Moving to loans trend over a period of time

In the above line plot shown, we can clearly see the different borrower state from USA while the plot
is judged among three parameters namely: - loan original amount, no of records and no of score
respectively

We can see small randomness in loan borrowings from the period of 2009 -2011 and after that sharp
spike was observed in loan borrowings in 2013 followed by a decline the next year. The reason
behind the increase can be mainly attributed to drastic decrease in interest rates and Underlying
cause was the Fed's actions to stimulate economy in FY'13-14 causing unemployment rate to fall at
an accelerating pace, leading to increase income in the hands of consumers ultimately leading to
decrease in borrowings and increase in average credit score.

These 4 states have the highest default rates: North Dakota, Utah, Iowa, Montana – Lending Club
should perform exhaustive end-to-end checks before lending money.

As the state the defaulter’s rate is progressively increasing due to which money lender are unwilling
to invest in the end which results in decline of score.

Now let’s look at the relationship between the riskiness of the loan vis-a-vis the expected returns it
will generate over its lifetime. LendingClub has its indigeneous 7 scale alphabetical grading system
which classifies the riskiness of the loans. It ranges from AA, then A to E and lastly HR with AA being
the lowest risky class of loan to HR being the highest risky. This is basically internal segmentation or
proprietary modelling

Now, this follows a direct relationship with the expected returns for the lenders. AA being the safest
investment, its yield is lowest at 7.9%, whereas the borrower rate can go as high as 31.73% for the
Highest Risky class of loans. Now if you look at the chart on the right, we have mapped average
credit scores of the borrowers with the ratings to identify the range which sets them apart. As one
clearly expects, borrowers classified as AA have the highest credit score with a median score of
782.4 and upper whisker breaching the 800 mark.

However, an important thing to note here is the median values of C, D and HR rated borrowers
which are 698, 688 and 687 respectively. These are in closer proximity to each other than we had
expected with HR rated borrowers having higher credit scores than E rated ones.

Also, if you observe closely, the candle for HR rating is much shorter with an exception of few
outliers in direct comparison with C and D ratings. We’ll look at this peculiarity in detail on the next
dashboard.

In this dashboard, I have compared returns generated and losses incurred by lenders over the years
for different ratings. The average estimated loss follows a direct relationship with the riskiness of the
loans. AA, the highest rating with lowest risk, incurs loss only 1.43% of the times whereas HR rated
loans incurs losses 17.33%, which roughly translates to 1 out of every 6 loans. There is also a direct
relationship between the returns and yield generated with riskiness, with a mere 6.64% yield for AA
and 25.39% yield for HR.

So here we saw that the estimated return, risk and yield are positively related to the riskiness of the
loan.
First: If we see the net principal loss on the loans, although HR is the riskiest of all, D is the one with
highest Net principal loss.

Second: The chart at the bottom shows estimated loss on the X axis and Estimated return and yield
on the Y-Axis. Here, we can observe that HR has the highest effective yield, and is also not as loss-
making as D which is the so-called less-risky loan.

So, with these two observations, my recommendation is that LendingClub should pursue the HR
loans over D and E loans as they have a similar range of Net Principal Loss but HR has a significantly
lower estimated loss and higher return. So, ideally, the portfolio of rated loans would be AA, A, B, C
and HR

(If loss in D is more, the interest rate is be skewed, increase it, or principle or tenure (strategic
choice)HR, E- ) Again this is strategic decision because in times of economic downturn, substandard
loans can default faster, so Lending Club can further study and decide to either pursue quality loan
or volume

Moving to trend analysis of loan purpose over the period.

If we look at 2008, we see the highest value of loans to be taken for the purpose of Personal Loan
which is represented by green circles. The next highest purpose is business in 2008 represented by
blue circles. But when we see the trend from 2010 to 2014, we see the red circles being the highest
value of loans. These indicate the Home Improvement Loans. We see that during the economic
recovery after the 2008 financial crisis, people bought homes and demanded home improvement
products and services.

This observation gives us our final recommendation which is that Lending Club can tie up with Home
Improvement Companies to offer attractive loans on home improvement services which will help it
to achieve a wider consumer base.

There is something called as risk management practice where any lending institution should not
give a lot of short-term loans. Rolling out longer tenure loans is a success formula which
companies like Lending Club can adopt. So, they can better their product portfolio, focus on 5-year
loan term and things on that line.

Lending Club to do extensive checks related to borrower’s credit history for the states of Utah,
North Dakota, Iowa and Montana as there is a geographic risk and political risk associated because
some states might not have robust policies or industries or other things. So, Lending Club’s
portfolio as a lender should be diversified across entire US. and recommend a portfolio of AA, A, B,
C and HR rated loans to the lenders

Low-income professionals, though being rated on the higher spectrum of the riskiness scale, are
much safer when compared to the default rates of the student loans which not only are high in
quantum

Leveraging the trend over the years, Lending Club should provide attractive finance services in tie
up with home improvement businesses to increase its top and bottom line