April 2011: Loans By Credit Letter Density Plots

In a previous post, I examined density plots of all Lending Club loan data as of April 1, 2011.  I used past loan data to estimate the rate of return for each previously available loan at Lending Club.  Now I want to do the same thing for subsets of loans.  Specifically, this post will examine subsets by credit letter.

First I looked at only loans graded “A” by Lending Club. The x axis represents the estimated percentage return on investment for each A grade loan. The y axis represents the number of loans with that estimated return, as a percentage of all A loans.

The median is 5.51% return. Notice that A loans seldom default, giving a positive return for almost every loan in the subset.  But there is a steep drop-off in return. The initial peak represents loans paid off early, and the second peak represents loans paid off much later, probably at the end of the 36-month loan term.

With B grade loans, you can begin to see the influence of additional defaults, with increased loans to the left of the red line (0% gain). Again, a double peak likely indicates a significant number of early-payment loans.

With C grade loans, less loans are paid off early than with A and B (no sharp peak to the right of the red line). More loans return higher gains (between 10 and 20%) but these are offset by additional defaults. The result is a median estimated gain of only 4.86%: less than either A or B loans.

D, E, F and G loans show greater dichotomy: a high proportion of these loans go bad (negative returns) while a significant number are paid off, with resulting high returns. This is good: if you believe you can pick winning loans, then these loan categories offer a promise of high returns if you successfully avoid loans that will end in default. And there are a significant number of lower grade loans that do not default.

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