P2P Lending / NFT Lending Forum

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. 

"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.

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.

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.

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.

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.)

"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%.

Yes, I spotted the error right after I posted my message. 

from: Zach on July 15, 2013, 02:02:17 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.

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.

Any updates to this collective knowledge about 36 month vs. 60 month loans two+ years later?

Thanks,

Jenn

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?

Previous discussion

Topic: What TERM loan do you invest in?
http://www.lendacademy.com/forum/index.php?topic=2473.0

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.

from: investforfreedom on July 15, 2013, 01:50:18 PM

The longer loans earn a higher interest rate, but have more defaults.

Net, they appear to earn a higher return, HOWEVER, we only know for certain during GOOD TIMES.  The 60 month loans weren't around during the 2008/9 recession.  I suspect that the longer loans will do more poorly during the next bad times.  It seems likely that longer loans are just another form of risk.  It is important to understand that the historical record of "all loans so far" is biased because the longer loans were added after the big recession.

The 60 month loans might have lower net return than 36 month loans for same vintage. The 60 month loans were first issued on Lending Club in May 2010 so the first vintage has just started to mature in 2015. It might not be unique to Lending Club as 60 month loans on Prosper also show similar results.

Lending Club Loan Performance from https://www.peercube.com/histperf/perfbyattr/term

Vintage	Loan Length	Origination Period	Loan Count	Interest Rate	Loss Rate	NAR
2010	36	01/2010 - 12/2010	9,156	11.31%	6.62%	5.70%
2010	60	05/2010 - 12/2010	3,381	13.83%	14.58%	4.49%

Prosper Loan Performance from https://www.peercube.com/histperf/prosperperfbyattr/Term

Vintage	Loan Length	Origination Period	Loan Count	Borrower Rate	Loss Rate	NAR
2011	36	01/2011 - 12/2011	9,651	23.61%	14.14%	14.38%
2011	60	01/2011 - 12/2011	1,030	20.16%	18.67%	11.08%

I can't help but compare LC loans to bonds in general. The longer the term the higher the interest rate risk. For the sake of argument lets say sometime in the future LC increases interest rates. Investors with 60 month loans are stuck at the lower rate while those with 36 month loans are able to invest at the higher rates sooner. If you think interest rates are going up then the 36 month loans are preferable. If you think they are going down then 60 month loans are preferable. If you think you can forecast interest rates you are probably wrong (though the Fed's muddy boots all over the bond market have made this a more tractable problem).

There's also the liquidity factor to consider. With 36 month loans everything is over in 3 years; good, bad and ugly. All loans turn to cash by that point. With 60 month loans it takes 5 years for all loans to turn to cash. This may trump a few basis points of NAR given an individual's particular circumstances. Meanwhile Folio is neither a deep nor liquid market. Someday, hopefully sooner rather than later, this will no longer be true. I look forward to the day when there is a robust, liquid and deep secondary market for LC notes with continuous bid/ask quotes, sizes, and narrow spreads. LC could go a long way towards making this happen with an API and historical data to encourage it. If not LC then someone else will do this and IMHO gain a significant competitive advantage. It is something that needs to happen.

Meanwhile, considering my personal situation, I'm sticking with 36 month loans. Three years and done is important to me.

from: AnilG on November 09, 2015, 03:13:27 PM

This is from LC's latest 10-Q:  http://www.sec.gov/Archives/edgar/data/1409970/000140997015001284/q31510q.htm

I don't know how NSR defines and estimates Loss Rate. Reviewing the chart posted by Fred and loss rate numbers published by Lending Club, I will guess NSR might be under-estimating the loss rate. The Lending Club Cumulative CO Rates spreadsheet provides lot more information including split by credit grade https://www.dropbox.com/s/0l5tijquoma4k3y/Cumulative%20CO%20Rates%20Projected%20Loss%20Curves%20v15_OCT2015.xlsx?dl=0,

Vintage	Term	Loss Rate
2010Q1	36	6.37%
2010Q2	36	6.48%
2010Q2	60	15.68%
2010Q3	36	5.35%
2010Q3	60	13.47%
2010Q4	36	5.54%
2010Q4	60	12.58%

from: RaymondG on November 10, 2015, 12:59:26 AM

from: AnilG on November 10, 2015, 12:59:43 PM

It wasn't my analysis. The spreadsheet is published by Lending Club. The Glossary and Disclaimers tab describe more on the calculations performed. The Data tab gives raw data.

Gross Credit Loss   Total Dollar Loss/Original Loan Amount
Net Credit Loss   Net Dollar Loss/Original Loan Amount, accounts for recoveries
Cumulative Net-Charge Off Rate   Equals the gross dollars charged off divided by the original funded amount

Cumulative Net Charge-Off Rates
Cumulative net charge off rates are calculated by dividing the gross dollars charged off by the total original loan amount funded.  Historical charge off rates are not intended to predict future charge off rates.  Actual charge off rates experienced by any individual portfolio may be impacted by, among other things, the size and diversity of the portfolio, its exposure to particular Notes or groups of Notes, as well as macroeconomic conditions.

from: RaymondG on November 10, 2015, 09:41:19 PM

@AnilG - My bad. I should have read the Glossary and Disclaimers tab. Thanks.

Back to the Loss Rates. I wonder if the Loss Rate 14.58% for 60Month loans of 2010 Vintage is cumulative loss rate over 60 month. If that's the case, then average over 5 year is about 3% per year. Or, average over 36 months when most losses are expected, the averaged loss rate is 4.86%. So estimating the net return in a simplified way, in the first 3 years,

36 months : 11.31% - 6.62%/3 -1% = 8.1%
60 months : 13.83% - 14.58%/3 -1% = 8%  - but remember, it assumed remaining principal would suffer little loss in the following 2 years

Look at the cumulative charge-off tables in The Lending Club Cumulative CO Rates spreadsheet in attachment. 60-month has materially larger Gross Credit Loss (cumulative loss rate), for example 15.19% for D, but its Annualized Credit Loss is better. The overall Annualized Credit Loss of 60-month loans looks close to 4%.

Anyway, the point is the loss of 60-month loans is not that scary like what my first impression was when saw the table below.


Lending Club Loan Performance from https://www.peercube.com/histperf/perfbyattr/term

Vintage	Loan Length	Origination Period	Loan Count	Interest Rate	Loss Rate	NAR
2010	36	01/2010 - 12/2010	9,156	11.31%	6.62%	5.70%
2010	60	05/2010 - 12/2010	3,381	13.83%	14.58%	4.49%

For comparison purposes, you could take an example of 15 years and figure out the cumulative loss of three 60-month loads vs. the cumulative loss of five 36-month loans. 

Of course this would be hypothetical, since a lot could change over 15 years, but I was just thinking of a simple way to compare apples to apples without having to guestimate the differences between performance of early and late months of the loan.

If I got a 36-month loan instead of a 60-month, I'd have to do something with my money in those last 24-months, which would probably be to invest in another 36-month loan....  So do I have more exposure to loss with the 36-month loans in that scenario?

Jenn

Jenn,

You have the right approach to comparing two investments of different length. How to compare two investments of different length is of considerable interest in academic research. There is no consensus on appropriate method of comparison. One way to do comparison is to assume that you re-invested in 36 month loans for another 24 months (2 years) after the first 36 month term and then compare the ending portfolio value with same investment in 60 month loans. This method assumes that you are able to reinvest at same interest rate after 36 months.

The Annualized return method is not an appropriate method to compare two investments when there is variation in loss rate and return from one year to next. In such situations, the annualized method will give you incorrect value for your portfolio value at the end of specific investment horizon. It is the same reason the prospectus from mutual funds and other investments show the value of hypothetical $10,000 investment over time when comparing their performance with benchmark.

from: jennrod12 on November 12, 2015, 02:02:47 PM

Ha.  And the LC Prospectus is where, again??   

from: AnilG on November 12, 2015, 05:23:12 PM

I have completed an analysis in a setup that assumes the account has been invested for long enough time. In this perfect setup, the investor will purchase fix amount new notes and withdraw fix amount cash every month, and so the total investment will always be the same over months. Please see the chart for comparison between purchasing 36month and 60month. The Loss distribution is assumed to be:

from: AnilG on November 10, 2015, 12:59:43 PM

from: AnilG on November 10, 2015, 12:59:43 PM

from: hoggy1 on November 17, 2015, 04:02:23 PM

Quote"> from: PhilGD on November 17, 2015, 04:59:11 PM