Home > Investing, LendingClub > LendingClub Note Selection – Payment to Paycheck Ratio

LendingClub Note Selection – Payment to Paycheck Ratio

Payment to Paycheck Ratio

Screenshot from lendingclub.com

Please note that I have read some other articles after the writing of this article that covers the same subject under different names. I don’t claim to have invented the “Payment to Paycheck Ratio”, I just used it before I read any articles that talked about similar topics.

I pay very close attention to what I call the “Payment to Paycheck Ratio” when searching for a suitable LendingClub note to invest in.

Think about it. The basic necessities of life come before paying off a debt. What would be your choice if you had to choose between food, shelter, or paying off a debt one month? For this reason, I do not invest in borrowers whose payments are a large percentage of their monthly salary. My theshold is 10%. This means if someone makes $5,000 a month, I will consider investing in a note where the borrower has to pay up to $500 a month. Anything more and I have to read the fine print.

The screenshot above shows an example of someone with a validated monthly income of $6,667 per month. Their payments are $275.72 per month so that equates to about 4%. I would consider investing in this note, and it is actually a note that I am currently invested in.

This rule that I follow is a tool to mitigate risk. Just because this ratio is over 10% does not mean the note is a bad one or will become a bad one. I am attempting to find higher quality notes by using this parameter. The other side is true as well. Just because the note meets my constraint, that does not mean it is a good note or will pay to maturity. There are many other factors that can make even a 4% Payment to Paycheck ratio fail, such as high rent or high expenses.

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Categories: Investing, LendingClub
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