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Investing at Lending Club with Watson Analytics

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Investing at Lending Club with Watson Analytics


Investors around the world are experiencing difficulty finding ways to invest with sufficient return. Saving accounts in US banks earn less than 1%. Five-year US treasury bonds are at all-time lows. Global stocks are currently highly volatile, jumping between highs and lows so fast that it’s difficult to pinpoint real ROI.

So, what’s an eager investor to do?

Peer-to-peer (P2P) lending might be a solution. P2P lending connects people willing to lend their money to people in need. It’s a win-win situation for borrowers as well as lenders. The borrowers get, on average, a lower interest rate for their loans than at banks. Meanwhile, lenders earn more money than they would with saving accounts. For example, Lending Club, the biggest P2P lending platform in the world, claims that their average return for investor (lender) is about 7% (including defaults).

Using Lending Club data to make smarter investments

For transparency, Lending Club provides loan data to the public. This data can be easily downloaded from the Lending Club website.[1] With the help of Watson Analytics, you can use this data to make smarter investments.

How? When investing at Lending Club, every investor has some information, such as annual income, length of employment, state, and purpose of loan, about the borrower at hand. The key metrics for investors is rate of return. To increase the rate of return, investors should try to decrease the percentage of defaulted loans. We took Lending Club’s data and analyzed it with Watson Analytics. Watson Analytics is really easy to use and thanks to its natural language processing ability and cognitive approach, everyone can find critical insights simply by typing a question. In our case, Watson Analytics enabled us to come up with three investment tips after we uploaded Lending Club data.

Tip 1:  Forget Nevada, the safe bet is Wyoming

The average default rate at Lending Club is about 14%. Loans issued in Nevada are the riskiest ones in US with the default rate at 20%. On the other side, the safe harbor for your loan investments is Wyoming with default rate of only 9%.

Nevada

Tip 2: If borrowers want to get married or buy a car, lend them money

The purpose of a loan plays a surprisingly important role in the determination of its default rate. For example, the loans for small business have a 27% default rate and renewable energy have a 22% default rate, so they’re the riskiest ones. Wedding (11%) and car (11%) purchases, on the other hand, have the lowest.

Cars

Tip 3: Length of employment makes a difference, but not how you think.

Looking at the Lending Club data, we observed that being employed for a longer time means a higher annual income on average. This information is not surprising; in fact, it’s expected. However, the fact that people who are employed for 5 years or less are more likely to pay back their liabilities than people who are employed for 6 or more years is very interesting information.

Employment

 

If you take these insights into account the next time you invest at Lending Club, you might be better off. In my next blog about investing at Lending Club with Watson Analytics, I’ll show you how you can use Watson Analytics to determine the most important variables determining the borrower’s default rate.

It really is that easy

Yes, you really can do this. Register for a free Watson Analytics account and download the data sample (https://ibm.box.com/s/d11j2dxt256q44y9udpw50ghv8tr6wlh). Then, try it on your own.

About the guest blogger

Michal Polena holds a graduate position in IBM Analytics in the Czech Republic. He combines sales and presales with a main focus on Watson Analytics.

[1] We used data from January 2009 to December 2012. Data from prior to 2009 because was not used because of volatility created by the financial crisis in 2007 and 2008. Moreover, Data from after 2012 was not used because it has not reached maturity yet.

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Kamil May 27, 2016

Deffinitely Amazing, Awesome!

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Forsyth Alexander May 28, 2016

Thank you!

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Ksenia Timchenko May 27, 2016

Amazing

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Forsyth Alexander May 27, 2016

Thanks for the comments!

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Forsyth Alexander May 27, 2016

Thank you for the comments!

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