 50% of defaults are expected to occur within 10 months of payment, and 80% of defaults within 20 months. 
  • The default trend for both 36 month and 60 month loans is very similar for first 8 months of payment.

4 comments:

  1. Excellent synthesis of data and graphs, Anil! Thank you once again!

    "Can the 60 month loans that continue to make payment make up for this extra loss in principal with longer repayment duration and/or higher interest rate?"

    Indeed, the search for that answer continues to intrigue me. I lean towards yes, perhaps mostly so for those able/willing to turnover their notes after extracting the majority of the interest.

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    1. Thanks for the encouragement Andrew.

      I am not so sure about your strategy of turning over notes after extracting the majority of interest. It is not a good strategy considering most of the defaults occur early so you are taking much higher default risk if you are buying new loans and selling them within 12-16 months for 36 month loans. In addition to extra duration risk, and inflation/interest rate risk with 60 month loans, I assume 60 month loans are going to have similar profile of most defaults occurring early.

      Actually, I think Sam @P2P_NY may have a better strategy of buying loans from secondary market after they have crossed the excess default risk hump in maturity cycle. Basically, buying notes that have negligible or very low risk.

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    2. "you are taking much higher default risk"

      That strategy does indeed incur a higher risk of loss. I agree that it is a fact. However, the degree of increased loss must be weighed against the increased ROI gained from living on the early to mid portions of the amortization schedule over time.


      "Actually, I think Sam @P2P_NY may have a better strategy of buying loans from secondary market after they have crossed the excess default risk hump in maturity cycle"

      I suppose it depends if your goal is to maximize ROI or minimize loss. There is indeed a lower risk of loss using that strategy. There is also a lower opportunity of gain. It is great for a conservative investor. I used to do that, but stopped a year ago.

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  2. I don't understand why your goal wouldn't be to maximize ROI. Am i confused, or was Anil basically saying that the opposite of Andrew's strategy is better for making money?

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