Loan Issued Date
There is no doubt that loan transactions at Lending Club have skyrocketed, almost doubled between 2010 and 2011, as the chart below shows. The bars indicate the number of loans issued in Quarter and straight line across year indicate total number of loans issued in the year. The total number of loans issued to date in 2012 are 11,656 (a digit clipped in the image). High number of loans are positive for the continued viability of Lending Club platform. It also reduces the risk for lenders losing their investment because of Lending Club as a middleman going out of business.
Default Rate and Loan-at-Risk Rate
Too many recently issued loans (44,913 loans since 2010) and not enough aged loans (6,529 loans prior to 2010) in historical loan database create a challenge in calculating default rate. As the recent loans haven't aged enough, currently these loans most likely will have much fewer charged off, defaults, in grace period, late and performing payment plans (bad outcome). The high percentage (87.3%) of recent loans in analysis will underestimate the loan population default rate.
As the chart below shows, the average annual default rate, if only counting Charged Off and Default status is 8.74%, much higher than the 3.64% calculated in my previous post Lending Club Data and Default Rate for the whole population of loans. The average annual default, using my definition for default rate, is 10.29% much higher than the 5.85% calculated in my previous post. Going forward, lets call the average default rate calculated using my definition as Loan-at-risk Rate to better differentiate from the other default rate. For aged loans, those issued in 2009 and earlier, the default rate is much higher than average and most likely the true representation of default risk on performance of loans to maturity.
The bars for each status have their own independent scale for % of total loans (Y-axis). The bars for all status for a particular year (vertically) add up to 100%. The straight horizontal line across the bars show the annualized average for last six years. The shaded band shows +/- 1 standard deviation from average.
One way to interpret this data is that, for example, on average you can expect to have 8.73% of loans in Charged Off and Default status with the uncertainty that this percentage could be as low as 1.35% and as high as 16.11%. Another way to interpret is that, for example, on average the probability of a loan to be Charged Off and Default is 8.73%.
The probability of a loan in Charged Off and Default status rise as age of the loan increases. Both on annual and quarterly basis, the age of loan is found to have very significant effect (p < 0.0001) on probability of loan with Charged Off and Default status. For mathematically minded,
Probability of Loan with Charged Off and Default status (%) = 0.0103481 * Quarters since Loan Issued - 0.0127628
Key Takeaways
The analysis of loan status with respect to loan issued date suggests three takeaways from my perspective. Please feel free to share your insights in comments.
- The Lending Club loans have higher default rate, i.e. higher risk on annualized basis than most of the "popular" opinion. The wisdom of the crowd doesn't necessarily overcomes the advantage of extensive background information available to commercial banks.
- In order to assess the real performance of your loan portfolio on Lending Club, only consider seasoned loans.
- In addition to diversification across lots of loans, selling loans on the secondary market before maturity is a potential way to reduce the impact of loan default risk on portfolio.
Brady at Lucrative Lending recently discussed investing in P2P lending while in debt. He has great advice, check it out. Personally I believe you should only be a P2P lender once you have built a solid financial foundation. Considering the evolving state of P2P lending, you should consider investing in P2P lending only a small fraction of your funds allocated to Junk Bond or high risk assets.
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