After the TSP, I invest my money in Betterment and Vanguard. I track all of my investments with Personal Capital. I also wrote a short, 2 hour book summarizing this site. You can buy it here.
Since joining Lending Club in February 2011, I’ve had five loans get charged off. You can see them below.
As you can see, they all started as $25 investments, cover 5 out of the 7 investment grades, 2/5 are 36 month, and 3/5 are 60 month. Four out of five of the notes still had more than 80% of the principle remaining to be paid off.
What Makes a Lending Club Note Default or Charge Off?
Let’s start with the A grade note. Specifically, this was an A4 grade note for $12,000 issued at 7.29%, for 36 months. The intended purpose of the loan was debt consolidation. 179 people funded the note, for an average investment of $67. The borrower also had confirmed income of $10,417 / month. Here’s the borrower’s stats:
Credit Score Range: 720-724 Earliest Credit Line 01/1998 Open Credit Lines 16 Total Credit Lines 36 Revolving Credit Balance $9,185.00 Revolving Line Utilization 19.40% Inquiries in the Last 6 Months 0 Accounts Now Delinquent 0 Delinquent Amount $0.00 Delinquencies (Last 2 yrs) 0 Months Since Last Delinquency 44 Public Records On File 0 Months Since Last Record n/a Months Since Last Major Derogatory n/a
Really no red flags here. The first loan payment was collected on 4/7/11. I received $0.77. Payments continued as agreed until October 2011. Here’s the log (from most recent to oldest) of what happened next:
2/17/12 (Friday) Charged off. PAYMENT 120+ past due. Collections efforts exhausted. Recovery unlikely 2/2/12 (Thursday) Collections Agency attempted to contact borrower 12/19/11 (Monday) Collections Agency attempted to contact borrower 11/22/11 (Tuesday) Collections Agency attempted to contact borrower 11/10/11 (Thursday) PAYMENT Failed 11/10/11 (Thursday) Collections Agency attempted to contact borrower 11/1/11 (Tuesday) Collections Agency attempted to contact borrower 10/26/11 (Wednesday) Collections Agency attempted to contact borrower 10/24/11 (Monday) PAYMENT Failed 10/24/11 (Monday) Collections Agency attempted to contact borrower 10/20/11 (Thursday) Engaged external collections agency 10/19/11 (Wednesday) Attempted to collect payment 10/17/11 (Monday) Attempted to contact borrower (left voicemail) 10/17/11 (Monday) Attempted to contact borrower (left voicemail) 10/13/11 (Thursday) PAYMENT Failed 10/13/11 (Thursday) Notified borrower of failed payment (e-mail)
Again, no real red flags. I guess he just stopped making payments. Not cool man. I lost $21.20 in principle on the loan. In total, he cleared over $10,000 by not making his payments. Here’s what happened to his credit score after defaulting on his Lending Club loan:
His credit score dropped 140 points from 720 to 580 by defaulting on his Lending Club loan. I hope that was worth it, buddy.
Looking at the other 4 charged off loans in my portfolio, there are no really obvious common traits. Some people utilize 98% of the credit, some use 0%. Some rent, some have do business with Northpoint mortgage whereas most use the main banks . However, my sample size is really small, so lets look at a much larger sample size…
Common Traits of Charged Off Lending Club Loans Versus Fully Paid Loans
Lending Club has released a massive 50 mb data dump of their loan data. So let’s dig into that a bit. Here’s my analysis of charged off and defaulted Lending Club loans versus loans that were fully paid off. These are all arithmetic averages.
,Charged Off/Default,Fully Paid
Debt-to-Income Ratio >10%,70%,44%
Revolving Line Utilization,54%,44%
Inquiries in the Last 6 Months,>1,<1 Monthly Income,$5179,$5958 [/table] While this is interesting, it doesn't help us too much when it comes to selecting loans to invest in. Check back soon as I'm going to look into using a genetic algorithm on the Lending Club stats. Hopefully I’ll be able to find the best filters for 2013 Lending Club notes to maximize return and minimize default risk.
2 Websites I Use to Achieve Financial Independence Faster
I have investment accounts all over the place. To keep track of all of them in one place I use Personal Capital. It combines all of my accounts, shows me where I may be overpaying in fees, and provides beautiful charts showing my overall asset allocation and performance.
I use Personal Capital to track my Roth and Traditional TSP, Vanguard IRAs, banking accounts, SDP, and my Betterment taxable account, all in one place. It's free, secure and presents me with a one-stop dashboard so I can see all my money on one site.
Read my full review of Personal Capital and see how easy it can be to manage your investments in one place. Trust me, once you try it, you'll love it.
P.S. - If you have over $100,000 of assets and a 401k, you really need to run the Personal Capital 401k Fee Analyzer.
The best way I know to achieve financial independence is to keep your investments simple, diversified, automatic, and low-cost. Costs eat into your returns like you wouldn't believe! A 1% difference in expense ratios can mean $100,000s lost to fees over a lifetime of investing.
Even if you're a DIY (do-it-yourself) investor like I am, you need to check out Betterment. You can read my full review here, but the bottom line is for only $250 per $100,000 invested (0.25% expense ratio) you get simple, diversified, and automated investing. In addition every account now gets free Tax Loss Harvesting+ features, which should increase returns for the average investor more than the minuscule management fee.
If you're not a DIY investor or are just getting started with investing, then you definitely need to check out Betterment. It's what I recommend to my family and friends who aren't strong investors or don't care to learn about asset allocations, diversification, or rebalancing.