Author Topic: Payment as a percentage of Monthly Income  (Read 4464 times)

GS

  • Sr. Member
  • ****
  • Posts: 413
    • View Profile
Payment as a percentage of Monthly Income
« on: May 10, 2013, 09:49:50 PM »
I put together a chart that tabulates payment as a percentage of monthly income, and how that relates to loan performance.

I used all data prior to 12/31/2012, and for the purposes of the charts, "troubled loans" are considered any loan not listed as "Current" or "Fully Paid".  In the chart, the bottom number represents the percentage of loan payment to monthly income, truncated.  So, for example, "2" would be 2.000 to 2.9999. 

As for the results, I expected to see more of a correlation.  There seems to be an inflection point after 15%, but for most part, stays within a range below 15%.  Perhaps you could say that <8% is slightly better than >8%, and greater than 15% should be avoided.  At least, that's what my "eyeball test" is telling me.

I thought 10% was interesting, though.  I can't help but wonder if people who lie about their income shoot for 10X their expected loan payment. 

Edit:  If anyone can repost the images properly, feel free.  I don't have easy access to image hosting.  Also, now that I look at the graphs, I should not have labeled the graph with "Default rate", since it also includes "Late" notes ...

[attachment deleted by admin]
« Last Edit: May 10, 2013, 10:06:47 PM by GS »

rawraw

  • Hero Member
  • *****
  • Posts: 2795
    • View Profile
Re: Payment as a percentage of Monthly Income
« Reply #1 on: May 11, 2013, 06:22:08 AM »
Cool graph :)

edward

  • Full Member
  • ***
  • Posts: 195
    • View Profile
Re: Payment as a percentage of Monthly Income
« Reply #2 on: May 11, 2013, 08:58:20 AM »
I've read lots of comments on here about 10% as a good cutoff, but I've always used less than 15% myself. Great graph to show both these points have good data to support them. Thanks for the work.

mitgib

  • Jr. Member
  • **
  • Posts: 73
    • View Profile
    • Hostigation High Resource Hosting
    • Email
Re: Payment as a percentage of Monthly Income
« Reply #3 on: May 11, 2013, 09:12:47 AM »
Since this is using all data through the end of last year, and the lowest is over 6%, how does LC justify their 5.4% or whatever they claim?  Or since this includes any trouble or default you are presenting a full story?

GS

  • Sr. Member
  • ****
  • Posts: 413
    • View Profile
Re: Payment as a percentage of Monthly Income
« Reply #4 on: May 11, 2013, 09:36:03 AM »
I think that is the difference.  If I had limited the data to charge off/default, the percentages on the graph would be much lower.

Fred

  • Hero Member
  • *****
  • Posts: 1421
    • View Profile
Re: Payment as a percentage of Monthly Income
« Reply #5 on: May 11, 2013, 10:57:48 AM »
If I had limited the data to charge off/default, the percentages on the graph would be much lower.
This sounds counter-intuitive, don't you think?

Am I missing something here?

GS

  • Sr. Member
  • ****
  • Posts: 413
    • View Profile
Re: Payment as a percentage of Monthly Income
« Reply #6 on: May 11, 2013, 01:37:52 PM »
Fred,

Good point.  I should clarify that my chart is based on a straight count of "troubled loans", and not intended to calculate a rate of return.  It's intended to reflect the likelihood that a loan could have problems before being fully paid.  Of course, some of these "troubled" loans may have made 2 payments then defaulted, other could have made 35 payments, then defaulted, and some late and grace period notes may bounce back, and those factors would, of course, affect your return on investment.  I was looking for a quick way to determine a relationship between monthly payments, monthly income, and the likelihood that the borrower was overextending themselves.  I always thought that the ratio of payment to monthly income was an important factor, but LC doesn't have that filter, and I really had no idea where the "breaking point" was.  Like some others, I arbitrarily picked 10% as my cut off, but since it's one of my main criteria, I thought it would be a good idea to test my theory.

When I did my count of "troubled loans", I included any loans not listed as Current or Fully Paid, so the count in the table includes any "Late, Grace Period, Default, and Charged Off" loans.  As "mitgib" pointed out, my percentages are higher than those stated by LC, but I'd assume that is because LC only counts Charge Offs in their stats.  If I had only counted Charge Offs, my count of would have been much lower, and therefore the ratio of troubled loans to the total would have been lower.

rajuabju

  • Jr. Member
  • **
  • Posts: 59
  • The One & Only
    • View Profile
Re: Payment as a percentage of Monthly Income
« Reply #7 on: May 23, 2013, 11:00:55 AM »
I've always kept to a general rule of 10% or less. Of course, one thing to keep in mind is that the higher the stated income, even with a higher loan payment that might still be 10%, it still leaves a larger $ cushion for the borrower.

Another issue with 10% (or any % for that matter), is that the stated income is based on Gross. So based on what state the borrower lives in, his actual take home pay can vary quite significantly from one state to the next. This is one of the reasons I stay away from states such as CA and NY and a few others (Oregon comes to mind) that have absurd state income tax rates, unless the % is much lower.
« Last Edit: May 23, 2013, 11:02:26 AM by rajuabju »

thezinfan

  • Full Member
  • ***
  • Posts: 119
    • View Profile
    • Email
Re: Payment as a percentage of Monthly Income
« Reply #8 on: May 23, 2013, 05:18:42 PM »
GS - thank you very much for the research! I try to stick to 10% max.

Rajuabju - I think you are correct. These charts may show a slight shift at various monthly income level. The inflection point probably increases as income increases.