Income Correlates With Loan Performance
Now that I’ve bought into nearly 1,800 personal loans on Lending Club, I think I’ve got a good enough sample to start running analyses.
The data isn’t perfect especially since none of the loans have reached maturity yet. Most are still between two and four and a half years away from completion. But strangely, 70 loans paid off early and a good number have already defaulted or are more than 16 or 30 days late and are on their way there.
With at least that to work with, I compared three groups:
- Early payoffs
- 16+ days late or defaulted
- All others
I examined 4 initial factors and I will surely examine many more. While I saw some weak correlation regarding FICO score, it’s borrower income that really stood out.
Ignoring all other factors, the accounts that paid off early reported earning 29% more annual income than the accounts that are bad.
I had heard Peter Renton preach the high income borrower strategy and truthfully I ignored income as a factor in my decision making up until this point. On equities.com, Renton said, “I typically like more than $50,000 in annual income, although $75,000 is even better, and $100,000 is better still.”
Looking at my own sample, there is indeed correlation between the $75,000+ income earners with paying off Lending Club loans early.
Unlike some business loan products, Lending Club personal loans accrue interest rather than bake interest into a fixed total cost. That means a borrower that paid back a 5 year loan in just 3 months only paid 3 months worth of interest.
It was surprising to see that 70 borrowers repaid the loans in their entirety within a matter of months.
Regarding FICO, the score spread between bad loans and early payoffs was only 8 points, a lot smaller than I’d expect. But the portfolio is young and some loans have only just issued in the last few months. With another 2+ years left to go, the sample size of defaults will get bigger and I will be running the numbers on this again.
In in meantime, low income borrowers regardless of all other factors appear to be more risky investments. I guess you could say I’m not surprised, but it’s exciting to see data that supports a hypothesis.Last modified: November 30, 2014
Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.