My Lending Club Loan Selection Criteria

I’ve had a few people ask me about how I go about selecting Lending Club loans, so I thought I’d write something up for all to see. Back when I was first testing it out, I built two test portfolios, one composed of “high risk” loans, the other “low risk.” In the time since then, however, I’ve started manually selecting my loans.

Getting started

For those that aren’t familiar with Lending Club, I thought I should start from the beginning… Not surprisingly, you get started by logging in. From there, simply click the “Invest” tab along the top.

This will pull up a screen that offers you three different “auto-invest” scenarios: More Conservative, Moderate, or More Aggressive. There are a couple of things to note from this screen…

For starters, you can click on the “More Options” tab to get a slider that gives you access to a continuum of strategies. Next to that is a button labeled “filters.” Click this button gives you access to a wide variety of filters that allow you to set specific investment criteria.

Those options are all well and good if you’re comfortable with auto-investing, but I’m not. If you’re looking for more control, look no further than the “Build a Portfolio from 117 Notes” link over to the left.

Selecting your filters

Once you decide to build your own portfolio, you’ll want to develop a set of custom filters to rule out loans that you deem unacceptable. The good news is that you really only have to do this once, as you can save your filters.

Filters can be accessed over in the sidebar of the “Browse Notes” screen. Though they’re all collapsed, you can see the primary filters that I use in the picture below.

Setting up your filters

If you’re intent on selecting your loans by hand, you’ll need to learn how to effectively filter out the loans that don’t interest you. The following is a rundown of how I set up my filters.

• Inquiries in the last 6 months. This filter can be set from 0-10. I limit it to 3, as I’m not interested in lending money to people who appear desperate to borrow.
• Delinquencies (Last 2 yrs). I set this one to zero. In reality, I won’t lend money to anyone that has a delinquency on their credit report (ever), but Lending Club doesn’t have a “no delinquencies, ever” filter. Thus, I use this one to pre-filter and then I double check by hand.
• Min length of Employment. This can be set between 0-5 years. I’m looking for stability, so I require 3 or more years in their current job.
• Max Debt-to-Income Ratio. Note that this is not a typical DTI calculation in that it doesn’t take housing expenses into account. On the first pass, I typically limit this to 10%, though I’ll sometimes relax it to 15%.
• Exclude loans already invested in. Lending Club loans sometimes take awhile to get completely funded, and I don’t want to accidentally invest in the same one more than once, so I check this box.
• Public Records. I exclude all borrowers with a public record on their credit report. Fortunately, Lending Club has an absolute filter for this one, so I don’t have to review them by hand.
• Month since last Delinquency. As noted above, I don’t want to lend to someone with a delinquency on their record, so I set this to the most stringent setting (60 months or more) to get rid of as many as possible.

Once you have your filters set up, click the “Save” link near the top. You’ll now be able to quickly and easily filter the current crop of loans whenever you come back (by clicking the “Open” link).

Manual review

While the filters above do a good job of filtering out the least attractive loan requests, I next do a quick manual review before investing. Here, I’m looking for two main things…

As noted above, I’m not willing to invest in anyone with a delinquency on their record, no matter how long ago. Thus, I quickly scan through the loan requests and rule out anyone with a delinquency. The good news is that only a few such loans are left after running the filters outlined above.

Next, I compare the monthly payment on the requested loan to the borrowers gross monthly income. If it’s more than 10%, I pass. There’s nothing magic about 10%. It’s just an arbitrary threshold that I’ve selected to make sure the loan payments won’t be a huge burden to the borrower.

While this sounds like a lot of work, it’s really not. If you click on the title of the loan (after filtering), it will expand to reveal more information. In order to efficiently review the loans, I click on each title (one-by-one), eyeball the delinquencies and payment-to-income ratio, and then collapse anything that isn’t acceptable. That leaves me with a slate of expanded, candidate loans from which to select.

Other considerations

In my experience, the above process knocks out the around 75% of the listed loan requests and it only takes a few minutes. From here, I follow my gut. One big thing that I do is to avoid business loans. In general, small businesses have a high rate of failure, and I don’t the added risk.

Other than that, I take look at what the loan is for and ask myself if the details add up. Borrowers are asked to include a loan description. Some do, and some don’t. If they can’t be troubled to explain why they need the money, I pass. If their reasoning doesn’t make sense, I pass. If a lender has asked them a question and the answer doesn’t make sense, or if the borrower has evaded part of the question, I pass.

Another common sense test is whether or not the request is consistent with the available information about the borrower. For example, many people request money to refinance credit card debt. In such cases, I compare that amount to the revolving debt on their credit card. If they’re requesting a bunch of money and don’t have much in the way of revolving debt, I steer clear.

Closing thoughts

While I haven’t been at this for a long time (less than a year), I’ve had a fairly good experience thus far. I’ve had one loan (from my auto-selected, high risk portfolio) go into default. That being said, all of my “low risk” loans are being paid on time, as are all of my manually selected loans.

Could I get away with using the auto-selected portfolios? Quite possibly, but I like having a bit more control, and I’ve managed to streamline my loan selection process to the point that it doesn’t take too much time. If Lending Club added a bit more flexibility to their filters, I could do it in even less time.