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Lending Club Discussion => Investors - LC => Topic started by: jasondhsd on January 19, 2017, 12:30:25 AM

Title: What loan purpose to avoid?
Post by: jasondhsd on January 19, 2017, 12:30:25 AM
I noticed a lot of my charge offs and late payers have been 'debt consolidation' loans so I've nixed that off the list.  What other things in that list should I filter out?  Somehow I read somewhere that it was best of avoid giving loans for purchases like cars, home improvement, wedding, etc and to give loans to people looking to get out of debt rather than get into debt.  However I think that advice was bullshit now as the people who are trying to get out a debt are mostly deadbeat losers, where people wanting to upgrade their kitchen or go on a nice vacation probably are hard workers that just don't want to drain their account in one swoop.
Title: Re: What loan purpose to avoid?
Post by: fliphusker on January 19, 2017, 01:10:34 AM
First, question, did you do backtesting at NSR before you started investing with LC?
Second, do you have a large percentage of your portfolio in debt consolidation?  This may skew your numbers. 

While I was investing in the primary market, I bought only debt consolidation and CC refinancing.  It was because that is what I got out of my backtesting and articles I had read. 
Having other good filters is important IMO.  Unfortunately others are currently seeing a spike in defaults as well.  Is it a cycle or a trend?
Title: Re: What loan purpose to avoid?
Post by: nonattender on January 19, 2017, 01:31:52 AM
0)  It's a numbers game.  Any (stated) "purpose" can be profitable, in the aggregate, if the underwriting is right.  (My mind flashes to Rodney Dangerfield in 'Back to School':  "If the roast beef is right, they'll be back.")

1)  On "bullshit" (and thank you for using my favorite technical term of art) - and keeping in mind Rule Zero - it's not necessarily bullshit advice, but it's not necessarily correct advice, either.  I believe your intuition is generally correct, from a behavioural finance perspective, but, at the same time, I think you've got to accept the nature of the game and that most people who borrow money don't think like you - otherwise they probably wouldn't be borrowing money (paying more now to do something for which they've not yet earned the money).

2)  "Deadbeat losers" is a bit harsh (and this coming from someone who loves to say unpopular, but true, things).  A lot of people don't think longterm.  Most people wind up living beyond their means by stacking up a whole bunch of "affordable monthly payments" - some come to realize that that's a great way to become an indentured servant to one's credit card company and then look for a way out of it; that's to be applauded, not derided.  Yeah, they screwed up.  But providing them a lower rate way to fix it - and make a buck - is nice...

(Risky business, to be sure, but "nice" if it's done "right".)

Anyway, you're beginning to think about the underlying mechanics, that's good; just be a bit careful with the sweeping generalizations.

This game is much more complicated than just picking one datapoint ("loan purpose") to blame for being stiffed.  Ask better questions...

In some ways, lending people money without doing diligence - and then getting mad - is similar to just accepting 'affordable payments'.

So......... there ya go.
Title: Re: What loan purpose to avoid?
Post by: bkcarolina on January 19, 2017, 04:31:43 PM
I have an almost opposite philosophy, and my NAR is at the top of the charts with an average portfolio age of 29.4 months. I figure people trying to refinance crazy credit card debt are the more responsible ones, where those looking to buy a car at the rates LC offers are either not eligible to get a more reasonable rate somewhere else (since car loans can be secured by the auto) or just don't know how the whole system works, so if they're not savvy about that, I don't want to loan them money.

The vast majority of the loans here seem to be for refinancing debt, so of course most of the charge-offs will be too.

It's probably the other filters you should concentrate on.

But FWIW the categories I never invest in are auto loans, medical expenses (walking away from medical obligations is just too ingrained in our culture), mortgage financing help, and "other" since that's just too sketchy in general.
Title: Re: What loan purpose to avoid?
Post by: Paulie2083 on January 21, 2017, 12:02:07 AM
I noticed a lot of my charge offs and late payers have been 'debt consolidation' loans so I've nixed that off the list.  What other things in that list should I filter out?  Somehow I read somewhere that it was best of avoid giving loans for purchases like cars, home improvement, wedding, etc and to give loans to people looking to get out of debt rather than get into debt.  However I think that advice was bullshit now as the people who are trying to get out a debt are mostly deadbeat losers, where people wanting to upgrade their kitchen or go on a nice vacation probably are hard workers that just don't want to drain their account in one swoop.

the only purpose i would advise anyone to stay away from are small business loans. Keep in mind that 50% of  small businesses fail within the first 2 years. Citation definitely needed but if you look at the backtesting the numbers aren't pretty.
Title: Re: What loan purpose to avoid?
Post by: neals384 on February 03, 2017, 08:25:49 AM
Vacation loans.  Not because of returns, but simply a moral judgement on my part.  If you can't pay for your own vacation, don't expect me to finance it.
Title: Re: What loan purpose to avoid?
Post by: rawraw on February 03, 2017, 08:21:31 PM
Vacation loans.  Not because of returns, but simply a moral judgement on my part.  If you can't pay for your own vacation, don't expect me to finance it.
So you'd rather finance someone who didn't have the foresight to take a loan out to pay for it, and instead ran up a credit card bill?  I've never understood this opinion, but it comes up quite frequently.  I'd rather lend to someone who took out the installment loan first and not the credit card.   "debt consolidation" translates to "paying off previous friviuous spending at high interest rate at a lower interest rate" most of the time
Title: Re: What loan purpose to avoid?
Post by: fliphusker on February 04, 2017, 01:47:40 PM
Vacation loans.  Not because of returns, but simply a moral judgement on my part.  If you can't pay for your own vacation, don't expect me to finance it.
Do not let your personal bias get in the way of proven backtesting. 
Why help consolidate debt?  Most of these people are buried in credit card debt.  If they are too irresponsible with CC why would they not be with a loan?
Credit cards, read above.
Car loans have to be cheaper elsewhere.  Why come to LC?
House, read above with car loans.
Small business better rates elsewhere for them.  (Bad backtesting anyway.)
Other, that is so risky, they could be going to Vegas to bet it on black.
Major purchase, what could be so big that they need a $35k loan for?
Home improvement, why pay an unsecured loan back as you just pumped $35k equity into your home?  You are not going to sell your home anyway.
So that leaves a 2 others.
Medical, I absolutely get it.
Moving, better job but can not afford to move to it.

This really limits your investment options.  And yes, I thought the same exact thing with vacations.  :)
Title: Re: What loan purpose to avoid?
Post by: gumbo_roux on February 07, 2017, 07:56:00 PM
See, I actually like making car loans.  I figure these are folks who are trying to get good pricing by purchasing from a private party.  These types of transactions are facilitated by having the cash in hand.  Also, when someone does that, they are less likely to get carried away and overspend on a car.  Once the car is purchased, it can be usually be refinanced at a better rate than the Lending Club rate, but a bank or credit union will ask you to identify the vehicle you want to purchase down to the VIN, and won't advance the funds.  One can also finance at a dealership, of course, but consumers are often told they will be better off separating the purchasing and financing transactions.

Title: Re: What loan purpose to avoid?
Post by: bluto on February 08, 2017, 11:48:09 AM
In back testing, for the grades of loans I purchase, the only types I do are Debt Consolidation+Refinancing, Home Improvement, and Wedding (that last one took quite a few months of back testing review before I trusted it), all the other categories resulted in significantly higher default rates relative to those four.  Keep in mind that of the loans I actually buy, the vast majority are Consolidation and Refinancing types, but the other two do pop up on occasion. 
Title: Re: What loan purpose to avoid?
Post by: BruiserB on February 08, 2017, 05:24:47 PM
Below are the ROI's of each category that I have invested in in my taxable account as calculated by NSR.

By far the worst category is Medical and surprisingly to me, my best is Wedding.  I do have relatively few loans in some of these categories, so it may not be statistically representative, but it's interesting.  I guess it makes sense...people who need loans for medical issues may then be unable to work for some period of time, and I guess wedding borrowers may be relatively well off, but need the funds to have their big party.

The original poster mentioned nixing Debt Consolidation off the list because they noticed that most of their defaults were that category.  Well, Debt Consolidation is by far the majority of my loans, so it would make sense that most of my defaults are those.  But overall, it's a solidly performing category.

Title: Re: What loan purpose to avoid?
Post by: jasondhsd on February 10, 2017, 12:17:45 PM
Thanks for all the responses but I'm done with lendingclub I didn't invest and take additional risk over index funds to make a 5% return and have to pay full income tax rates on any that return as well.  I did have other criteria set like mortgage, own, credit score 700 or higher, $3k mo or high income, 2yr min employment, and a few others like $0 amount total collections, major derogatory >60, etc. But since I started 9 months ago the amount of late payments and defaults are unacceptable 70 total in grace, late, default, or charged off.   Total past due notes are at  ( $1,257.13 ) just going to let it ride not reinvest and hope for the best.  I just don't see it getting better, the economy is supposedly good right now so if I'm at the high getting only 5% ROI then what happens when the economy downturns and people who have been paying start becoming unable to pay.  Really though with this sort of investment the ROI should remain fairly constant maybe +/- 2% not like a stock where it can swing 30%-40%+ either direction in a given 6 month period.   Also I'd like to see better collection methods, like broken knees and dismembered limbs. Screw the fair debt collection practices act, if someone takes out a $20k loan pays once and then never again they should be severely maimed. IMO.
Title: Re: What loan purpose to avoid?
Post by: rawraw on February 11, 2017, 04:28:00 AM
Really though with this sort of investment the ROI should remain fairly constant maybe +/- 2%. . . Screw the fair debt collection practices act, if someone takes out a $20k loan pays once and then never again they should be severely maimed. IMO.
LendingClub is not a good fit for you.  It is probably best you are stopping investments
Title: Re: What loan purpose to avoid?
Post by: newstreet on February 11, 2017, 01:17:52 PM
I noticed a lot of my charge offs and late payers have been 'debt consolidation' loans so I've nixed that off the list.  What other things in that list should I filter out?  Somehow I read somewhere that it was best of avoid giving loans for purchases like cars, home improvement, wedding, etc and to give loans to people looking to get out of debt rather than get into debt.  However I think that advice was bullshit now as the people who are trying to get out a debt are mostly deadbeat losers, where people wanting to upgrade their kitchen or go on a nice vacation probably are hard workers that just don't want to drain their account in one swoop.

So you all realize that people can check any box they want don't you??? The purpose is not verified. This is a silly discussion. 
Title: Re: What loan purpose to avoid?
Post by: Fred93 on February 11, 2017, 05:35:23 PM
So you all realize that people can check any box they want don't you??? The purpose is not verified. This is a silly discussion.

Irrelevant.  Historical data shows that when we divide loans by which box was checked, we see different performance in the different groups.  This means the variable has value.  Yes, we realize it isn't verified.  In spite of this, it has value.
Title: Re: What loan purpose to avoid?
Post by: newstreet on February 12, 2017, 03:37:16 PM
So you all realize that people can check any box they want don't you??? The purpose is not verified. This is a silly discussion.

Irrelevant.  Historical data shows that when we divide loans by which box was checked, we see different performance in the different groups.  This means the variable has value.  Yes, we realize it isn't verified.  In spite of this, it has value.

Yikes!  Garbage in-garbage out. I continue to be incredulous at these comments.
Title: Re: What loan purpose to avoid?
Post by: Joleran on February 20, 2017, 03:40:51 PM
Yikes!  Garbage in-garbage out. I continue to be incredulous at these comments.

So, is your argument that some statistically significant percentage of people lie for some reason (e.g. perception of better rates offered, embarrassment, laziness, etc.), and any categorical differences observed are due to random chance?  Personally, I think most people will be relatively honest, and mistakes in loan categorization will be far more honest errors than malicious intent.
Title: Re: What loan purpose to avoid?
Post by: Fred93 on February 20, 2017, 11:56:18 PM
So you all realize that people can check any box they want don't you??? The purpose is not verified. This is a silly discussion.
Irrelevant.  Historical data shows that when we divide loans by which box was checked, we see different performance in the different groups.  This means the variable has value.  Yes, we realize it isn't verified.  In spite of this, it has value.
Yikes!  Garbage in-garbage out. I continue to be incredulous at these comments.

At this point we have to make a distinction between philosophy and science.  The philosopher sits in a dark room and has grand thoughts about how he thinks the world might be.  He may decided that the world is flat, or perhaps that the loan purpose field has no value.  His logic is reasonable, but he makes false presumptions because he fails to begin with observation of the physical world.  The scientist, on the other hand, begins with observations, then learns from those observations.  He looks at the data, and tries to make use of it to help him understand the world.  He decides that the world is round, and the loan purpose field has value.

Many of us who have actually looked at the LC data have decided that some of the unverified fields have value.  You of course have the right to be incredulous and ignore the science if you like.

I don't know exactly why your logic is wrong, but the data tells me it is wrong. 

You don't need to do a lot of work to reach this conclusion.  You can get the statistics on performance of loans with various values in the purpose field with a few clicks on the nsrplatform.com web site.  I recommend that you include the filters that you normally use when investing, so you're confident that the data applies to the subset of loans you're investing in, and I suggest you check to see that the resulting categories contain adequate numbers of loans to avoid random fluctuations, and that you look for a relationship that persists over different time frames, perhaps over several years.  If all these things are true, then the data is likely telling you something.
Title: Re: What loan purpose to avoid?
Post by: Data Junkie on February 23, 2017, 10:16:16 AM
I skip renters taking out home improvement loans.  Don't understand it, therefore I am not going to participate.  But if anyone has a logical explanation for it, I am interested to hear.
Title: Re: What loan purpose to avoid?
Post by: rubicon on February 23, 2017, 11:48:41 AM
I skip renters taking out home improvement loans.  Don't understand it, therefore I am not going to participate.  But if anyone has a logical explanation for it, I am interested to hear.

my sister rented a place for a few months when she rebuilt her home
Title: Re: What loan purpose to avoid?
Post by: Data Junkie on February 23, 2017, 02:13:44 PM
I skip renters taking out home improvement loans.  Don't understand it, therefore I am not going to participate.  But if anyone has a logical explanation for it, I am interested to hear.

my sister rented a place for a few months when she rebuilt her home

The phrase "her home" suggests your sister owns the home, in which case on a loan application would she choose "renter"?
Title: Re: What loan purpose to avoid?
Post by: Edward Reid on March 01, 2017, 02:45:19 PM
I only do debt consolidation and CC refinancing. I don't have numbers, it's just that I feel I understand why people do these. Since I put my current criteria into place about 18 months ago, only one note I've taken, out of about 250, has gone south. (This restriction was not my only change.)

Well, I do have one number: as I type, 79% of the notes offered are in these categories. In grade C, where I invest, it's 85%. If I went studying the other categories, it would be a waste of my time. (I'm not saying it would be a waste of everyone's time, just of mine.)

The OP's followup mentioned "additional risk over index funds to make a 5% return". I assume they meant a stock index fund. I did look at the numbers on this before I started, and concluded that investing in Grade C or better is much less risky than a stock index fund, and was very likely to yield better than 5%. While it's possible to lose money on LC, with a properly diversified portfolio selected to avoid loss it's very rare. Even in 2008-2009, the highest grade to go underwater was D. Far rarer than losing money in a stock index fund.

That's why I'm here: better returns than bonds or CDs, and safer than anything involving stocks. A LC portfolio has economy risk: when the entire economy goes south, more loans default. But a stock index fund has market risk: the market can go down for many reasons even when the economy is good.

Edward

Title: Re: What loan purpose to avoid?
Post by: KidorioL on February 10, 2020, 10:49:38 AM
Hey, so what do you think about having a high salary job, but not to taking a loan? Since it is pretty unusual thing, for me (because a take a lot of loans in the past) I think that there is a thing that can improve my budget and it's a job because when I asked too many loans, guys from "Debt Collection Agency (https://frontline-collections.com)" has comed to me and asked for a money, and on that time I didn't had it. Since then my thoughts is only about the job or creating a small business with a good team.
Title: Re: What loan purpose to avoid?
Post by: nonattender on February 11, 2020, 04:21:25 AM
So you all realize that people can check any box they want don't you??? The purpose is not verified. This is a silly discussion.
Irrelevant.  Historical data shows that when we divide loans by which box was checked, we see different performance in the different groups.  This means the variable has value.  Yes, we realize it isn't verified.  In spite of this, it has value.
Yikes!  Garbage in-garbage out. I continue to be incredulous at these comments.

At this point we have to make a distinction between philosophy and science.  The philosopher sits in a dark room and has grand thoughts about how he thinks the world might be.

The philosopher is the guy who thinks "Fred's happy making underwriting decisions based purely upon statistics.  Make sure Fred - or people who think like Fred - are never able to implement such a one-size-fits-all statistical control method to qualitative humanitarian enterprises."

You ever see Errol Morris' documentary about Bob McNamara?  All kinds of data, but not much in the analysis/insight department - a ton of collateral damage.

Same shit playing out in a variety of disciplines/fields, right now...  Technology - actually, more of a false Scientism - is on the loose.

I say "false Scientism" because I think that a lot of what you imagine as philosophy is actually "sociology dressed up in Science talk."

You might enjoy the preface to Kant's Critique of Pure Reason where he talks about how function Reason(Reason) is a bit 'recursive.'

Anyway... I know this is like 3 years old... I do wish I'd seen it back then...  Sad that philosophy/science won't unite against bullshit!

:)
-t
Title: Re: What loan purpose to avoid?
Post by: Facelesslk on February 18, 2020, 05:10:46 AM
This is about me. I'm one of those who takes a vacation loan. Because I can't afford the vacation in one fell swoop that my wife and kids want. So I have to take out a loan to please my family. But I am a good taxpayer and pay all loans on time. I just don't have a huge salary to meet the needs of my family, so I prefer to pay in parts. Thanks to this opportunity, I was able to book a wonderful vacation for my family here (westgateresorts.com (https://www.westgateresorts.com/hotels/florida/orlando/)), and I am very proud of it. I am sure that we are waiting for interesting adventures, and our children will visit Disney World, which they have long dreamed of. To be honest, it was a childhood dream for both me and my wife. And so, we can't wait for our vacation to start.