As I have never discussed Loans with Similar Risk Profile feature, I just wanted to put more color on how PeerCube determines the 'Loans with Similar Risk Profile'. PeerCube uses a clustering algorithm to determine what loans are similar to each other. The Loans with Similar Risk Profile box displays the five closest loans similar to the loan being viewed. There are multiple ways to use this for making lending decision.
- If your filter selected a loan, by reviewing Loans with Similar Risk Profile, you will be able to select similar loans that may not have met some of your filter criteria but are still very similar to the loan selected by filter according to the algorithm. It may just have missed a few selection criteria of your filter. This may works well when your filter is very tight and doesn't find enough loans on its own in lieu of cash buildup. The main drawback is that you will be building a portfolio of very concentrated loans that are similar to each other so they may move in tandem.
- If you prefer a very diversified portfolio, you can use the Loans with Similar Risk Profile to avoid investing in loans similar to one you are viewing.
- If you are after higher return, select the loan with higher interest rate among the Loans with Similar Risk Profile and the one you are viewing. For example, if you are viewing a C2 Grade loan and Loans with Similar Risk Profile displays a E4 Grade loan, you may consider selecting E4 loan that will give you higher potential return for similar risk profile.
In the past, a few PeerCube users mentioned that they leverage Loans with Similar Risk Profile feature by using a combination of method 1 and 3.
It's easy to click on the individual loans in the PC Similar Risk box and then note the default rates, although I'm not sure if they were model produced. I haven't paid enough
The expected default rate on loan details page is provided by Lending Club and not generated by any model used by PeerCube. I typically ignore this number as you can be certain it rises with credit grade and interest rate. PeerCube internally uses this number a few times but none of those usage are directly visible to users.
Thank you very much for the additional information. I like the #1 and #3 explanations and the bolded LC default model comment about ignoring it. Thanks for explaining the one provided is not internally generated.
Off the subject somewhat--I find risk index numbers of 130 and under are usually loans I've decided I want from the filtered ones LC gave me. However, for a Major Purchase I'm not quite as confident that the added debt is taken into account (whether loan purpose is part of the scoring model).
I am also interested in this question from rawraw: "Is the cluster analysis done on just the credit variables or does it factor in past performance of those combination of credit variables?"
Thank you for your ongoing participation and help on this forum.