Peer-to-peer lending site LendingClub has a feature called LendingMatch that allows you build a portfolio of multiple notes simply by choosing a desired risk profile. Even though I’ve funded over 30 loans, I never touch the thing. Now, I think in general LC does a decent job rating their loans from A1-A5, B1-B5, all the way to G5. But sometimes I just don’t agree with their assessments, and other times I have a more personal objection to the loan. Today, I found an example that fit both.
This loan passed through all of my usual manual filters. A/B grade only, 714+ credit score, debt-to-income ratio < 10%, and zero delinquencies within last two years. The assigned grade was A5, which is quite good overall. But then I read the details. (If you're a member, it's loan #411092.) His reported gross income is $26,000 per year. He's only been at his current job for only one year. He has been delinquent on accounts before, but last time was over 4 years ago. He has about $18,000 in credit card debt currently. He has 70% of his annual income as debt? To me, that's like someone making $100k a year before taxes having $70,000 of consumer debt. Seems like quite a burden. Already skeptical, I then read the loan description. Here it is, after I stripped out what I felt was not important:
This loan will be used to consolidate the remaining balance on two credit card balances and for home improvement. Looking to payoff some credit card debt and add a sunroom to my home. I am coming to the lending club community to help me build a nice sunroom to enjoy a cold glass of iced tea.
Honestly, I didn’t even know what a sunroom was until I looked it up. According to this site, a small 80 sq. ft. sunroom would cost from $5,000 to $15,000. He already has 70% of his gross annual income as debt, and he wants to add another $5,000 to it? That would result in a debt-to-annual income ratio of 90%.
I like the idea of helping people pay down their credit card debt by lowering their interest and consolidating into one payment. But this guy seems to really like being in debt. Now, that’s his choice, but I don’t like the idea of supporting it. Am I alone in thinking this way? I’m thinking I might not be, as his loan request didn’t fund the first time.
You can read about the other details of my LendingClub portfolio here. My annualized return after fees so far is 8.8%.