Last week I made a horrible confession. I am a greedy investor, or more importantly I WAS a greedy investor when it came to my Lending Club account and investing in peer to peer lending loans. But, I have learned the errors of my ways. I love Lending Club and the idea of earning a great rate of return by investing directly in peer to peer loans of people who need funding and may not otherwise receive it.
So, I’m not giving up on investing in peer to peer lending through Lending Club. I’m trying to be a better loan picker and evaluator. So, here are a few areas that my Lending Club default loans have in common. Maybe by understanding a little more about why these may have defaulted, I can avoid making similar mistakes going forward in the future with new peer to peer loans.
Traits Of My Defaulted Peer To Peer Lending Loans
36 Month Maturities
Every single one of the 12 loans that I have that defaulted have a 36 month length of maturity. This is a little hard to gauge because I started investing in some of these peer to peer loans before Lending Club started offering five year loans.
Very Risky Loans
Almost all of my Lending Club peer to peer loans that defaulted were very risky. In fact, 9 were rated a D, E, F, or G on Lending Club’s A to G scale of risk where A is the loan class for the safest loans with borrowers who have the best credit scores, and G class loans are extremely risky. Six of my defaulted loans were in the D class, two Es, and one F. Surprisingly, three of my defaulted peer to peer loans were listed as C class. Maybe going forward I will only stick with the very safe A and B class Lending Club loans.
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Credit Scores, Credit Utilization, & Home Ownership
Looking back at the defaulted loans and the borrowers’ credit scores, revolving credit utilization, and home ownership, I hope to find more trends. The utilization of the borrowers’ revolving credit lines had a wide range of 14% to 89%. The average was 40% and most fell close to that mark. The credit scores of the defaulting borrowers primarily fell into the Lending Club range of 679-713. Only one loan had a lower credit score, and two had higher credit scores. Home ownership was spread out as well with three renters, seven home owners, and two with ownership statuses that were not listed on their peer to peer loan applications.
The Loans Were Not A Total Loss
I still try and spread my risk out over multiple loans, and I almost always only invest $25 in each peer to peer lending loan. I had eleven $25 investments and one $50 investment in loans that defaulted for a total default of $325 in principle. Luckily, eleven out of the 12 had made some payments on their loans before defaulting and subsequently being charged off (Note: Lending Club makes a distinction between defaulting and a loan being charged off. All 12 of my loans have gone through defaulting and been charged off, never to return or give me my money back).
Ten Defaulters Were Entrepreneurs
I have a soft spot in my heart for entrepreneurs. I’m a firm believer in creating businesses and employing people as one of the primary ways to live the American Dream. So, it is a little crushing to realize that most of my Lending Club losses (10) came from people starting a business, buying a franchise, or expanding their current business. The other two defaulting loans were college education expense related.
It was good to go back and try to dissect where I might have gone wrong with my peer to peer lending loans. I definitely have a game plan going forward with the rest of my peer to peer loans. I’m staying away from the high risk loans, and unfortunately, no more business loans.
What about you? Have you change up an investment this year? Leave a comment below. I’d love to hear from you.
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