I just checked my Lending Club account. And I saw my first charge off. My part of the charge off was only $20, but the loan was for someone doing a $15,000 kitchen and bath remodel.

The part that surprised me, was that it was an A grade loan. However even with an A grade, Jill may be onto something when she filters for loans under $10,000 in How to Earn High Returns with Lending Club.

The part I found fascinating is how much information Lending Club provides me with. The loan was taken out in February 2009. They paid on their loan for seven months before a late payment. Once they stopped paying the loan went to a collection agency in December 2009 and was charged off in February 2010. There’s an entire collection log that shows the contact between Lending Club and the borrower over the year.

The most interesting part, take a look at what happened to their credit score:

Lending Club Credit Score

Obviously, something went terribly wrong and their kitchen and bath remodel wasn’t the only thing that got charged off, as you can see with their credit score plummeting by 250+ points.

Since it was my first charge off, I couldn’t help but feel a little scammed since I invested time reading about the borrowers personal statements and somehow felt connected to their beautiful new kitchen. Then, I wondered if there was even a kitchen and bath remodel.

However, when I come back to the numbers and remind myself that 2.20% of loans were in default when I took on this loan in my Lending Club review, charge offs were to be expected.

And let’s be honest, I lost $20. By the looks of their credit score, they’ve lost a lot more. And for that I feel bad for them. Hopefully they’ll recover from this.

I’m amazed at how powerful the connection with the borrower becomes when you have so much information! And since I took advantage of the Lending Club $25 Sign Up Bonus and the rest of my loans are current, I’m still ahead!

Update: For those of you who have asked, here is how I handled the Lending Club charge off on my taxes.

Have you had any defaults? Did you see anything interesting in their collection log or credit score time line?






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Comments to A Closer Look at a Lending Club Default

  1. I haven’t had any of my loans on Lending Club go bad yet, but like Jill I also have set a 10k limit to the loans I take part in. I figure the lower the amount, the easier to pay it back. So far it has worked pretty well.

    That is quite a drop for that person’s credit score though. Wow is all i can say.

    Peter

  2. Peter, I know, isn’t that graph worth 1000 words? I really feel bad for them.

    Madison

  3. I have one charge off out of 27 loans. I lost $45. I was feeling pretty taken advantaged of so appreciate your comments about the person’s credit score. I checked on my loan’s and it went from 673 to less than 500 so they are in bad shape. Worse shape than me losing $45. I guess they needed the money. The original loan was for $8k and classified as a C2 loan.

    I also try to look for low dollar amounts as hopefully the person would be able to make a low monthly payment. I also look for debt consolidation loans as I figure they would have to pay the money anyways. Maybe a better chance of them paying it back.

    Sarah

  4. As someone who has taken out loans and is now investing in lending tree, I wouldn’t take out a loan over 5k, rarely 3k. The payments weren’t good for my budget.
    Because of that, I won’t give money over 3k unless it is for schooling to increase their income.
    Those are my personal rules.. so far so good.

    Dawn

  5. Although I love the concept of lending without a costly bank in the middle, my one try at Lending Club was a total failure. Top rated loan (at the time Lending club boasted that none of them went in default). Borrower defaulted after a few months. Similar credit score graph as you show. But why would you expect anything else from someone defaulting on a small loan?

    These loans are totally unsecured.

    What surprised me was how long the loan sat in “late payment” status before Lending Club declared it a failed loan.

    Maybe if this type of investment matures over time, the offering company will leverage their huge diversity and offer some sort of (partial) principle guarantee.

    I would love to use this type of investment for cash flow. Invest enough at one time to give me monthly cash to cover my expenses (with some buffer), but since you don’t know how many loans will default, you can’t depend on any cash flow.

    Jon

  6. I’m with LC for a year now and so far out of 30 loans I have 2 defaulted and 2 in recurring late payments with payment plans – which I won’t be surprised if they default too eventually. All four are B grade loans (I have half A and half B) – with seems to indicate B is not worth it, the rate premium seems not to compensate the risk. Though it may just be that I chose stupidly or just I am unlucky :)
    Both failed loans were in default after 4-5 months of payments.

    SM

  7. Madison,

    I find this really interesting. I emailed you several months back noting that almost all of my A loans had dropped in their credit score. I’ve been doing good so far, but it will be interesting to see how things pan out. I too tend to look for loans under $10k. I think they are generally safer.

    Jenny

    Jenny

  8. Good luck with lending club! I’d love to be able to invest like 50-100K in it, but I’m too nervous about default.

    Financial Samurai

  9. I don’t lend if the monthly payment is more than 10% of their stated monthly income, though I’ve also started capping the total dollar amount on loans that I’ll invest in. In general, if the total request is below $15k and the monthly payment is less than 10% of income, then I’ll take a closer look.

    nickel

  10. I have one loan that was charged off in June. The customer contact log indicates that the borrowed contacted LC after the charge off and made arrangements to pay. The log also states that a payment was received in July, but I have yet to see my share of the payment disbursed and it is now December.

    Emily

  11. I’ve been with them since about 2008. I have 33 paid off, 29 current, and 16 that went bad.
    I only do $25 notes
    Bad ones are 4D, 4G, 4E and 4F.

    Fully Paid: 1B, 1C, 9D, 12E, 5F, 5G.

    Of the deadbeats, 1 never even made one payment, 7 made 6 or less payments.

    and this guy (www.AdrenalinIsland.com) that wanted to buy some DJ equipment, made 2 payments and then filed bankruptcy.

    2/9/09 (Monday) Bankruptcy Discharged
    12/31/08 (Wednesday) Charged off. Bankruptcy: account dischargeable
    8/6/08 (Wednesday) Borrower filed for Bankruptcy

    Seriously…don’t people feel that they have any obligation to not just take and not give back?

    Matt


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