Author Topic: Loss / Interest Earned percentage.  (Read 5504 times)

J2E

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Loss / Interest Earned percentage.
« on: July 11, 2014, 01:39:01 AM »
Not sure if I'm doing something wrong, but I definitely know I can be doing a lot of things better.  I'm invested in around 1500 notes, most of which are $25, but I moved up to $50 earlier this year.

My charged off rate is 3.2% which doesn't seem too hateful but when I look at my loss / interest per month I'm seeing an average of 17% of my interest lost to charge offs.  My worst month, 75% of my interest disappeared into the wind.  I've not had a month where I've gone negative thankfully. I know this is a factor of the number of charge offs and at what point in their maturity they go sour.

I'm a buy and hold type investor, mainly because I haven't dedicated any time to develop or implement a selling strategy.  I'm an Interest Radar member so I'm sure my best bet is to figure out an auto sell strategy and let it do the work for me as I do with auto investing.  Or possibly better yet, an investment strategy that filters more of these out?

Any  suggestions to offer?

Fred93

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Re: Loss / Interest Earned percentage.
« Reply #1 on: July 11, 2014, 05:45:35 AM »
My charged off rate is 3.2% which doesn't seem too hateful but when I look at my loss / interest per month I'm seeing an average of 17% of my interest lost to charge offs.

Why does this concern you?   

When I use NickelSteamroller to give me overall Lending Club statistics, and I tell it to look at all loans up thru 12/31/2013 (avoiding very recent loans so they don't damage the statistics too much) I see an average interest rate of 14.47% and loss of 5.18% .

Therefore, an investor in this portfolio would have seen 5.18%/14.47% = 36% of his interest go to chargeoffs.  You are doing a lot better than this average, which is a good thing.

This consumer lending stuff involves lots of chargeoffs.  You gotta establish a mental discipline where you accept it.  Otherwise, this is not the right investment for you.


rawraw

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Re: Loss / Interest Earned percentage.
« Reply #2 on: July 11, 2014, 09:41:05 AM »
Charge-offs are just part of the game man.  Like Fred93 said, you just have to get used to it.  But I am currently trying to build a charge off stress test, to see how robust my returns would be under stressed economic periods.

BruiserB

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Loss / Interest Earned percentage.
« Reply #3 on: July 11, 2014, 08:09:25 PM »
My charge offs are roughly 28% of the interest I've earned.  I've had my account for 3 years and have added funds each year.  When I first started I took defaults somewhat personally and had this "how can you not pay me back??? I believed in you!" feeling.  But with time I've gotten over it.  I can freak out that I've lost almost a third of my interest, but my notes are at an average of around 18% so losing about a third of it still leaves me with a 12% return.  Then I look at what CDs pay or the volatility of the stock market and I feel pretty good about having a chunk of my portfolio in Lending Club!


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« Last Edit: July 11, 2014, 08:11:27 PM by BruiserB »

J2E

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Re: Loss / Interest Earned percentage.
« Reply #4 on: July 11, 2014, 08:48:35 PM »
I guess it concerns me because I don't like to see  earned interest eaten up by losses.  Hopefully that concerns everyone.  Now, don't get me wrong, I'm not personally offended when there is a charge off and I understand it's an accepted part of the system.  That all makes sense and I whole hardheartedly accept that as I am investing in the higher risk notes.  What I'm hoping to do is hopefully minimize the losses category.

Options come to my mind include but aren't limited to investing in higher grade notes that may be less likely to default, hone an investment strategy that historically has reduced the % of charge offs that occur, and develop a selling strategy to move the note to someone else.  Possibly a combination of all 3 may be the most effective.  I don't plan on investing in the higher grade notes and I've got my investment filter pretty respectable so perhaps I need to look at a selling strategy.  I'm curious for people who typically do 'limited' selling, do you find it improves your position or the scenario I'm thinking of, you sell more loans at a small to moderate loss but holding them all and having only a handful of them default would come out on top.  Make sense? 

Joleran

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Re: Loss / Interest Earned percentage.
« Reply #5 on: July 11, 2014, 10:32:21 PM »
Options come to my mind include but aren't limited to investing in higher grade notes that may be less likely to default, hone an investment strategy that historically has reduced the % of charge offs that occur, and develop a selling strategy to move the note to someone else.  Possibly a combination of all 3 may be the most effective.  I don't plan on investing in the higher grade notes and I've got my investment filter pretty respectable so perhaps I need to look at a selling strategy.  I'm curious for people who typically do 'limited' selling, do you find it improves your position or the scenario I'm thinking of, you sell more loans at a small to moderate loss but holding them all and having only a handful of them default would come out on top.  Make sense?

Well, the question is, are you mentally challenged or tax challenged?  That is, are you going to irrationally turn down a higher rate of return because it also involves more defaults, or do you shun defaults because you're not able to take advantage of (what is commonly held to be the "correct" way of deducting losses) capital losses, resulting in an actual lower rate of return?

I fully believe in selling notes that look to be going bad, preferably before they actually have a loss, but I'll sell 31+ late for a dollar or two after they've missed two payments in a row too.

J2E

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Re: Loss / Interest Earned percentage.
« Reply #6 on: July 12, 2014, 01:30:05 AM »
Does it have to be OR?  I can't be both?  :P 

I'm not turning down a higher rate of return.  I'm buying the the notes that I think give me a good return, probably better out there, but it is what it is, and I'm taking the defaults as they come in.

The question is, can I do better selling notes that start to go down hill or just sit the selling game out and take the defaults.  What have other people found to be their experience?

If I had to choose, I'm probably tax challenged in that I'd be willing to guess this last tax season, my losses didn't seem to affect my tax return any if at all.  More than likely something I did incorrect, I own that, something I need to get straight this year.

Fred93

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Re: Loss / Interest Earned percentage.
« Reply #7 on: July 12, 2014, 02:33:19 AM »
The question is, can I do better selling notes that start to go down hill or just sit the selling game out and take the defaults.  What have other people found to be their experience?

There has been a lot of speculation and opinion thrown around on this subject, but no one has any good study demonstrating that selling notes on some criteria will improve your returns.

rawraw

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Re: Re: Loss / Interest Earned percentage.
« Reply #8 on: July 12, 2014, 09:26:15 AM »
The question is, can I do better selling notes that start to go down hill or just sit the selling game out and take the defaults.  What have other people found to be their experience?

There has been a lot of speculation and opinion thrown around on this subject, but no one has any good study demonstrating that selling notes on some criteria will improve your returns.
I'm pretty confident that you can use Anil study on FICO  and the average discount I'm able to sell notes consistently to demonstrate that it does help

turing

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Re: Loss / Interest Earned percentage.
« Reply #9 on: July 16, 2014, 03:14:32 PM »
There has been a lot of speculation and opinion thrown around on this subject, but no one has any good study demonstrating that selling notes on some criteria will improve your returns.

A full study on this would be very interesting.  How many cents on the dollar would you get on average if you waited instead of selling?  Selling for anything more than that would be a net positive.

Quick analysis of past LC data shows 1.8% of Fully Paid loans had at least 1 late payment (paid a late payment fee).   Not many Fully Paid loans were late.  So more than likely it is worth it to sell a loan before it defaults.

BruiserB

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Loss / Interest Earned percentage.
« Reply #10 on: July 16, 2014, 04:38:50 PM »
What triggers a late payment fee?  Late beyond the grace period??  I've barely received any late payment fees, so does Lending Club have discretion to waive them....or have most of my late notes defaulted?


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turing

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Re: Loss / Interest Earned percentage.
« Reply #11 on: July 16, 2014, 05:44:25 PM »
What triggers a late payment fee?  Late beyond the grace period??  I've barely received any late payment fees, so does Lending Club have discretion to waive them....or have most of my late notes defaulted?

According to LC fees page they are assessed on 16 days after payment is due.  Basically when grace period is done after 15 days, late fee is assessed.  It is greater of 5% of principal or $15.

A loan that is late but never makes another payment will be assessed a late fee but will never pay it.  If a loan was late once, then got current again, and then defaulted there would be some late payment fee made.

rawraw

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Re: Loss / Interest Earned percentage.
« Reply #12 on: July 16, 2014, 10:38:07 PM »
What triggers a late payment fee?  Late beyond the grace period??  I've barely received any late payment fees, so does Lending Club have discretion to waive them....or have most of my late notes defaulted?

According to LC fees page they are assessed on 16 days after payment is due.  Basically when grace period is done after 15 days, late fee is assessed.  It is greater of 5% of principal or $15.

A loan that is late but never makes another payment will be assessed a late fee but will never pay it.  If a loan was late once, then got current again, and then defaulted there would be some late payment fee made.
BUT if the borrower promises to pay, the fee is waived.  Hence why you see that statement often and the late fees rarely.

BruiserB

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Loss / Interest Earned percentage.
« Reply #13 on: July 16, 2014, 11:04:14 PM »
What triggers a late payment fee?  Late beyond the grace period??  I've barely received any late payment fees, so does Lending Club have discretion to waive them....or have most of my late notes defaulted?

According to LC fees page they are assessed on 16 days after payment is due.  Basically when grace period is done after 15 days, late fee is assessed.  It is greater of 5% of principal or $15.

A loan that is late but never makes another payment will be assessed a late fee but will never pay it.  If a loan was late once, then got current again, and then defaulted there would be some late payment fee made.
BUT if the borrower promises to pay, the fee is waived.  Hence why you see that statement often and the late fees rarely.

I had a feeling they were frequently waiving the fee.  Never really looked too closely at this.  Should probably pay better attention. Interesting that almost no completed loans had ever paid a late fee.  However relatively few loans have "completed" yet.....no 5 year loans have, except any that have paid early and it's unlikely that late payers would then go on to pay off early.  Probably a better statistic would be how many paid off or currently current loans have paid a late fee.



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