I was wondering how much help higher interest rates will be in offsetting the degraded loan quality.

The following table provides an interesting look at cumulative charge off rate versus interest rate.

The numbers look reasonable but I really didn't know what to expect.

LC forecasts "D grade" loans to have a future cumulative charge off rate of 15.1%.

That's an average and isn't broken down by subgrade that I have found.

Rates comparison now and two years ago:

Int Rate Int Rate

Subgrade Today Nov 2014

---- ---------- -----------

D1 16.99% 15.59%

D2 17.99% 15.99%

D3 18.99% 16.49%

D4 19.99% 17.14%

D5 21.49% 17.86%

The current interest rates at a cumulative charge off rate of 15% put annualized returns in the +5.07% to +9.72% range.

Should the cumulative charge off rate rise to 19% those returns drop to the 1.88% to 6.45% range. That would be a very big increase.

Break even starts at a cumulative annual charge off rate of 21%.

At its worst in 2008 cumulative charge offs for D loans was 23%. F loans reached 33%.

However, we all know that there is nothing constant about D or F except the letter so comparisons are difficult.

For the same cumulative charge off rate of 15% the annualized returns given the Nov 2014 interest rates is in the 4% to 6% range.

At 19% charge offs the 2014 interest rates return break even to 2.79%.