...a situation where a borrower is late or overdue on a payment, such as income taxes, a mortgage, automobile loan or credit card account.

Investopedia

Criteria No Delinquencies

Result Historically removes 35.6% or 18,332 loans and in current sample removes 31.0% or 273 loans

Highest risk comes from those borrowers who had a recent delinquency. There is a small drop, to back under my 7.5% max, around the three to four year mark, but it goes back up in the following years. Reason not to include these is because in one to two years they’ll be back in the higher risk group. It is surprising that Lending Club allows in so many borrowers who have had credit issues.

Criteria Exclude those with less than two years experience

Result Historically removes 22.4% or 11,507 loans and in current sample removes 26.0% or 229 loans

The default risk rate is fairly low for this filter, but those without an established career or no job at all, may have difficulty in paying if something happens to their income source.

Criteria Include Car Financing, Credit Card Refinancing, Major Purchase, Wedding Expenses, Debt Consolidation, Home Improvement

Result Historically removes 20.4% or 10,488 loans and in current sample removes 18.1% or 159 loans

Several options here don’t have enough historical data to make the default percentage very accurate. For now I'm staying away from loans dealing with renewable energy, business, and education since they have a high risk of default, even though I'm interested in those areas. Surprisingly car financing has a decent number of loans and has the lowest risk rate, I would think that the interest rates offered by dealers are lower then what Lending Club can provide. Perhaps these are mostly used car loans where it may be harder to get a bank loan at a low rate.

...the relationship between the balances on your credit cards and the credit limits on all of your open credit card accounts.

Mint

Criteria Exclude those with 0% and 80% or higher

Result Historically removes 18.4% or 9,462 loans and in current sample removes 21.0% or 185 loans

This statistic shows how much of their available credit a borrower uses. This attribute, along with several others that go into use of credit, show that those with no experience with credit and those that max out their available credit have a higher risk for defaulting on their loans.

Using mathematical models, the FICO score takes into account various factors in each of these five areas to determine credit risk: payment history, current level of indebtedness, types of credit used and length of credit history, and new credit.

Investopedia

Criteria Exclude below 679

Result Historically removes 17.1% or 8,777 loans and in current sample removes 15.2% or 134 loans

Those with low FICO scores most likely have difficulty in getting loans from traditional financial institutions and give Lending Club a shot. Note that the under 660 group with the 30.5% risk of default don’t have a large enough sample size give that default rate a lot of accuracy, but it still show’s that this group is highly risky. In another post I’ll go into how I review funded loans in my portfolio for signs of default with the intent to sell them off. This is one of the key pieces of information I look at to make that determination.

This statistic shows the ratio between open lines of credit and total lines of credit.

Lend Analyst

Criteria Exclude those with less than 20% and 70% or more

Result Historically removes 16.5% or 8,465 loans and in current sample removes 15.6% or 137 loans

This goes hand in hand with the revolving balance utilization filter mentioned before by reaffirming that those who don’t use credit a lot or those who exceed their usage show higher risk then borrowers who fall in the middle. The basic idea to take away is to stay away from borrowers who hit either extreme.

The total number of open accounts appearing on the borrower's credit report.

Prosper

Criteria Exclude those with less than 5 or more then 19 credit lines

Result Historically removes 14.0% or 6,981 loans and in current sample removes 7.5% or 66 loans

Similar relationship of credit usage to risk as the revolving balance utilization and credit line ratio.

The total number of credit lines appearing on the borrower's credit report.

Prosper

Criteria Exclude those with less than 10 or 60 or more total lines of credit

Result Historically removes 12.5% or 6,425 loans and in current sample removes 8.1% or 71 loans

The relationship between credit usage at the extremes to default risk is enforced again by this statistic.

A transaction whereby a bank or other credit-issuing institution views an individual’s credit report in connection with a loan or credit card application. The purpose of a credit inquiry is to evaluate an individual’s likelihood to repay money that is lent to them (known as creditworthiness).

Investopedia

Criteria Exclude those with 3 more inquires

Result Historically removes 12.2% or 6,280 loans and in current sample removes 7.7% or 68 loans

Initially I had this at the top of my list of filters to implement since the default risk rises dramatically with each extra inquiry past two. As you can see though, Lending Club doesn’t let in many borrowers who have been rejected by other financial institutions a high number of times, so while this is an important filter to include, it won’t reduce the loan pool by much.

...a situation where a borrower is late or overdue on a payment, such as income taxes, a mortgage, automobile loan or credit card account.

Investopedia

Criteria No delinquencies

Result Historically removes 10.7% or 5,486 loans and in current sample removes 10.0% or 88 loans

Anything that deals with having issues with paying debt in the past shows a higher rate of default. Borrowers who show a history of bad money management skills show a tendency to repeat those same mistakes in the future.

A personal finance measure that compares an individual's debt payments to the income he or she generates. This measure is important in the lending industry as it gives lenders an idea of how likely it is that the borrower will repay the loan.

Investopedia

Criteria Exclude those with 0-3% DTI

Result Historically removes 9.2% or 4,738 loans and in current sample removes 6.2% or 55 loans

Before doing this analysis, I stayed away from DTI’s higher than 20%, but the risk was really at the lower end of the spectrum. Given the small sample size, the 28-30% DTI low risk rate may not be accurate, more data may cause this to rise. After all, Lending Club hasn’t accepted borrowers with ratio’s higher than that, so there must be some indicator showing a higher default rate past the 30% mark.

Public records are legal documents created and maintained by Federal and local governments, which are usually accessible to the public. Some public records, such as divorces, are not considered by your FICO score, but adverse public records, which include bankruptcies, judgments and tax liens, are considered by the FICO score. Your score can be affected by the mere presence of an adverse public record, whether paid or not.

myFICO

Criteria Exclude any borrowers that have had any historical records

Result Historically removes 7.7% or 3,941 loans and in current sample removes 3.1% or 27 loans

A record is a claim made by a credit institution on the borrower's credit history. Any number of such records shows a very high rate of default. This is similar to the inquires in past six months statistic, in that the sample size of borrowers who fall into the excluded list is small, but their default risk is very high.

Criteria Exclude any and none

Result Historically removes 0.28% or 145 loans and in current sample has no effect

The two exclusions I list are not common, mostly originating between 2007 and 2009 (though there have been one each in the past two years). So the basic take away from this statistic, is that it isn't a good indicator of default risk. I included it because I assumed that perhaps mortgage might have a higher default rate in the past 2-3 years because of the credit crisis, but this shows that there is no such correlation.

After all this analysis has been applied, you only have to review 10-15% of the loans in funding. This can still leave a high number of loans to consider (around 100 in this case) so I also exclude loans with less than an 11% interest rate.

In the near future I'll be adding another section to this website that will include the notes that I invest in. If you are new to Lending Club, then that may be a good place to start choosing which loans you should invest in.

Lastly, if there are any questions about accuracy or points of confusion in this post, please let me know in the comments below.