If the first filter you’ll always set is the credit grade, so that you have a chance of getting high returns, and the second is the loan length, so you can adjust for how long your money will be committed, probably the third most important filter in LendingClub is the Loan Purpose. Few other filters are so significant.
You can quickly notice how different each purpose performs by looking at the Quick Chart (only loans C through G):
Again, the black bars represent number of loans while red bars represent the loss rate. You can see that there are many purposes in the chart with a low volume of loans but a very high loss rate. And there is Debt Consolidation, the third pair of bars, with the highest number of loans issued and a somewhat low loss rate. And there are some purposes that have an average loss rate that is even smaller than Debt Consolidation, some of which you may find surprising: Credit Card, Car, House Down Payment, and Wedding.
Interest Radar filters indicate the purposes that have higher risk of default with a red text.
Let’s take a look at some of the purposes and see if we can understand how they behave.
Car, House Down Payment
These are interesting purposes for a LendingClub loan, from a credit perspective. Why would a borrower shop for unsecured-grade interest rates to purchase for an asset that is commonly attached as a collateral for a loan? The only explanation is that the mainstream credit industry is turning the borrower down for some reason. For a house we understand what is going on: after 2009, no bank is risking to be in a junior creditor position with real estate as collateral. And the market is offering normally no more than 80% of the closing price of the house. Some people will need additional funds to finance a house. LendingClub is a good option for them.
Cars are a bit different. It’s still relatively easy to get car financing or leasing if you have good credit, with just a small down payment. And a car is the most important asset for an employed person, so the default rate on secured car loans are the lowest in the industry, much lower than even secured mortgage loans (you can always abandon your property and go rent, but in most places you can’t walk or use public transportation to work). Despite all this, statistically, car loans in Lending Club have a comparatively low risk.
Credit Card, Debt Consolidation
One issue we have to deal with is that the borrower sometimes do a poor job filling out their loan request forms. A classic case is the confusion between Credit Card and Debt Consolidation. It’s not clear for them which one is supposed to be selected in what situation. Therefore, it’s almost pointless to differentiate these two purposes when analyzing performance.
Also, almost 70% of all loans are either Credit Card or Debt Consolidation. That means most of your investment will be in these categories.
Unfortunately, small business loans have a terrible track record in LendingClub. Probably the platform isn’t robust enough to allow venture capitalists to understand the business’ chances of success. Or maybe the loans are being taken as a last resource by entrepreneurs that are already on the verge of bankruptcy. LendingClub doesn’t give us much insight into that, as there is no way for us to understand the situation of a debtor after default: whether they filed for bankruptcy, or they deceased, or they just accumulated much more debt.
Wedding, Renewable Energy
At first sight, these purposes appear to be quite lame for a loan request. But turns out that, when the right filters are applied, they show a pretty nice performance.