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Author Topic: Why would someone borrow $9,500 to payoff credit card debt of $4,000

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I've wondered about this for quite some time. I recently got a charge off for a loan who's stated purpose was credit card refinance.

When I started buying loans 3 years ago I let LC's auto investing choose my loans. The majority of loan purposes was to refinance / paydown debt. I also got a number of loans for other things (vacation, home remodel, medical, etc).

I re-invested proceeds for the next 9 months. When I re-invested I created my own filter to only invest in debt paydown type loans. When i focused on those loans I noticed that some of these loans requested much more money than their Info page showed they owed to revolving credit. I didn't buy those loans. However... LC's auto purchase did buy those loans for the first 3 months of my LC purchases.

Why would the borrower do this?

The revolving credit balance field would include all credit card debt of the borrower, right? I assume that is right so for someone to request more than double the amount of his credit card balance under the category of credit card refinance is (more than a little) bit suspicious, right?

What was he/she doing? ... asking for money for a spending spree?

When I noticed this I seriously thought of checking all my refinance loans and selling any I saw that didn't get a good fico jump (that would mean they obviously did not use the loan proceeds to pay down their debt). I didn't sell for two main reasons: I didn't want to take a Folio loss on a "maybe" and (more importantly) I didn't want to deal with the tax complexity of Folio sales.

This particular loan id is 15249524. This person obviously used some of the proceeds to pay down the credit card debt of around $4,000 because his FICO jumped up 50 points within two months of getting the loan. His fico score stayed that high for the next 10 months, then it started dropping. Was he using that extra $5,000 to finance his lifestyle and then when it ran out he resumed his credit card binge...showing he did not learn his lesson? Me thinks this was the case...which means that person never really intended to mend his ways.
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This person actually owed $18,000, due to 5 installment accounts.
Given the prior bankruptcy and the cage cashier job in Nevada, I'd say the spending spree happened before the loan request.
I can't see the note data, but it looks like the person tried hard and almost made it!  Too bad.
A DTI of 24.69% at an income of $2,917 per month is a struggle.
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It is very hard or impossible to figure out what was happening in one individual's life with this limited data.

The debts that are shown in the credit data may not be all of this fellow's debts. 

Even something as simple as a credit card... All credit cards are not reported to all three agencies.  LC uses one agency.  Some cards are missed.

Other debts that don't show up...  Alimony.  That loan from the loan shark.  (Can you imagine the possibility of there being a loan shark in Las Vegas?)

So it is quite possible that he was more stressed financially at the time he took out the loan than showed up in the data you had available. 

There were several accounts listed.  We don't know the terms of those accounts.  Maybe some one of them "came due".

We just don't know enough about his situation and life events. 

You're right about one thing ... Some people pay down their debt with proceeds of an LC loan, and some don't.  You already commented on the FICO bump. 

If you backtest LC loans, you can see that loans which have a close match between the amount of existing debt an the amount of the loan generate slightly higher returns.  This fact has been discussed here from time to time.  This result of course is a measure of the average performance of many loans, so while I believe that it means just what you think in general, it means nothing for one loan in particular.

You can do this kind of analysis on .  I created a "formula" which was revolving balance divided by loan amount.  (Loan amount is never zero, so is a safe denominator.)  I then asked nsrplatform to calculate for all LC loans (no filter) for all time, broken down by my formula, and finally told them to display this as a chart.

The horizontal axis is the revbal/loanamt ratio.  Sorry that the axis labels aren't tidy.  This is an artifact of the way NSR autogenerates labels.  Look at the blue curve.  You can see that there's a broad optimum near the ratio = 1.  Not a big variation, except when the ratio is very low, which is the case where a person borrows a lot more than he owes on his revolving accounts.

Before using this idea for your own investments, I suggest you use nsr to recalculate this for your particular loan filters, and for a limited set of years.  You'll get a different result depending on the set of loans you use.  Your other filters, for example, might already filter out the bad guys which filtering on this ratio would catch. 
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Cash out refinancing!
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Collection note: "Borrower stated ball landed on red, not black.  Won't be paying money back.  Blames LC for enabling him, provides BK attorney information, and requests that collection efforts cease and desist.  Says he feels lucky, though - and can win it all back, just needs 2x the dough!"
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Just another example why I do not buy any loan from sand states.
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