Lending Club Default Rate: How to Reduce Lending Club Defaults

If you’re an investor on Lending Club, you know that the number one thing that can negatively impact your rate of return is borrower defaults. Lending Club gives each borrower a credit rating, but by taking advantage of some other factors, you can find “C” and “D” borrowers that you might want to lend money to above “A” and “B” borrowers.

Last summer, Lending Club had an online discussion with veteran investor Scott Langmack, who has averaged a 12.6% rate of return since Lending Club began operations in 2007. Langmack shared his tips to reduce Lending Club Default Rates:

Diversification – Langmack contended that in order to maximize the stability that you have on your loans, you need to have at least 400 loans in your portfolio. Langmack says that the more notes that you have, the more likely you will receive the “expected” default rate since you’ll have the law of averages on your side. If there’s an expected default rate of 5% for a certain type of loan, you’re much more likely to have that default rate if you have a large number of loans. If you have a few, larger loans instead of many smaller ones, you might have a 2% default rate or a 10% default rate depending upon how lucky you get. By investing in a large number of loans, your default rate will be much more predictable.

Choose Your Volatility – Another one of the Lending Club investment tips that Langmack offered was that Before beginning to invest, you need to decide what interest rate you would like to receive on your money. In making that decision, you are also deciding how much volatility and how much risk you are willing to take on. Langmack stated that you can easily get 7-8% back on your money without much risk or volatility by investing in high-quality loans, but if you’d like to earn in the 12% range, as Langmack does, you should invest in loans paying 12.5% to 20%.

Job Stability of the Borrower – When reviewing a potential loan to invest in, Langmack contended that investors should not only look at the income of a borrower, but also look at the person’s job stability. How long have they been working at their current job? Is the type of possession that the person has a “high turnover” field? State or Federal Employees with a long term history of employment are much less likely to have a period of unemployment than an individual in the automotive industry in Detroit that has been working for 6 months, which reduce your overall default rate.

Choose the Best Loan Types – Langmack contended that the reason the borrower is asking for the loan is often predictive of whether or not the individual will default. He stated that loans for vacations, weddings, and lowering credit card loans have default rates of only 2%. Loans for medical costs, home improvements, moving expenses or major purchases have a default rate of 3%. Meanwhile, loans for educational expenses, down payments on homes, start-up capital for business ventures and debt consolidation have average default rates of 5%.

Take advantage of these tips and carefully read a borrower’s loan description in order to reduce your Lending Club Default Rates.