A few days ago I had my first Lending Club note hit the “Grace Period” which is a term I’m not familiar with. After doing some research it became clear that the automatic withdrawal from the borrower’s account had failed and therefore I had not received my P&I payment. I continued to watch this note for the next few days patiently waiting until today when the payment was made and I received my money. From what I’ve found there are a two ways that a loan can reach the grace period (please let me know if I’m missing any.)
- The bank account did not have sufficient funds
- The person is paying by check and the check was not mailed in time
I’m guessing what happened is that the bank account did not have sufficient funds to make the payment. Lending Club allows its borrowers pay by check but they charge a $15 fee per payment… which seems like a huge deterrent to me. If my borrower is paying by check then he (or she) is a fool and I regret lending them $25. This still puts me in a tight spot because it’s clear that the borrower screwed up for some reason. I’m hoping (since this was their first payment) that they just weren’t sure how the process worked and next time they will get it right and have sufficient funds. The problem is that I’m sure they were hit by numerous fees from their bank for this and they’re already in a tight spot (or why else would they be borrowing money from Lending Club?)
Either way I’m going to keep watch on this loan and potentially sell it off if they keep missing payments like this. I have good criteria in when I filter my loans and find it odd that a B1 grade loan would be my first to enter the grace period (not the F or G loans I picked up for fun.)
Jay says
“Grace Period” really just means that payment was not received by Lending Club when it was due (why it wasn’t received isn’t a factor). A loan will remain in “Grace Period” status for 15 days from the payment date if no payment is received, at which point it goes into “Late 16-30 Days”. If payment is received before that 16th day, the note goes back to “Current” and the borrower is not hit with any late fees.
Notes of all grades default, so don’t be surprised that a B1 went Grace Period but an F or G didn’t. My first default was a C2 grade and my second a B4, even though I carried a percentage of just about every grade. Statistically B grade notes default less than F grades do, but that’s across the system as a whole. Theoretically you could be really unlucky in your note selection and pick nothing but A grades that default.
Brian Lohr says
This is true! It doesn’t really matter why it went into the “Grace Period” but it’s still interesting to consider. Lending Club works on a direct withdrawal system so theoretically a note would only enter the “Grace Period” if the borrower did not have adequate funds in their account. One could argue that poor planning (having insignificant funds in their checking account) is indicative of someone who is not great at managing money and maybe their loan is riskier than the lender originally thought.
New Jersey Guy says
Typically, Lending Club will attempt a second withdrawal about 10 days after the original due date.
Like Jay said, after that, it goes 16-30 days late and the value of the note decreases.
Before deciding to dump the note, check the collection log for borrower contact. (Real contact, not attempted contact). I’ve found that the odds are quite high that the note will come around if there has been some real contact with the borrower.
What worries me about situations like this is that it’s hard to believe the borrower sucked every penny from the account. Couldn’t even leave enough in to cover the first, darn payment! Not a promising first impression.
NJG, that is good advice. We haven’t yet signed up for trading accounts, but I’m sure we will feature some posts regarding that eventually. Quite the opposite situation to what I experienced a few weeks ago. I had a high grade note where they made their first payment and then immediately paid off the entire loan balance.
You’ll see that high grade early payment happen a fair amount of the time. The reason is because once they’ve consolidated their revolving credit with an installment loan from LC, their FICO will spike up. Sometimes the spike is enough to make them able to borrow from LC again at an even better rate — some borrowers don’t even think like that, while others do.