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Opinions and analysis of Marketplace Lending, Online Lending, and Peer to Peer Lending.

My prosperous Prosper experience

Early Repayment of Loans and Impact on Lenders' Yield at Lending Club

Lending Club Loan Default Rate and Returns: Two Years is a long time in the life of a Loan


It has been quite a while since I published any meaningful analysis of peer to peer lending loan data though I have been doing quite a bit of analysis for PeerCube and other projects. Recently, while communicating with Peter Renton, he mentioned that the published findings from my previous analysis of Lending Club historical loan data are becoming stale. His suggestion gave me the idea to update and refresh these findings.

In last two years a lot has changed in Lending Club underwriting. Peer to peer lending has become much more mature and competitive. Loans are being fully funded within couple of hours compared to weeks two years ago. Overall this market is becoming much more efficient. This post is an update of my previous post Lending Club Data and Default Rate published on May 14, 2012.

Loan Volume

The last analysis used the historical loan data file captured on May 1, 2012. It contained information on 51,768 loans issued between June 2007 and April 2012. The following analysis uses the historical loan data file captured March 20, 2014. It contains information on 267,414 loans issued between June 2007 and March 2014. There is no doubt that the growth of over five-times in issued loan volume over the past two years is spectacular.

Loss Rate

Below are the loss rate estimates by loan status reported by Lending Club in 2012 and 2014. In 2012, Lending Club reported these numbers based on 6 Months loss rate while in 2014, these numbers are reported on the basis of 9 Months loss rate.

Loan Status 2012 6-mo Loss Rate 2014 9-mo Loss Rate
In Grace Period 16% 23%
Late (16-30 days) 23% 49%
Late (31-120 days) 47% 72%
Default (120+ days) 96% 86%

It is interesting that while the loss rate has increased significantly for Grace and Late loans, the loss rate for defaulted loans has declined in past two years. Most likely, these two factors are the causes of this pattern.

  1. Lending Club excludes from loss rate calculations, any loans that paid partially after going into a specific loan status. For example, if Lending Club recovered even $1 from loan that defaulted, it would not be part of loss rate for defaulted loans.

  2. By extending the loss rate period from 6 months to 9 months, Lending Club has longer time period to account for any recoveries on defaulted loans. This extended period negatively impacts Grace and Late loans loss rate as there is longer time period for loans to not have received any payments and going into default.

Default Rate

Two charts below show the percentage of loans with different loan status for loans issued as of May 1, 2012 and March 19, 2014. On percentage basis, the loan volume with different loan status is surprisingly very similar. By 2012, 3.61% of loans were charged off and 15.36% of loans were fully paid off. Similarly by 2014, 3.69% of loans were charged off and 15.62% of loans were fully paid off.

Loan Status for Lending Club Loans as of May 1, 2012

Loan Status for Lending Club Loans as of March 20, 2014

These charts may give the impression that there is not much difference between 2012 and 2014. However, we all are aware of the changes in economic climate and outlook as well as frequent tweaks being made by Lending Club in underwriting rules and criteria and overall operations. In my opinion, the stability of composition of loans with different status may have to do more with exponential growth in loan volume rather than assumption of stagnating environment.

Because Lending Club only provides a snapshot of all loans each day, combining these snapshots from two different days can provide the progression of loans between the two dates. In this case, I got lucky as I have two snapshots almost two years apart. The chart below shows the percentage of loans with different loan status as of March 19, 2014 for the loans issued before May 1, 2012.

Loan Status as of March 20, 2014 for Lending Club Loans issued by May 1, 2012

By March 19, 2014 out of all loans issued before May 1, 2012, 11.48% of loans were charged off and 50.63% of loans were fully paid. Both charged off and fully paid loans tripled within two years.

Returns

While it may be interesting to review default rates, in the end what we care about most is the dollar amount gained or lost. The two charts below show the Total Amount Funded and Loan Payment Expected as of May 1, 2012 and as of March 19, 2014 for Lending Club loans issued before May 1, 2012.

Return of Lending Club Loans as of May 1, 2012

Return of Lending Club Loans as of March 19, 2014 issued before May 1, 2012

The Loan Payment Expected is same as Payment to Date for Loans with Fully Paid and Charged Off status. The Loan Payment Expected for loans with other status takes into consideration Loan Loss Factor, Monthly Payment, and Loan Term in addition to Payment to Date. The cumulative returns can easily be calculated by subtracting Total Amount Funded from Loan Payment Expected and dividing by Total Amount Funded. The cumulative return calculations assume that none of the outstanding loans will prepay. I will try to share my thoughts on prepayment penalty in the future.

The default rate on dollar basis can be estimated by dividing the unpaid amount for defaulted loans by total amount funded. On dollar basis, the default rate was 2.21% in 2012 as of May 1, 2012 and 6.63% as of March 19, 2014 for loans issued before May 1, 2012.

The table below shows the cumulative returns based as of May 1, 2012, and as of March 19, 2014 for loans issued before May 1, 2012:

Loan Status Charged Off Fully Paid Current In Grace Period Late (16-30 days) Late (31-120 days) Total
2012 Cumulative Return % -67.37% 11.07% 19.57% 11.65% -11.93% -38.71% 14.86%
2014 Cumulative Return % -57.05% 15.14% 26.89% 21.56% 8.37% -8.18% 11.10%

The return results from 2012 and 2014 clearly highlight the lesser impact of charged off and fully paid later in life of the loans. Also, as there is smaller amount of principal outstanding for loans with other status, the expected return on such loans is higher than for loans with same status two years prior.

Readers should be aware that these return calculations do not take into consideration the reinvestment. Therefore, their portfolio returns may not be comparable to these returns. The main purpose of this thought exercise is to show the variations in return with the aging of loans.

Key Takeaways

  • It appears the loss rate is still a moving target for Lending Club.
  • Loss rate may depend on the age of the loans.
  • The default rate on dollar basis is much lower than that on loan count basis as some payments are typically made before loans default.
  • The loan defaults and prepayments have lower impact on returns later in the life of the loans.

Note: Due to excessive spam, the commenting ability on this blog has been disabled. Please use PeerCube section on Lend Academy forum for any comments and discussions. We may edit this post to include relevant comments and clarifications.

Are you an asset management firm, hedge fund, financial institution, family office or accredited investor interested in peer to peer lending strategies, portfolio management and risk assessment? PeerCube provides custom analytics services in p2p lending domain. Please contact us to discuss how we can help to meet your needs.

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