Sunday, September 11, 2011

Loan Description Length: By Credit Grade

Last week I took a look at how the length of a loan description affects payoff rates with posts about both Lending Club and Prosper.

Today I wanted to dig a bit deeper into the indicated trend: loans with longer descriptions are less likely to be Paid or Current. To begin, let's look at the trend we saw from Prosper Loans initiated before 2008:

The trend is pretty clear cut. Let's step back for a minute, though, and show the number of characters in each description for each credit grade:

From this graph we see three things:
  1. The lower the credit rating the longer the loan description a borrower writes. (The blue line.) 
  2. Lenders tend to fund loans with higher than average character counts. (The red line.)
  3. Of those loans that are funded, the ones that went on to become Paid tended to have fewer characters than the average funded loan. (The grey line.)

Looking at these trends it would seem that, when a credit score is lower, lenders choose to fund loans with longer descriptions. This, very likely, explains my findings from last week. I'll continue to explore on Tuesday with a post examining Prosper's 2009 and 2010 loans.

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