Each week I peruse Lending Club for high quality loans that fit my loan selection criteria. I apply my filters and start looking at each loan to determine whether they should be added to my portfolio. Some make it, some don’t. There are several red flags that tell me that I should stay far away. Some have to do with the lender’s profile, others with the lender’s credit history, and others with the loan description or user answers.
Not Enough Income
If a lender doesn’t have an income of at least $3,000 a month, I tend to stay away unless the loan is for a small amount. At that income level, it’s harder to deal with unexpected expenses, and I don’t want to lend to someone who is going to prioritize their car needing a new transmission over my loan.
Bad Credit History
I already filter out for delinquencies, but another think to look out for is a high credit utilization rate. If someone is using 80% of their available credit, it could mean that Lending Club is being used as a last resort because they are unable to attain credit elsewhere. I don’t want to loan to people who are trying to get by. I want to loan to people who are trying to improve their financial situation or who are using their loans wisely.
Sometimes, people give away more information in the answers than they need to. They ramble on, and while more information is certainly good for investors, it hurts individual borrowers. For example, I have seen answers from people who admit to having declared bankruptcy a few years earlier. Why in the world would I want to lend to someone who has a blatant history of not paying back his debts? Another example comes from someone who is responding to a question about why they carry a large revolving credit card balance. He volunteered the information about having an existing Lending Club loan, which to me indicates that he is having trouble keeping up with his payments. I stayed far away from it, but as you can see, 364 other people invested in the loan for a total of $15,000. We try to earn superior returns by choosing high quality loans. Borrowers can use this information to improve their chances of being fully funded for a loan.