Author Topic: What loan purpose to avoid?  (Read 8863 times)

jasondhsd

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What loan purpose to avoid?
« 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.

fliphusker

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Re: What loan purpose to avoid?
« Reply #1 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?

nonattender

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Re: What loan purpose to avoid?
« Reply #2 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.
A little nonsense now and then is relished by the wisest men.

bkcarolina

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Re: What loan purpose to avoid?
« Reply #3 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.

Paulie2083

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Re: What loan purpose to avoid?
« Reply #4 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.

neals384

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Re: What loan purpose to avoid?
« Reply #5 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.

rawraw

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Re: What loan purpose to avoid?
« Reply #6 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

fliphusker

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Re: What loan purpose to avoid?
« Reply #7 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.  :)

gumbo_roux

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Re: What loan purpose to avoid?
« Reply #8 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.


bluto

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Re: What loan purpose to avoid?
« Reply #9 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. 

BruiserB

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Re: What loan purpose to avoid?
« Reply #10 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.

« Last Edit: February 08, 2017, 05:29:30 PM by BruiserB »

jasondhsd

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Re: What loan purpose to avoid?
« Reply #11 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.

rawraw

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Re: What loan purpose to avoid?
« Reply #12 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

newstreet

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Re: What loan purpose to avoid?
« Reply #13 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. 

Fred93

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Re: What loan purpose to avoid?
« Reply #14 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.