Top 6 Questions LendingClub Investors Ask Borrowers and Why
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As a LendingClub investor, I’ve spent my share of time browsing the notes that are up for funding. While the information the a borrower provides in the loan application offers a substantial amount of background knowledge, investors would always appreciate more information to help them decide whether or not they should fund a particular loan.
The basics of peer-to-peer lending should mimic the approach that banks take when conducting their lending operations. Banks ask a plethora of questions during the loan approval process and so should us investors. Luckily, LendingClub allows potential investors ask questions to the loan applicant.
Upon scanning through loan notes, many of the same questions will appear because they pertain to every borrower’s financial health.
These are the most common questions asked by LendingClub investors and why they are so important:
- What is Company ABC? What is your job title and what are your duties?
These questions help the investor assess a borrower’s job security and income stability. Understanding the industry in which the employer operates provides insight to the business’s functional stability compared with economic conditions. The job title and duties are more important because they define the significance of the position.
If the job lies on the upper echelon’s of a company’s ranks, it’s less likely the employee will get fired due to greater responsibilities. For example: a regional manager position for Walmart beats a sales associate position for Walmart. Basically, the safer the business and the securer the job, and the better the chances of repayment.
- What debt obligations do you currently have (please provide balances, interest rates and monthly payments) and which debts do you intend to pay off with this loan?
Investors like to see that borrowers have a sound plan when it comes to managing debt. They want to see that the borrower knows what to do with the LendingClub loan such as applying the funds from the loan towards balances with interest rates higher than that of the loan.
If the loan is used to pay off part of the outstanding debts, investors will need to account for the separate repayments when assessing the borrower’s repayment ability.
- Can you list your monthly itemized expenses and their amounts?
Knowing the monthly expenses will allow the investor to determine the borrower’s net cash flow. After verifying the borrower’s monthly income, deducting monthly expenses from this amount would result in the net cash flow, based on which investors assess the borrower’s ability to make the monthly LendingClub payments.
If the net cash flow is less than the monthly LendingClub payment amount, the borrower won’t be able to repay the loan. If the net cash flow exceeds the monthly LendingClub payment by just a sliver, the borrower represents a high risk because there will be very little money left for discretionary spending while there is a greater chance of defaulting.
- Can you explain the reason for your delinquency or public record on your credit report?
Delinquencies and public records represent tarnishes on a borrower’s recent credit history (they wouldn’t show up on the credit report after 7 years). The negative marks could result from things such as a loan sent to collections or declaration of bankruptcy. They may reveal underlying problems with the borrower or they could just be small, honest mistakes.
Most investors prefer a clean record but if the borrower explains that the situation was just a one-time error, many investors won’t mind it. Outstanding delinquencies would alert investors of risky borrowers with bad debt relationships that would jeopardize the safety of their investment.
- How much equity do you have on your house (please include appraisal value and remaining mortgage balance)?
For most homeowners, a mortgage constitutes their greatest financial debt and, for some, has become a dangerous asset in recent years due to falling housing prices. Investors frown upon homeowners with negative equity in their houses because most people would choose to default on other loans rather than default on their mortgage and risk foreclosure.
Just like banks will do, investors can look at a borrower’s residential location and see the location’s frequency of foreclosure. Also, investors would feel somewhat safer that a borrower can access the equity on their homes in order to repay the LendingClub loan if the need presents itself.
- How did you accrue your debt and what steps will you take to stop incurring more debt?
How one accumulates debt exhibits his or her spending habits. Obviously, investors don’t want to see that the high balances across multiple credit cards resulted from a shopping spree to help treat depression after a bad breakup.
Simply put, they want to see a mindset that is determined to become debt-free from now on. Some borrowers have said that they’ve stopped using credit cards and resorting to cash only, or started using financial tools such as money management and budgeting software, or begun taking classes from Dave Ramsey’s Financial Peace University.