Author Topic: 36 months vs 60 months  (Read 19322 times)

Preston

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36 months vs 60 months
« on: July 12, 2013, 01:55:34 PM »
I'm new to this site and boy am I glad I found it!  There is a wealth of information being shared and I am looking forward to joining LC Investors community. 

I've been investing in LC notes since February of this year. Initially I made the assumption that 36 month notes carry less risk (didn't do any formal analysis of the statistics) and purchased only 36 month notes.  Recently, in an attempt to find more notes that meet my filters I have started to look at 60 month notes and its seems to me I am finding some real gems in there. 

Will some of you please share your throughts on 36 month vs 60 month based on your experience or research of the statistics?  Do the 60 month notes carry so much more risk that the higher rate may not be worth it? 

I've started to purchase 60 month notes but before I add to many more I'd love to hear about other investors experiences with them. 

New Jersey Guy

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Re: 36 months vs 60 months
« Reply #1 on: July 12, 2013, 02:06:44 PM »
"I'd love to hear about other investors experiences with them.  "

Yea....so would I.

I just looked at my portfolio of "Hold" notes, and it's an even mix of 36 and 60 month loans.  Personally, I'm not a big fan of 5-year notes even though I own them.  I guess I just don't want to be looking at them for 5 years, but you can't beat the extra interest.

But I'd be interested in knowing the additional risks involved, too.
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SarahV

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Re: 36 months vs 60 months
« Reply #2 on: July 12, 2013, 02:43:16 PM »
I think it's kind of difficult to make any real statement on 36 vs 60 month loans because IIRC the very oldest 60 month loans are only 60% finished (not counting early payers). The default rate is higher than 36 month loans in the first few years, but after that no one really knows. With 36 month loans the vast majority of defaults are in the first 60%, so if 60 month loans follow that pattern, we'll probably do OK with them. If they don't follow that pattern, well, who knows?

I haven't seen an analysis on whether the higher interest rate on the 60s makes up for the higher default rate. In theory (if LC is grading correctly) one should even out the other, so I ignore the loan term when I purchase notes.

GS

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Re: 36 months vs 60 months
« Reply #3 on: July 12, 2013, 03:29:26 PM »
If there is additional risk, you are being compensated by higher interest rates.  It seems like LC ups a grade level for 60 month loans (i.e., a C5 borrower (60 months) would be a B5 borrower (36 months)).  So, you are getting more credit worthy individuals than their grade would imply, which would, of course, offset some risk of the longer duration.

Unfortunately, we won't have good data on the risk vs. reward until a large block of 60 months loans are completed.

Preston

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Re: 36 months vs 60 months
« Reply #4 on: July 12, 2013, 05:40:36 PM »
Thanks for the comments.  I think I'm inclined to continue adding 60 month notes to my portfolio.  I seem to be finding what I believe to be very good notes that are 60 month.  The same notes, if at 36 months would likely be atlease a grade lower as mentioned above.  I guess the extra interest should compensate for any additional risk the notes carry......the difficulty is quantifying how much more risk is carried in the 60 month notes.  Time will tell I guess.

investforfreedom

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Re: 36 months vs 60 months
« Reply #5 on: July 15, 2013, 01:50:18 PM »
I did some amortization calculations--on the presupposition that most defaults occur during the first 10 months.  I am using the example of a borrower who is borrowing a $20,000 loan rated at grade C1: https://www.lendingclub.com/public/rates-and-fees.action  (In the interest of simplicity, I did not take into account the fees charged by LC.)

(A) For a $20,000 C1 36-month loan at 17.32%, the monthly payment would be $716.24. And 10 months' cumulative payment would be $7162.4, which would be 35.81% of the principal invested.  If the borrower defaults on the 11th month, the investor would lose 64.19% of the capital.

If the borrower does not default and makes every single payment, the investor would receive $5784.64 worth of interest over the life of the loan. This means that the investor would have a total cumulative return of 28.92% ($5784.64/$20,000) over a period of 3 years. 

(B) For the $20,000 C1 60-month loan at 16%, the monthly payment would be $486.36.  And 10 months' cumulative payment would be $4863.6, which would be 24.32% of the principal invested.  If the borrower defaults on the 11th month, the investor would lose 75.68% of the capital.

If the borrower does not default and makes every single payment, the investor would receive $9181.60 worth of interest over the life of the loan.  This means that the investor would have a total cumulative return of 45.91% ($9181.6/$20,000) over a period of 5 years. 

The question then is whether for 60-month loans, the higher returns for the longer loan term outweigh the risk of greater loss of capital (as compared to 36-month loans) should the borrower default during the first 10 months. 

I hope this helps.  (IMHO, one should have a good balance of 36- and 60-month loans.)

« Last Edit: July 15, 2013, 02:07:47 PM by investforfreedom »

Zach

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Re: 36 months vs 60 months
« Reply #6 on: July 15, 2013, 02:02:17 PM »
"If the borrower does not default and makes every single payment, the investor would receive $5784.64 worth of interest over the life of the loan. This means that the investor would have a total cumulative return of 45.91% ($5784.64/$20,000) over a period of 3 years. "

The cumulative return here should be 28.92%.

investforfreedom

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Re: 36 months vs 60 months
« Reply #7 on: July 15, 2013, 02:08:31 PM »
Yes, I spotted the error right after I posted my message. 

"If the borrower does not default and makes every single payment, the investor would receive $5784.64 worth of interest over the life of the loan. This means that the investor would have a total cumulative return of 45.91% ($5784.64/$20,000) over a period of 3 years. "

The cumulative return here should be 28.92%.

IrishMoss

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Re: 36 months vs 60 months
« Reply #8 on: July 15, 2013, 03:46:56 PM »
I was asking myself the same question earlier, and came across  this article:
http://andirog.blogspot.com/2012/06/lending-club-loan-length-and-default.html

Interesting that the default numbers are higher with the 60 month notes.  I still haven't digested all the info there, (or here for that matter... I'm new to this and it's a bit overwhelming at this point)  but it still seems like some worthwhile data in that article.

LonghornSF

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Re: 36 months vs 60 months
« Reply #9 on: July 15, 2013, 05:41:54 PM »
60 month loans are generally more risky but carry a higher interest rate to both compensate for the yield curve differential (i.e. interest rate risk) as well as credit risk. From what I have seen, 60 month loans are slightly better on a risk-adjusted basis after considering both credit and rate risk. Also note that many of the higher risk loans effectively only come in the 60 month variety.

jennrod12

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Re: 36 months vs 60 months
« Reply #10 on: November 08, 2015, 09:14:00 AM »
Any updates to this collective knowledge about 36 month vs. 60 month loans two+ years later?

Thanks,

Jenn

RaymondG

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Re: 36 months vs 60 months
« Reply #11 on: November 08, 2015, 11:07:24 PM »
Here is a study done by AnilG in 2013. http://andirog.blogspot.com/2013/03/lending-club-loans-issued-since-2010.html

The Months of Payment chart shows the percentage of all defaulted 36 month (and 60 month) loans as a function of months of payment for loans issued since 2010.  The default patterns are very similar for first 10 months of payment. But, we know that 60-month loan with same loan amount pay less monthly payment, hence we receive less total payments (Principals + interests) comparing to a 36-month loan if both defaulted after same # of months. However, since most defaults of 60-month loans happened in first 2 years, we may expect the remaining 60-months loans will compensate the higher loss in the first two years by their higher overall return in remaining 3 years because of much less defaults in this period.

Who has the default ratio of 36-months vs 60-month loans by grade?
« Last Edit: November 08, 2015, 11:31:22 PM by RaymondG »

lascott

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Re: 36 months vs 60 months
« Reply #12 on: November 09, 2015, 09:28:33 AM »
Previous discussion

Topic: What TERM loan do you invest in?
http://www.lendacademy.com/forum/index.php?topic=2473.0
Tools I use: (main) BlueVestment: https://www.bluevestment.com/app/pricing + https://www.interestradar.com/ , (others) Lending Robot referral link: https://www.lendingrobot.com/ref/scott473/  & Peercube referral code: DFVA9Y

RaymondG

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Re: 36 months vs 60 months
« Reply #13 on: November 09, 2015, 09:48:34 AM »
According to my own account, using similar filters, 60-month loans's net return is a little better than 36-month loans for Grade D, E, while 36-month loans is better for Grade C (11% vs 8%). Much higher interest rates of Grade D & E might have allowed 60-month loans to catch-up later (with potential to receive higher net return over whole life of loans) after higher loss of principals in the first year. The result is also conincident with distribution of all LC loans among loan grades, more 36-month loans available in B & C while more 60-month loans available in D & E. So, I am going to add some 36-month loans in Grade C to balance my account. Hehh! I should have analyzed this in the past.
« Last Edit: November 09, 2015, 10:07:52 AM by RaymondG »

RaymondG

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Re: 36 months vs 60 months
« Reply #14 on: November 09, 2015, 10:17:36 AM »
(A) For a $20,000 C1 36-month loan at 17.32%, the monthly payment would be $716.24. And 10 months' cumulative payment would be $7162.4, which
......
(B) For the $20,000 C1 60-month loan at 16%, the monthly payment would be $486.36.  And 10 months' cumulative payment would be $4863.6, which
......

I would suggest to use $20,000 60-month loan at rate near (17.32% + 3%) for a better apple-to-apple comparison. "borrowers with the same credit profile and loan amount are modified by 4 to 8 grades " if they want longer loan term.

LC link: https://www.lendingclub.com/public/60-month-notes.action

Earn 3.82% more interest on average1
 
By investing in 60-month loans, you can earn more interest while diversifying your investment portfolio beyond 36-month loans. To enjoy the longer repayment term of 60 months, borrowers with the same credit profile and loan amount are modified by 4 to 8 grades. They pay a higher interest rate, so most people can earn from 2.62% to 5.03%2 more interest.