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Credit Variables Explained: Inquiries in the Last 6 Months

In evaluating an applicant for a loan, lenders typically pull data from 1 or more of the 3 major U.S. credit bureaus. The bureaus provide potentially hundreds of data points on the borrower’s experience with credit and repayment history, and lenders use these data to make their approval decisions. One factor used by many lenders is the number of “inquiries”, a variable available in the LendingClub notes filter as “Inquiries in the last 6 months”.  LendingClub gets this data when it pulls the borrower’s credit file from TransUnion.

What is an inquiry?

An inquiry results from the very process of a prospective borrower applying for a loan. When processing the application, the lender’s request of information from the bureau is known as an “inquiry”. If you have recently applied for a mortgage, credit card, auto loan, or even a peer-to-peer loan, you may see those lenders’ inquiries listed on your credit bureau. Rest assured that this variable only includes “hard” inquiries, those that result from a borrower actively applying for a loan.  If you look up your own credit report, or a bank uses bureau data to include you in a marketing campaign (sometimes known as a “soft pull”), you do not get a new “inquiry”, and your credit scores are not affected.

Why does it matter?

Lenders view a high number of inquiries as evidence of potential “credit seeking behavior”. While everyone applies for credit on occaion, an excessive frequency of inquiries in a short timeframe can be seen as indicating a desperate need for cash or an applicant who has been declined by several lenders and is having difficulty getting approved.

How can I use it on LendingClub?

The number of inquiries does correlate with risk and return for a population of LendingClub historical notes:

lc-risk-return-by-inquiry

Even when controlling for Credit Grade, notes with a higher number of inquiries experience a greater incidence of default:

lc-defrate-by-inquiries-bygrade

In Conclusion

LendingClub’s “browse notes” interface allows you to filter for inquiries in the last 6 months.  It is also available in the “In Funding Loan Data” file, as well as through the API.  Understood and used properly, you may be able to utilize this variable as a component of a successful note-selection strategy.

 

  • […] Credit Variables Explained: Inquiries in the Last 6 Months from Orchard – Detailed explanation of why number of inquiries is an important variable for p2p investors. […]

  • […] credit bureau, including but not limited to payment history, amount owed, length of credit history, new credit inquiries, and types of credit used. Upon receiving a loan application, most U.S. lending institutions will […]

  • […] a lender might consider repeat borrowing to be a sign of risk. A similar pattern does exist with inquiries, as detailed in a previous post. On the other hand, a lender might take previous borrowing history as a sign of reliability. If […]

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