Early Repayment of Loans and Impact on Lenders' Yield at Lending Club
Mad Rush at Lending Club Loan Release Time: Part I
Lending Club Loan Listings, Issuance, and Impact on Yield from Non-performing Period
Objective
I am sure you may have heard lot of discussion along the lines “Lending Club takes too long to issue loans” or “while Lending Club is deciding to issue loan, lender commitment to that loan is locked up without earning any return” or something similar.
The objective of this study is to investigate the loans on Lending Club platform that are finally issued after being listed. The findings of this study can help lenders determine the ratio of their investment that may not result in being lent to borrowers and the period for which their investment are non-performing, i.e. not earning return. We also put forward a process to estimate the cost of such non-performing periods and the potential reduction in expected yield.
Data Collection
The loans listed between July 10th and October 2nd, 2013 (about 3 months) were used for this analysis. The loan listing and historical data used for this study was captured by PeerCube. The historical loan data file was downloaded on May 25th, 2014. The historical loan data file was used to determine the loans that were actually issued after being listed between July 10th and October 2nd, 2013 and the performance of those loans.
Loan Listings and Issuance by Credit Grade
Between July 10th and October 2nd, 37,456 loans were listed requesting $560,977,550 in funding, as detected by PeerCube. Table 1 below shows the distribution of listings and associated median interest rate by credit grade. Less than 15% of loans listed carried E to G credit grade. 85% of loans listed carried A to D credit grade. It appears Lending Club continues to focus, source and list high quality grade loans.
| Credit Grade | A | B | C | D | E | F | G | Total |
| Listing Volume | 3,379 | 12,576 | 10,522 | 5,574 | 3,065 | 1,814 | 526 | 37,456 |
| Listing Volume % | 9.02% | 33.58% | 28.09% | 14.88% | 8.18% | 4.84% | 1.40% | 100% |
| Interest Rate (Median) | 7.62% | 11.55% | 15.22% | 18.85% | 21.60% | 24.50% | 25.83% | 14.33% |
Historical loan data file shows 23,938 (63.91%) of loans listed in this period were issued. Table 2 below shows the issued volume and the percentage of listed loans that were finally issued by credit grades. The data clearly shows that over 45% of low quality loans that carry E to G credit grades are never issued.
| Credit Grade | A | B | C | D | E | F | G | Total |
| Issued Volume | 2,344 | 8,571 | 6,767 | 3,327 | 1,710 | 968 | 251 | 23,938 |
| Issued as % of Listing | 69.37% | 68.15% | 64.31% | 59.69% | 55.79% | 53.36% | 47.72% | 63.91% |
Table 3 below shows the number of days Lending Club takes to issue loans after being listed by Credit Grade. Most loans take between 1 and 36 days to be issued with 90% of loans are issued within 15 days of being listed. There is very little variability between the credit grades.
| Credit Grade | A | B | C | D | E | F | G | Total |
| Days to Issue (Median) | 8 | 7 | 7 | 7 | 7 | 7 | 8 | 7 |
| Days to Issue (90 Percentile) | 15 | 15 | 15 | 15 | 15 | 16 | 15 | 15 |
| Days to Issue (Range) | 1 - 33 | 1 - 33 | 1 - 35 | 1 - 32 | 1 - 36 | 1 - 31 | 2 - 27 | 1 - 36 |
Cost of Non-performing Period
Lenders can approximately estimate the cost of non-performing period of their investment by using the interest rate, % of listings not issued, and days to issue.
For example, assuming a lender is investing $10,000 in G grade loans with 25.83% interest rate (median). During the first investment cycle of investing $10,000, because only 47.72% of G grade loans are issued, $5,228 will be returned to lender after 15 days (90 percentile) while $4,772 will be invested after 8 days (median). Based on these numbers, in first investment cycle, lender will miss out on return of:
($5,228 * 15 days + $4,772 * 8 days) * (25.83% / 365 * 100) = (78,420 + 38,176) * 0.0007077 = $82.512
During the second investment cycle, the returned amount $5,228 will be invested. Because only 47.72% of G grade loans are issued, $2,495 will be invested after 8 days and $2,773 will be returned to lender after 15 days. Based on these numbers, in second investment cycle, lender will miss out on return of:
($2,773 * 15 days + $2,495 * 8 days) * (25.83% / 365 * 100) = (41,595 + 19,960) * 0.0007077 = $43.562
Similarly, we can estimate the missed return for third investment cycle and so on.
Similar estimates can be made for other credit grades. Table 4 shows the summary of calculations performed for all credit grades. A shared Google Spreadsheet can be accessed here if you want to play with these numbers. The annual cost of non-performing period can be between 0.31% to 1.73% depending on the credit grade.
| Credit Grade | A | B | C | D | E | F | G | Total |
| Cost for first investment cycle | $21.18 | $30.21 | $41.10 | $52.81 | $62.36 | $75.16 | $82.51 | $38.82 |
| Annual Cost | $30.53 | $44.33 | $63.90 | $88.47 | $111.77 | $140.86 | $172.91 | $60.74 |
Overall, lenders should consider subtracting 0.31% to 1.73% for non-performing periods from their expected yield to arrive at a more realistic yield expectation.
Key Takeaways
- Lending Club continues to focus on listing loans of high quality credit grade.
- Over 45% of low quality loans are never issued after being listed.
- No return during the investment lockup while Lending Club deciding on issuing loans reduces expected yield by 0.31% to 1.73% for the investment portfolio.
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Comments: (1)
- MB | Monday January 5, 2015, 12:57 pm
I've got to say, coming from my normal activities of trading stocks, options, and futures... Lending Club is KILLING me with how slow they are. I put $100 into my account two weeks ago and I'm still waiting for these stupid loans to get "approved." Two weeks of "dead money" is so *NOT* ok for me. I'll stick with this batch and see what happens, but I'm most likely not putting any more cash in. It's just too boring.