Monday, June 04, 2012

Days Between Listing and Issuance of Lending Club Loans - Rush at Listing Expiration

Coat-tailing Strategy

Some P2P lending investment strategies may rely on the percentage of loan amount already funded or number of lenders already committed or average funding per lender in a loan. I agree with the basic premise of coat-tailing on commitment of someone else or institutional money as a qualifying criteria. However, I suspect that such strategies predominantly will select loans that are late in their funding cycle and listings near expiration. This will be especially true for investors who review and select loans infrequently. Such investors, including myself, may miss out attractive loans that get funded very quickly.

Is there a right time to review loans in their funding cycle on Lending Club? I started out today's analysis with this question. As I mentioned in my previous post Lending Club Loan Application Date - When to Invest?, I switched my note selection day from Tuesday to Wednesday night as majority of new loans seem to be listed early in the week. But this schedule change means catching loan listings near expiration. Are the loans funded and issued quickly more desirable from defaults perspective?

Days between Loan Application and Issued Dates

Though Lending Club provides information on amount and number of lenders already committed to a loan during notes selection for new loans, it doesn't provide such details in historical loans data file. Thus a direct analysis using such parameters is not feasible. The days between the loan listing date and loan issued date may serve as a close proxy for lender interest in loans.

Loan Volume

The chart below shows the loan volume with number of days between when loan was listed and when loan was issued. Originally, I was surprised to see a few loans issued up to five days before they were listed on the platform. After reading comment "I invested a significant amount of my own money to fund the first loans on the platform" by Lending Club CEO in Finovate interview, such loans no longer seem surprising as most start-ups in their early days need to be creative to generate demand and show traction. Still, this is an interesting observation that needed to be highlighted as such loans were issued in early 2009.

The issuance of loans can take as long as 36 days after being listed on the platform though most get issued within 21 days. The period between listing and issuance has been lengthening year over year, from 21 days in 2007 to 36 days in 2012. I'm guessing its because of Lending Club staff is not able to keep up with the tremendous growth in loan volume.

Some loans are issued within couple of days after being listed. These loans might be funded by or reserved for institutional investors, LC Advisors, and PRIME account holders. Someone needs to have inside access at Lending Club for such a quick turnaround. Such borrowers might also be fully-vetted before loans being listed on the platform.

Two separate peaks are visible in the chart, one at 7 days and another one at 14 days. Most loans took either 3 to 11 days or 13 to 15 days between listing and issue. The former group most likely contains desirable loans. The later group appears to be right about the time when loan listing expires. The later group may be result of everybody rushing into fund at the last moment. Also, by the time loan listing expires, most borrowers are fully-vetted so turnaround time for issuing loan may be shorter. I suspect the former group of loans to have lower defaults than the later group.

Default Rate

The chart below shows the percentage of loans with Charged Off and Default status with the number of days between loan listing and loan issued date. One observation right away stands out - the loans issued within a day of listing have higher than average default - so much for "insider" advantage!

As the number of days increase between loan listing and loan issue, the default rate increases, peaking just after expiration of loan listing. It appears a lot fewer loans issued within 10 days of listing have charged off and default status compared to the ones issued at near or after listing expiration.

The chart below showing default rates for interest rate bins separately confirms the above observation. The percentage of loans with charged-off and default status is higher near and after loan listings expiration for most interest rate bins. See my previous post Lending Club Loan Interest Rate and Return - Do Defaults Matter? for explanation of interest rate bin.

Key Takeaways

  1. A coat-tailing strategy to select loans for investment may be a viable strategy as long as the selected loans are not near listing expiration.
  2. Default rate can potentially be reduced by selecting loans that are being funded very fast and soon after being listed on Lending Club platform. From default perspective, loans issued earlier in their funding cycle are more desirable. But it is better to stay away from loans that are issued within a day of listing.
  3. This analysis still doesn't help with choosing the right time to select loans as lenders don't have influence on when loans are issued.

Recently Caron Beesley wrote a very good article P2P Lending and Crowdfunding - Explore the New Frontier for Small Business Lending with good suggestions for borrowers planning to start a small business. I frequently notice on Lending Club that business borrowers don't provide sufficient information about business. Borrowers will have much better chance of getting funded if you tell lenders your story and share your achievements and progress to date.

--- Promotion ---


  1. Very interesting and timely. I have ben working on a blog post that touches on some of these things. I am curious to know about the trends in this data. Would the default rate chart have shown the same tendency six months or twelve months ago? The other key point that you didn't mention is how long it takes between a loan being fully funded and it issuing - I don't think we even have that data. Still it is very interesting analysis and I will mention it in my blog post.

    One point that should be noted. You mention about quick funding loans that these may be reserved for the institutional investors. This is not true. There are very strict rules in place that govern PRIME accounts as well as the LC Advisor funds (which holds most of the institutional money) and how much they can invest in each loan. So, a quick funding loan would not be due to that. More likely these are people who have promoted their loan to friends and family or have smaller loan amounts which will fund much more quickly.

  2. Peter, thanks for the comment. Let me know if you need any chart for your post. I am concerned about posting default rates with time as such chart misrepresents the actual default rate. The age of loans has much larger impact on default rate that any other factor.

    I guess the quick funding loan is another data point why it is better to lend to strangers than family and friends. :-) I am still bewildered how LC can list and issue loans within a day.

    Yes, the stats file doesn't have data on when a loan listing was fully funded that's why I used days between listing and issued as proxy for this analysis. I had no success in getting old stat files from Lending Club. I am thinking of writing a post requesting readers if they can provide me old stats files and also old Browse Notes files for analysis. I think there is lot more insight to be gained from time-series analysis versus point in time snapshot analysis as I am doing.

  3. Your chart seems to indicate that loans with an 18% to 20% interest rate only have a 2.4% default rate. How is this possible?