What am I missing?

[donmiller]

Hello!

New to forum & just started with LC in mid December.  I'm doing pretty well but sometimes there are things that make so sense to me!
I would like to get your opinion on exactly what components of the following listing should have been red flags:

Requested: $16,200 (Debt Consolidation)
D3 @ 17.27% (60 months)
Monthly payment $405
Home Ownership: Mortgage ($1900/mo)
Gross Income $6000/mo
DTI: 4.7%
Credit Score: 714-749
Revolving Balance: $19,550
Stated reason for large revolving balance: Roof replacement.

This borrower filed for chapter 7 after he made only one payment!

I do not get it.  His DTI is low.  If I assume he nets 66% of his gross after taxes and allow for reasonable amounts for food, fuel, and paying off the revolving balance, this guy should have a reasonable amount of disposable income even before he refinances the credit cards.

It just seems to me that with the CC refinance, even if this guy lost his job it would take him a bit longer than 1 month to go bankrupt.

My question:  Did I miss a red flag in the listing, or is this "just one of those things"?  Ideas?

TIA,
Don

[Peter]

There are now red flags there that I can see. This is just part of p2p lending. Sometimes a borrower can look great on paper, even have a long employment history in a stable company and bam, they default right away. It could be because they are scammers and wanted to have a last fling before filing bankruptcy or something unexpected happened such as the loss of a job or a major medical expense. Either way, some defaults are impossible to predict. That is why it is important to diversify into as many loans as possible because defaults happen to all loan grades.

[TravelingPennies]

Thanks Peter.

I guess I was somewhat looking for validation.  This was my first default, and it looked like such a cream-puff loan.  Logically, I know to expect these things to happen, but the first one is still kind of hard to take!

I am up to 321 loans now, so this event will not *totally* trash this month's return, but it may halve it -- but who can complain about getting 6 or 7% these days?

My plan has been to individually pick loans instead of letting LC build my portfolio because I want to learn how to pick the best loans.  To that end, however, I find the information presented on each loan rather anemic.  I hope LC obtains and utilizes more information than that when deciding to accept the loan.  Some of the listings do not even have employment information.  I pass over those with great prejudice.

Thanks,
Don

[TravelingPennies]

I hate to say it but with 321 loans you are probably going to have to get used to defaults. They will happen for you on a regular basis I expect. And you are right, the first one stings, and there are times when they will dramatically impact your monthly returns. But if you keep a longer time horizon you will see that they are really just a cost of investing in p2p lending. We want to reduce them as much as we can but it is very difficult to eliminate them.

[Josh Brooks]

donmiller,

Your remark:  "My plan has been to individually pick loans instead of letting LC build my portfolio because I want to learn how to pick the best loans."  I do neither of these.  Instead, I pulled down Lending Club's data file, and analyzed it.  The result is a filter that I now use, which (hopefully) helps me reduce my default rate.  Now, when I go to purchase notes, I run my filter and buy everything that pops up;  I don't even look at the listings.  Between three accounts (my RIRA, my Wife's RIRA, and our regular account) I am buying more than 100 notes per month (at $25 each - maximize diversification).  So far, this technique is working;  my default rate is less than 1.5% (knock on wood).  I would encourage you to take a look at Lending Club's CSV file, as a way to inform your loan selections.

Happy Hunting.

Josh

[TravelingPennies]

Josh, Thanks for chiming in. That is indeed the way I invest as well. I download the notes to Excel and filter there and invest in around 20-30 loans a week this way. With careful screening I believe that investors can minimize the risk of defaults even in the lower grade notes. I wrote about my filters here:
http://www.lendacademy.com/investing-lending/how-i-am-investing-in-lending-club-and-prosper-in-2012/" class="bbc_link" target="_blank">http://www.lendacademy.com/investing-lending/how-i-am-investing-in-lending-club-and-prosper-in-2012/

[veggivet]

How many credit inquiries were listed on this loan?

[TravelingPennies]

He had 3 inquiries...

I'll look at the offline filter approach.  I know that one of my main difficulties is maintaining "detachment".  It is becoming increasingly clear to me that many people just bald-faced lie on their applications.  If they are really re-financing *all* their present debt, burning their cards, and paying hundreds less per month in the process --- then there is no reason they should have trouble on month #1 or month #2 of their new loan!

I get what my problem is.  I over-think each loan.  Statistics, just statistics... right Peter?

Thanks,
Don

[TravelingPennies]

You got it, Don:  get a good filter, spread your investment out over as many notes as possible, and don't take the defaults personally.

Instead of fretting of every loan that defaults or gets charged off, go into the account activity tab and take pleasure in all of the interest rolling in.

V/R,
Josh