Author Topic: Credit Card / Debt Consolidation  (Read 5645 times)

balto21

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Credit Card / Debt Consolidation
« on: March 10, 2016, 03:03:24 PM »
For Lending Club Filters, what is the difference between Credit Card and Debt Consolidation???

Looking at NSR historical data, there are major differences in returns depending on your filter criteria but I don't understand from an individual borrower perspective...How does LC define a Credit card loan, which I assume is used to pay off credit card debt and debt consolidation?

Thank you

Fred93

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Re: Credit Card / Debt Consolidation
« Reply #1 on: March 10, 2016, 03:36:15 PM »
For Lending Club Filters, what is the difference between Credit Card and Debt Consolidation???
...How does LC define a Credit card loan, which I assume is used to pay off credit card debt and debt consolidation?

It is simply which check box the borrower checks.  It means what it meant in the borrower's mind when he checked the box.  Nothing more.

Those of us who have been doing this awhile have learned not to think too much about what such things "mean".  One can overthink, or wrongly imagine or fantasize what something means, but we have real data that shows us the result.

balto21

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Re: Credit Card / Debt Consolidation
« Reply #2 on: March 10, 2016, 06:45:14 PM »
So, in my filter, a check of the debt consolidation box would be a negative of almost 2% when compared to credit card.

Also, more people choose Debt Consolidation.

@Fred93 - I have seen your other answers here and I know that you know the game but a 2% hit seems more substantial to me than your explanation below.


Fred93

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Re: Credit Card / Debt Consolidation
« Reply #3 on: March 10, 2016, 07:10:39 PM »
So, in my filter, a check of the debt consolidation box would be a negative of almost 2% when compared to credit card.
...
@Fred93 - I have seen your other answers here and I know that you know the game but a 2% hit seems more substantial to me than your explanation below.

I don't see that disparity with my filters, and I don't see that disparity with all loans.  Have never seen it, so I have no explanation for you.  Must be something odd about your filters.  Everyone's filters are different, so you are expected to see different numbers than I do.   Your result does seem unusual tho.

Here are some thoughts to help you work thru whether this is a fluke or a discovery:  You can filter on individual years, and learn whether this holds up year after year.  You can filter on individual grades, and observe same.  Etc.  Be careful when you do this tho.  If you filter down to a small # of loans in any category, you lose statistical meaning.  I try to stick with result categories that have >1000 loans in them.  You might need to widen your filters to learn from a year-by-year or grade-by-grade breakdown.

In the case of the stats you showed us, a category that has $1.6M of principal in it is only about 100 loans.  I suspect that's the problem.  Statistical random variation has added noise in the return numbers.  Open up your filters until you get >1000 loans and I'll bet the result goes away.

It takes careful thought to make sense of back filtering.  It is easy to be mislead.  For example, loan volume has been exponentially growing during LC's life.  That means that when you get a result that includes many years, it is HEAVILY weighted to the later years.  That's ok if you understand, but otherwise you can fool yourself.  NSR nicely shows you the breakdown by year, so you can observe what is going on over time if you want to.  Similarly, I always exclude the most recent year, ie right now I set the final date at 09/30/2014.  Gathering "statistics" on loans that haven't lived very long is meaningless.  Loans have to be 5 months old before then can default at all, and similarly loans that are 6 months old have only had one "chance" to default, and so forth, so statistics for very recent loans are heavily skewed by this time shift (counting interest and defaults for very different lengths of time).
« Last Edit: March 10, 2016, 07:13:37 PM by Fred93 »

RT45

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Re: Credit Card / Debt Consolidation
« Reply #4 on: March 10, 2016, 07:30:19 PM »
@Fred93 I've seen comparable data on credit card vs. debt consolidation which seems to hold true.

Generally, the logic is that credit card consolidation is a more specific action, where the borrower has a known thing they are paying off which has an immediate cost savings to their personal balance sheet.

Debt consolidation is more ambiguous, and can lead to excess borrowing and therefore higher chance of default. LC also upsells people to borrow more at these stages (e.g. take out an additional $5k for a slightly higher rate).

Most financial institutions who conduct credit card refinancing will require the borrower to pay off credit cards by only releasing funds to the credit card companies.

balto21

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Re: Credit Card / Debt Consolidation
« Reply #5 on: March 10, 2016, 10:16:57 PM »
Fred, thank you very much for the advise on how I should look at my filters...that is a great idea. >1000 and nothing that was originated within the last 5 months.

I have seen this large discrepancy in other filters where there was over 1000 loans for credit card and debt consolidation so RT45 thank you for weighing in and giving your thoughts on the subject. Much appreciated.

Fred

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Re: Credit Card / Debt Consolidation
« Reply #6 on: March 11, 2016, 01:18:14 AM »
Here is what LC says in  https://www.lendingclub.com/info/statistics.action

Quote
Loan purpose describes the reported intent of borrowers ... and may not reflect actual usage. Investors should rely on loan grades rather than loan purpose.

balto21

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Re: Credit Card / Debt Consolidation
« Reply #7 on: March 11, 2016, 04:53:53 PM »
LC saying that we should rely on loan grades takes away from the "real data" to show us results.

Either way, i see it a lot that the CC filter shows a much better return than a Debt Consolidation Filter in certain scenarios. I think that you and RT45 are correct in that it is in the mindset of the borrower and in these particular overall filters, the mindset of the borrower who chooses Credit Card and not Debt Consolidation will perform better over time.

I wonder what psychological studies will come out of this historical data one day.


fliphusker

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Re: Credit Card / Debt Consolidation
« Reply #8 on: March 11, 2016, 05:53:54 PM »
On my back testing filtering, loan consolidation beats CC by .2% going back to 2011.  Not saying that anyone else filters will show the same, just saying mine does.  With my filter i use at LC to look through notes, I have both listed, and take both as long as they meet the rest of my criteria.  Guess my filter is probably too stringent, so have to stop someplace. 

rawraw

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Re: Credit Card / Debt Consolidation
« Reply #9 on: March 13, 2016, 12:45:06 PM »
I don't spend much time in the data like I used to, but I always though CC refi outperformed if you made sure the revolving loan balance was within 20% of the loan amount. 

dompazz

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Re: Credit Card / Debt Consolidation
« Reply #10 on: March 13, 2016, 05:08:25 PM »
I don't spend much time in the data like I used to, but I always though CC refi outperformed if you made sure the revolving loan balance was within 20% of the loan amount.
That's an interesting one to look for!

In my model, all else being equal CC vs Debt Consolidation will result in about a 3% lower probability to default.  I'm controlling for a number of other factors, however.

RaymondG

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Re: Credit Card / Debt Consolidation
« Reply #11 on: March 14, 2016, 01:39:40 AM »
I am updating my filters after having not touched it for 2 years. In the three filters I backtested in NSR platform on loans issued from 3/2014 to 3/2015, comparing ROI of CC to ROI of Debt Cons, it's +0.7% for Grade C, 0.03% for Grade D, -1.19% for Grade E.

PhilGD

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Re: Credit Card / Debt Consolidation
« Reply #12 on: March 14, 2016, 08:19:22 AM »
I am updating my filters after having not touched it for 2 years. In the three filters I backtested in NSR platform on loans issued from 3/2014 to 3/2015, comparing ROI of CC to ROI of Debt Cons, it's +0.7% for Grade C, 0.03% for Grade D, -1.19% for Grade E.

In my opinion it is better to compare default rates than ROI in backtesting, since LC has adjusted interest rates recently. And also since LC updates their credit models pretty regularly, a grade-by-grade comparison might not be relevant to today's notes.
« Last Edit: March 14, 2016, 08:21:45 AM by PhilGD »

RaymondG

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Re: Credit Card / Debt Consolidation
« Reply #13 on: March 14, 2016, 01:10:23 PM »
I am updating my filters after having not touched it for 2 years. In the three filters I backtested in NSR platform on loans issued from 3/2014 to 3/2015, comparing ROI of CC to ROI of Debt Cons, it's +0.7% for Grade C, 0.03% for Grade D, -1.19% for Grade E.

In my opinion it is better to compare default rates than ROI in backtesting, since LC has adjusted interest rates recently. And also since LC updates their credit models pretty regularly, a grade-by-grade comparison might not be relevant to today's notes.
I agree. The main purpose of my last post is to say that the different performances of CC and Debt Cons in backtesting does not tell much about what it is in general. A lot more of factors affect the backtesting result.