It’s been several months since I started investing with Lending Club and there have been some interesting developments recently. Do you want the good news first or the bad news? As the eternal optimist, I’ll start with the good.
One loan has been paid in full – early. I don’t know the circumstances behind the early payoff, perhaps the borrower landed a windfall or just needed the loan to cover a temporary shortfall. They made only 3 payments in the life of the loan, the last one to pay off the balance. I didn’t receive much interest as a result, but it does allow me to relend the money immediately. This was a “B” grade loan, meaning the borrower had pretty good credit. I hope he (or she) is enjoying that new airplane!
Now for the bad news, one borrower is officially late. They have apparently engaged the services of a debt consolidator and are working on a payment plan. They only made a partial payment for October, which is still considered a late payment. Based on the notes in the file, a payment plan has been worked out and it appears they are expected to make the same monthly payments as before. I have a feeling this loan will never be fully repaid since it was taken out in July and already the borrower is in trouble. I should have known better, this is one of the few low grade investments I made. While most of my investments are in the upper credit tiers, B’s on average, this loan was to an “E” credit borrower. As one would expect, poor credit means a poor likelihood of being paid in full. The payments made so far only represent 8% of the total loaned, hopefully they will get closer to 100% before totally defaulting.
Loan defaults are a fact of life for lenders. The higher risk of lending to people with poor credit is offset by charging them higher interest rates, my B grade borrower had a rate of 12.2% compared to 16% for the E credit borrower. Obviously in this circumstance, the rate spread should have been higher! The 30% interest charged by the credit card companies doesn’t seem so steep in light of borrowers who default almost immediately. All I can do is hope for enough “good” loans to offset this one bad investment.
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4 comments:
I have a few loans with Lending Club as well but only made the minimum of $25 to each person.
I am in a similar situation as you are. One person paid early but one is in default right now while the others are on time.
I was told when investing to only invest what you can afford to lose so I am not going to kill myself over that one $25. I hope to have enough invested there to be able to make new loans from the payments that I receive in the future.
All the best on your loans.
I have always held back from participating in this investment. My 25 years in the automobile business taught me a lot about credit risk.
I hope you manage to finally collect the money!
I've also had an "E" loan go bad. The borrower never even made the first payment. Just... Poof. Gone. All others loans are being paid on time, so it's not all bad. Some defaults are to be expected, especially if you dabble in the lower grades. Just keep your notes small and spread the money around.
I've been reading how other people's peer-to-peer loans are going into default too. As you say, defaults are part of the risk equation for lenders. Considering savings accounts are only giving 1.3% APY right now, even with some defaults, I would think you'll still come out ahead. *fingers crossed*
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