Dissecting My Twelve Loans That Defaulted On Lending Club

by Hank Coleman

Lending Club Passive Income With Automated InvestingLast 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.

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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.

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 homeowners, 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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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 577 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


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{ 12 comments… read them below or add one }

cashflowmantra

Sounds like with the poor economy, the entrepreneurs could not make it. I was surprised by the range of credit utilization. Why would someone with a 14% utilization default? That didn’t make a lot of sense to me unless much more was borrowed after this loan was funded.

Reply

Hank

I am with you about the 14% defaulter. You think that they would have been able to handle the loan. Maybe it was just an outlier in the statistics.

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Peter Renton

Interesting analysis Hank. I would caution making any major decisions based on just 12 defaults. Although the one thing I agree with is that loans for business purposes are more risky than the traditional debt consolidation loans. Doing analysis on Lendstats.com confirms this. It is unfortunate because I like to support entrepreneurs as well but that is the reality in p2p lending.

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Hank

Peter, I love how you say “just” 12 defaults. LOL…I know my sample size is small, but 12 still hurts nevertheless. I picked entrepreneurs more than any other category in the beginning because I am one and believe in it and love being one. I’m an eternal optimist who hopes that small business can persevere. I’ve definitely learned my lesson though and have made moves to be more diversified by loan type. It has been one of my biggest learning experiences so far.

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Henry

Sounds like you had one borrower who did not even make the first payment. While there can be honest reasons for this – sudden job loss, bad accident, heart attack, etc., in many cases this is potential fraud or identity theft. After a borrower gets a big hunk of money things just should not go bad that suddenly. If they do I would expect the borrower to not evade Lending Club emails and voicemails, since there is a legitimate excuse. I have had one and only one first payment default. These and 1 or 2 payment defaults are very suspicious – in my opinion. Again there could be an honest reason, but there is also “Bust Out Fraud”; based on establishing a line of credit with the intent of not paying. Goggle it. I am still happy with LC since I play the probabilities – if 4% or 5% default, honestly or dishonestly – that’s factored into the higher interest rates I receive. If the P2P lender is doing his homework, then the outcome should be good; it is the honest borrower who must pay higher interest rates to make up for the less honest. Good luck in future investing to all of you.

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Hank

Thanks for the advice and luck, Henry. I appreciate it.

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Mike

Just a heads up: limiting your future loans to grades A-C is no guarantee of avoiding defaults. I never loan to anybody for medical expenses, as that is the number one cause of bankruptcy in this country. I’ve also eliminated loaning to anybody in California, Nevada, or Florida. I pretty much limit loans to debt consolidation, zero inquiries, stable employment history, and perfect grammar/spelling in the loan listing and answers to any questions asked. I have experienced borrowers declaring bankruptcy after one or two payments. Definitely some scam artists out there, and I find them difficult to pick out ahead of time. All that said, my returns between my two accounts are right at 10% with over 1000 notes in total. Less than 3% of my total investment portfolio is in Lending Club, and I am not adding any funds at this point in time, and don’t plan to in the future. I believe the risk/reward curve is more appealing in the stock market.

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Hank

Thanks, Mike. While limiting my loans to A-C will not guarantee avoiding default, it will reduce my odds. I’m also going to take your other criteria into count as well. I love the mention of the spelling. That is definitely a red flag.

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Mike

I think you meant to write “take your other criteria into account as well”. Good thing you’re not applying for a loan!

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Hank

Great point, Mike. You’re right. But, I do want you to invest in a loan for my brand new start up. Pay no mind to my credit score, I rent, and have only been at my job for 2 weeks. You in? Just kidding….thanks again for adding to the post!

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P. Scully

By keeping to debt consolidation as an investment strategy you are reasonably sure that you are not facing undue risk.

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Zack Jones

Here’s a crazy idea I think I’m going to try. There are 7 ratings A-G so if I were to pick one in each rating and invest it would cost me $175.00. I just happen to have that sitting in my PayPal account now. I may create an account and loan out my $175 and then sit back and watch what happens.

Reply

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