Investors that make use of the peer-to-peer lending firm, Lending Club, recently gained access to a lot of new data that will help them make better decisions as to what types of loans they should fund and which ones they should avoid. Lending Club’s new statistics page provides details about what types of loans perform better based on credit risk, purpose of the loan and information about the borrower.
One of the questions that frequently comes up is whether or not it’s better to invest in high-risk or low-risk loans. With high-risk loans, you will receive a better interest rate, but the borrower is likely to have lower credit and a higher likelihood of default. With borrowers that have A and B credit ratings on Lending Club, the default rates will likely be much lower, however, the amount of interest that you’ll receive will also be lower.
Investors have to make the decision as to whether or not the extra risk that they are taking on with high risk investors is worth the extra percentage points that they will earn in interest. Lending Club’s new statistics page makes that decision a lot easier.
As you can see, loans from borrowers with C, D and E credit ratings seem to perform the best. “A” rated loans have averaged a 7.94% rate of return after all defaults, late payments and expenses. “B” rate loans return an average of 8.82%. “C” rated loans return an average of 9.65% and “D” rated loans return an average of 10.05%. “E” rated loans return an average of 10.23. “F” rated loans return an average of 5.49% and “G” rated loans return an average of 10.76%
Based on Lending Club’s statistics, it might appear that “G” rated loans are the best deal, but you’re really only getting an average half of percentage more, and it’s probably not worth the volatility and risk you’re taking on from high-risk borrowers.
Loans in the “C”, “D” and “E” range are probably the “sweet spot” for the amount of risk that you should take on compared to the interest rate you receive. It’s important to remember that you’re still taking on risk. About 9% of Lending Club loans will go delinquent during some point over the course of the loan, and if you’re not comfortable letting that happen, you might want to stick to lower risk loans.
