In Funding Loans Now

This is how the In Funding Loans Now in the Strategy Shop page works:

  • Every time Interest Radar refreshes the list of in funding loans from LendingClub, the strategies are run to find new matches
  • Initially, the number of matches are shown in this column
  • As you Invest or Discard the loans (see Show Current Listings), this number drops
  • When you’ve decided on all the loans in that strategy, weather invested or discarded or found in your notes.csv file, the column will show zero
  • Next time there is a new batch of fresh loans to invest from LendingClub, you’ll see the loans showing up here again
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Show: Current Listings

After you’ve decided how you want your loans filtered, it’s time to go ahead and put your money to work. In the Analysis screen, you will do that by checking the Current Listings display option.

The list of loans will show you the following information (and you can click the header to sort the list):

  • LoanID: The account number for the loan in LendingClub. You can click this number to see a popup with more detailed information on the loan
  • Age: How long since loan was listed (or the word “new” if listed within the last 48 hours)
  • Grade: LendingClub’s credit grade
  • Interest Rate: Interest rate that will be charged
  • Loan Purpose: The purpose input by the applicant
  • State: The state of residence of the borrower
  • Loan Length: Number of months in the loan term
  • Title: The title of the listing, input by the borrower
  • Total Amount: Total amount requested by the borrower
  • % Funded: How much is already funded by investors, at the time the information was obtained from LendingClub. The list is updated every hour from LendingClub. Sometimes a listing may show as active here, but it’s already 100% funded in LendingClub, due to timing. In that case you won’t be able to invest in that note anymore, and LendingClub will show the message “0 notes added to your portfolio” when you click on the quick invest link (see below)
  • Funding Hype: Interest Radar’s proprietary measure of the speed in which this listing is being funded. The faster the funding, more green arrows up you’ll see. If the funding is going too slow and the loan has a chance of not being 100% funded before expiring, then you’ll see red arrows pointing down. Blank mean average funding rate. This field may indicate to you that other lenders may be considering this a low-risk loan
  • Average Invested: How much in average each investor funded the loan. Sometimes the funding hype may have a distortion: an investor may have put so much money in the loan that it appears like a tens or hundreds of investors are confident on the listing. You can detect this behavior looking at this column. Considering that most investors will put $25, and some wealth or corporate investors may have to put 10 to 50 times that to meet their investment goals, it’s safe to assume an average of up to $1000 considering the mix. If you see an average of more than that, it’s not really a hype of several lenders, but one lender that got really excited about the listing — and that’s not a very rational trend to follow
  • Amount Requested Ratio: The ratio between the amount being requested and the revolving balance as per the credit report. The normal behavior for debt consolidation is to see a number around 1.0 in this field, as we assume the borrower needs the loan to pay off all the credit cards. A percentage too low (less than 0.2) or too high (over 1.5) is an indication that something unusual is going on with the loan (if it’s for debt consolidation purposes)
  • Estimated Loss Rate (Words): Interest Radar will help you analyze the description entered by the borrower, rating the words or sentences that showed in the past that are related to a high loss rate. You can click on the number to see the analysis behind it. More on this subject later
  • Score: The IR01 score assigned to that loan
  • Estimated ROI: The interest rate minus the estimated loss rate of your filter selection, minus the average loss rate for that score range. The table is initially sorted by this column
  • My Investment: This will help you keep track of your decisions in regard to this note:
    • Invest: If you have not taken any action yet, this will be a link to LendingClub’s investment button, so you can add the note to your shopping basket at LendingClub with just a click. You must be logged in to LendingClub before clicking. You can also control how much you want the one-click investment to be; the default is $25 but you can change that in the Quick invest amount below the Current Listings option
    • Added to Order: This means you have already clicked to add the loan to your order in LendingClub. Until you upload your notes.csv file in the My Portfolio page, the confirmation of the investment won’t appear in the column
    • Amount: When you see an amount, say $25, it means your notes.csv file already has this loan already invested
    • Discarded: If you decide this is not a good loan to invest in and click Discard, the link to invest will go away and the word Discarded will show up in this column. You may clear your discarded selection clicking “clear” in the column header

Only the first top 50 loans in the criteria are displayed. You must narrow your search or change the order of the list if you want to see more loans.

Show: Cash Flow

Another powerful tool in the Analysis page is the Cash Flow generator. Just like the Breakdown option, if you choose Cash Flow and run the analysis, Interest Radar will output a simulated cash flow based on the performance of the loans filtered by your selection.

As a cash flow is easier to understand when all the notes have the same term, you can only generate the list if you pick either 36 or 60 months.

The generated cash flow is based on a hypothetical investment of $1000. The output is a table with the actual numbers, a summary table with the results of the analysis, and a chart.

The columns in the table are:

  1. Month: ranging from 1 to the 36 or 60, depending on the filter you provided
  2. Beginning balance: the principal balance at the beginning of the month
  3. Loss %: the percentage of the principal that is lost due to defaults or late payments, i.e., how much principal (of the previous column) is never going to pay again
  4. Accumulated Loss: dollar amount of the principal loss, accumulated until this month
  5. Interest: dollar amount received as interest payment
  6. Amortization: dollar amount received as principal payment
  7. Ending Balance: the principal balance at the end of the month, calculated as: G = B + B x C + F. That amount will be the beginning balance for the next month

In the results box you have the following indicators:

  • IRR: The annualized IRR or the investment
  • Principal loss: Total principal loss as a percentage of the initial investment
  • Total received: Total payments in the course of the 3 or 5 years
  • Yield: Total received divided by the initial investment amount

Finally, the chart will plot a line representing the accumulated loss each month. A dotted line means the loss cannot be determined with accuracy for that period. In the table you’ll see such months with a question mark in the Loss % column. You can decide whether to consider zero loss for the undetermined period, or use the average loss for the determined period, by checking the Assume constant average loss checkbox under the Cash Flow option.

Another option for the cash flow generation is Assume total loss for late loans. When this is checked, every late status is considered 100% loss instead of the predicted loss rate for that status (see the table used for predicting loss in the Loss Rate explanation). If you’re a very conservative investor with a high degree of aversion to defaults, you can use this option to preview a very pessimistic scenario.

Show: Filter Breakdown

The Filter Breakdown option in the Analysis screen is your best friend for understanding how an attribute behaves in a group of loans. Instead of running the filters several times and making notes to understand the effects that an attribute has on the Loss Rate, you can set up your filters, then check the desired attributes you want to test (just like you checked the other filters), select the Filter Breakdown option, and run the analysis.

The trigger to generate a breakdown table for an attribute is simple: at least 2 options in the attribute’s filter must be checked.

If you have a filter with no option checked, you’ll see no breakdown table for that attribute. If you have only one option select, no breakdown either.

The following columns are displayed in each breakdown table:

  • Attribute value: the first column is the filter option segmenting the loans
  • Loan #: Number of loans in the group
  • Loan %: Percentage of loans in the group, out of the universe of accounts being analysed
  • Interest: Average interest rate of the loans in the group
  • Loss %: The loss rate of the loans in that group
  • Loss #: Number of loans in the group that are currently in a late or defaulted status (i.e. that has a Loss Rate different than 0%)
  • ROI: The Interest Rate minus the Loss Rate, i.e., the approximate average return you have over your investment, not considering the effects of the actual cash flow
  • Quick Chart: A visual representation of the Loan % and Loss % columns. The black bars sizes are proportional to the number of loans, and the red bars are proportional to the average loss rate of the loans. The bars with different colors are not proportional to each other, they are only proportional to its own dimension

Sometimes the analysis require you to see the list of attributes in the natural order of the filters, for example, 0 delinquencies first, then 1 delinquency, then 2, and finally 3 or more. But sometimes you’ll want to sort the results by the loss rate, so you can quickly identify which options are reducing your ROI. You have that flexibility and much more:

  • You can click on the column header to sort the tables by that field
  • You can click again to change the order to descending
  • You can also sort the columns using the Sort By dropdown box under Filter Breakdown
  • If you click on the first column the order will be the natural sequence for the attribute values
  • The bars in the Quick Chart will also change order to match the table

Finally, the Breakdown Current Status option will also output a breakdown table with the current status of the loans in the filter, so you can get some details regarding the calculated loss rate.

Monthly Income

Another very important indicator of a debtor’s ability to pay his dues is his income. This may sound obvious, but the entire purpose of a credit score is to determine the ability of a person to pay debt (their creditworthiness), and still the credit score (FICO etc.) doesn’t consider the income of an individual or household. This is simply because the income is not an information that you can find in a credit report.

For you as a creditor, having the chance to analyze the income of the borrower is a very powerful feature. But you have to be careful, as most of the listings in LendingClub are not verified, so the stated monthly salary may be fictional.

Another way of looking at this attribute is what percentage of the income will go to pay the loan installment. Here is a reference matrix, showing how much the installments is based on the term (table 1 is 36 months and table 2 is 60 months) and the loan amount (rows) and interest rate (columns).

36 10% 15% 20% 25%
5000 $161 $173 $186 $199
10000 $323 $347 $372 $398
15000 $484 $520 $557 $596
20000 $645 $693 $743 $795
25000 $807 $867 $929 $994
30000 $968 $1,040 $1,115 $1,193
35000 $1,129 $1,213 $1,301 $1,392
60 10% 15% 20% 25%
5000 $106 $119 $132 $147
10000 $212 $238 $265 $294
15000 $319 $357 $397 $440
20000 $425 $476 $530 $587
25000 $531 $595 $662 $734
30000 $637 $714 $795 $881
35000 $744 $833 $927 $1,027

If the burden of the loan on the borrower’s finances is over 30% of their income, you should start to get worried whether or not they will be able to pay for their daily expenses while at the same time keep up with the debt payments. If that task becomes impossible, it’s mostly certain that the daily expenses will prevail.

Description Level

The description entered by the borrower to request the loan is probably the most debated subject in P2P lending the internet. You can find endless advice about what to avoid in the text: bad spelling, mismatching information, contradictions with the credit report, lack of explanations, low drive to defend the need for money.

But is this based on facts, or just an attempt to be zealous and diligent but only based in intuition and common sense?

Interest Radar’s Description filter can aid you in answering this question. Here is what each value means:

  • None: when the description entered is blank or the length of the text entered is less than 10 characters
  • Short: when the length of the description is 10 or more characters, but less than 400
  • Full: when the length of the description is 400 or more characters

If you’re used to the Quick Chart by now, you can see how the length of the description affects the loss rate with this:

Loss Histogram

Apparently, too much description is a bad sign. As a matter of fact, loans with no description will perform as well or better than the ones with description.

A word of warning though: LendingClub doesn’t include in its public database of loans the answers to questions by borrowers. Only the initial description, and the additions to the description, are shared in the file.

If you don’t feel comfortable lending to a stranger without first reading their story and making sure it has a strong and consistent explanation for the need of money, you can always review the description clicking on the loan number in the Current Listings list before investing.

Loan Purpose

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):

Loss Histogram

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.

Business

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.