Every method that computes ROI on a loan portfolio must decide how it deals with loans that have not run to completion (fully paid or charged off). One approach popularized by lendstats.com is to use the current status of a loan to estimate how much of the outstanding balance will get paid off. The logic being that the later a loan is currently the more likely the borrower will stop making payments and the less outstanding balance will get returned to the lender. This seems reasonable. But it can result in the confusing side effect of computing high ROI's for portfolios with a large amount of new loans. Investors often mistake this as the final ROI they should expect. Only to see it drop significantly as the loans age a little and people start missing payments. To better understand this effect and hopefully achieve a better view into the final ROI I now compute the age of every loan.
Calculated as follows:
Loan Age = Months Since Issue / Loan Length
A 36-month loan issued 32 months ago has an age of 90%.
Using loan age it is now possible to pull from the database only loans that have reached a certain level of maturity. If we want to see with high precision exactly how a strategy will perform, we use older aged loans (such as > 80%). We can even see how different age pools perform against one another to gauge the changes in ROI.
This attribute has been added to the Search Loans tool. And I'll be using it in some of my upcoming analysis on the recommendation engine