Steadfast FinancesLending Club Portfolio Update: Earning 15% NAR on P2P Lending Investments

Lending Club Update: Earning 15% NAR on Microloan Investments

Filed in Banking , Investing 101 , Peer to Peer Lending 62 comments

~ ~ ~ April 2011 Update: Shutting Down My Lending Club Investments over Q&A Change ~ ~ ~

~ ~ ~ December 2010 Update: Earning 15.6% NAR on Lending Club Investment Portfolio. ~ ~ ~

Once again, I’m pleased to report positive results for my Lending Club investment portfolio.

Summary

  1. My Net Annualized Return is 15.03%.
  2. Zero defaults thus far. I’ve have had several borrowers test the grace period allowance, and only one hit the “30 days late” mark, but all caught up after being contacted by Lending Club.
  3. Two loans have been paid off early over last year.
  4. Five year notes outnumber three year notes 55% to 45% respectively.
  5. I’ve increased the balance of Lending Club account by 1.5 fold. The 5% cash back bonuses and 1.5% bonus on recurring deposits offers were too good not to capitalize on.
  6. Forming a LendingClub.com investment club.

Detailed Analysis

As with any performance update that doesn’t show any real blemishes, it’s only natural to want to look under the hood and ask questions. So here is a more detailed look at the what’s, where’s and how’s.

  1. Account balance. Feeling more comfortable in my original Lending Club investment strategy, as well as an inability to say no to Lending Club’s “free money” promotions, I decided to accelerate my investment plan. If you saw a $50 bill lying on the street, you would be a fool not to pick it up, so if you’re wondering why my account balance ballooned in size by 150% from last quarter’s update, blame LC for enticing me with free moolah. 
  2. Weekly recurring investments. I’m still proceeding with recurring weekly investments, but at an increased rate of $125 per week. As Lending Club’s popularity extends more into the mainstream financial community, the number of loan applications that meet my investment strategy is getting easier to find. Not only am I able to find all I need, I’m getting to the point where I find myself cherry picking between some very solid notes in the 14% to 22% NAR range. Investing $500 per month also qualifies me for a 1.5% cash back bonus on recurring deposits, which exceeds most interest rates on Plain Jane checking/savings accounts.
  3. Diversification. Per my investment plan, I’m only investing $25 per note to achieve maximum diversification but I am hand picking my notes versus using Lending Club’s automated investing model. This is considered by some to be the “diversipicker” investment strategy, where I’m attempting to spread my risk across as many notes as possible, but only investing in notes that meet my investment criteria. (Note: I made a mistake several weeks ago by investing in the same note twice by failing to pay attention to the “previously invested in” icons in the checkout menu.)
  4. Focusing on notes greater than 14% NAR. Over the past two to three months, I’ve shifted my risk to Grade C notes and higher. This is perceived to be higher risk based on the borrowers FICO score, however, I would argue the risk of many of these higher credit risk loan applicants is less than or equal to Grade A & B loan applicants simply based on their profession, job history, job security, payment histories, etc. My theory is those who keep their jobs, and have a solid history of repaying their debts, will repay their Lending Club loan.
  5. Making 15% NAR is a new goal. With the quality of borrowers who are borrowing money in the Grade D notes and higher, I think making 15% NAR or higher is a realistic goal.  This depends upon several factors — minimizing defaults, selecting high job security borrowers, etc. — but I think it can be done by investing in people who have, fairly or unfairly, have a credit score that is not reflective of their credit risk. (FYI: Lending Club quantifies my NAR in the 87% investor percentile based on this chart.)
  6. Three year notes versus five year notes. The popularity of five years notes among loan applicants has taken off far faster than I anticipated. This is due, at least in my opinion, to the attractive nature of making lower monthly payments, which in turn, makes it easier for the borrower to service their debt along with their recurring monthly living expenses. Some investors avoid the five year notes, but from my thesis of investing in those with an in-demand profession and a solid job history, I consider it a minor risk by extending the term of the loan for an additional two years. From my vantage point, it’s a benefit for me, the investor, because I get to make a higher interest rate on a borrower, who not only pays a slightly higher interest rate, but will pay more interest on capital borrowed over the lifetime of the loan if he/she only makes the minimum payments.

Closing Thoughts

Naturally, I’m ecstatic about a 15% NAR performance. Whether or not it lasts, is anyone’s best guess. I’m betting it does, but like any unproven strategy, it’s unwise to count chickens before they hatch.

Screening and reviewing hundreds of promissory notes isn’t easy by any stretch of the imagination, but if you have a sound investment strategy and willing to invest the time to review loan applications from borrowers you believe to be credit worthy, Lending Club is, at least based on my results thus far, superior to nearly all fixed income investments I’ve encountered.

Also, I would be remiss to say I’m somewhat obsessive about selecting superior notes. I probably invest a minimum of one to two hours each week screening, filtering, reading Q&A sections, and asking questions to potential borrowers. Thus far, I would argue my obsessiveness has paid off.

The Lending Club “Investment Club”

For anyone interested, I’ve formed a pseudo investment club with a few personal finance bloggers and other Lending Club investors. Once or twice a week, we share ideas, via email, on the notes we believe are going to pay off in full, plus interest. If you would like to be included on this email list, leave a comment in the section below or send me an email via my contact page.

I’ve also collected a sizable Twitter list of P2P lending investors, P2P borrowers, and employees (and a few founders) who work for multiple P2P lending companies across the globe. So if you’re interested in learning more, or just “auditing the course”, both the email list and the Twitter list might be an easy (and free) way to pick up a few tips here and there.

 

 

Quarterly Lending Club Investment Portfolio Updates

April 2011 Update: Shutting Down My Lending Club Investments over Q&A Change

December 2010 Update: Currently earning 15.6% NAR on Lending Club investment portfolio.

September 2010 Update: Currently earning 15% ROI on my Lending Club investment portfolio.

June 2010 Update: Currently earning 14.2% ROI on my Lending Club investment portfolio.

March 2010 Update: Currently earning 13.6% ROI on my Lending Club investment portfolio.

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Posted by CJ   @   21 September 2010 62 comments
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62 Comments

Comments
Sep 21, 2010
12:41 pm
#1 Matt Jabs :

I’m glad to have come on board the LCIC Matt. Nice work with the background research to bring all this to fruition, and thanks for dropping keys and opening this up to others. Cheers.

Sep 21, 2010
12:44 pm
#2 Pete :

Wow, you’ve had some great luck with Lending Club so far – apparently your pickiness in choosing loans has paid off. I’m a bit more conservative in my LC account, as I don’t like risk as much. I’ve also had zero defaults, and nobody even making so much as a late payment – but my returns are closer to 10%. IT sounds like I might be able to diversify a bit more into some riskier loans, and still have good returns if I’m careful as you have been. Now that I’ve joined your email list, it may be time to give some riskier loans a try. :) Good stuff!

Sep 21, 2010
5:54 pm
#3 Matt SF :

You’re in Zach. Thanks for commenting.

Sep 21, 2010
5:57 pm
#4 Matt SF :

… more like obsessiveness. Not uncommon for me to spend 30 minutes every day reading the Q&A sections.

Glad you signed up.

Sep 21, 2010
5:59 pm
#5 Matt SF :

No problem Matt. Curious if this might lead to something bigger in the future.

Sep 21, 2010
6:48 pm

Amazing article. What a great way to diversify. Don’t let the big guys read about this. Please add me to your e-mail discussion list. Thanks!

Sep 23, 2010
2:11 pm
#7 David :

What is the total number of “extremely low risk” notes you see in Lending Club per month? Are you sometimes turning down what you feel are qualified notes due to the fact that you are only purchasing 20 notes (500 dollars) a month?

I am wondering what the maximum low-risk, high-yield investment amount per month at Lending Club could be utilizing your strict criterion strategy.

Sep 23, 2010
2:51 pm
#8 Matt SF :

I can’t give you an exact number because I do not review any note less than 10%. However, I can reasonably say that using LC’s filters of time on job, no public records, etc., as well as the downloadable Lending Club loan application spreadsheet, that there are around 20 notes each week on the LC platform that I would consider “lower risk than average“.

And yes, there are frequent cases where I simply don’t have the cash available that week to fund notes I’d otherwise fund. Usually, it’s a case of where I find five “10s” but don’t have enough cash for the “9s”. For example, a FDA employee over a successful dentist’s practice.

Of course, it depends on your strategy, how conservatively you want to invest and how much of a chance you’re willing to take on your borrowers. For example, I recently lent money to a Federal Reserve board member (21% NAR), and I consider him less of a risk than a sales manager for The Gap (10% NAR). To me, a credit score is not single best indicator of credit risk when you consider that we have multiple metrics to measure and weigh against a potential default. But as I say in my weekly investment club email, feel free to crucify my ideas if you feel it’s warranted.

Sep 23, 2010
2:53 pm
#9 Matt SF :

Thanks Jerret. I fear they already know, and will take appropriate action once Lending Club gains full on mainstream attention. Perhaps a “consumer credit fund” much like that of a money market account or perhaps a ETF like investment vehicle.

Sep 24, 2010
3:10 pm
#10 Joel M. :

I’m interested in the mailing list if you’re still accepting entrants :-)

Sep 24, 2010
3:21 pm
#11 Matt SF :

You’re in.

Sep 24, 2010
9:51 pm
#12 Robert Nystrom :

I would love to be included on your emails and am just getting into the lending club and trying to figure out how to diversify the initial amount plus recurring deposits. Thanks for the information

Sep 24, 2010
9:54 pm
#13 Matt SF :

No problem. You’re in.

Sep 24, 2010
10:19 pm
#14 David :

Usually, it’s a case of where I find five “10s” but don’t have enough cash for the “9s”. For example, a FDA employee over a successful dentist’s practice.

Yeah, I was talking about the “10s” when I say “extremely low risk” notes: notes that, if the data provided by the borrower is accurate, would seem (at least subjectively) to indicate practically zero risk of default other than physical incapacitation of the borrower in question (and even then might still be repaid).

My problem is that I’ve been hyper-OCD about mitigating my risk possibilities on Lending Club, and therefore have been selecting around 70% grade A notes and 30% unbelievably good-looking grade B notes.

However, upon observing your stated strategy and performance results so far, it seems that I may have been putting an irrational level of faith into both the FICO score and Lending Club’s internal rating system’s predictive capacity for 660+ rated borrower default probabilities.

Sep 27, 2010
11:14 am
#15 Tony :

Do you know how Lending Club comes up with 15%? Using Excel I performed the calculation investing $125/week for 52 weeks. If you received $119.63 in interest you are really getting 3.29% net annualized return.

Maybe I’m missing something?

Sep 27, 2010
11:47 am
#16 Matt SF :

Great question Tony. Lending Club uses a rather complex looking, 2nd or 3rd year Algebra student kind of equation to compute Net Annual Return (NAR).

Equation seen here: http://www.lendingclub.com/public/lendersPerformanceHelpPop.action

To be completely honest, I’m not a huge fan of using NAR because I’m more of a simple minded guy when it comes to calculating Return On Investment (ROI). Therefore, I would prefer something like this very basic ROI equation:

ROI = (Total Money Repaid – Money Invested) / Money Invested

Then, to compute Annual ROI…

Annual ROI = ROI / Number of years

[If you want to get more detailed, you would also include your investment fees.]

Why Lending Club uses NAR versus simple ROI is unknown to me. Perhaps NAR is superior because it encapsulates nuances of the lending market I don’t fully understand, complex equations are all the rage, or maybe it just looks better to the marketing department. I honestly don’t know.

To address your specific calculation of 3.3%, one of the reasons the interest payments to date are so low at this time is that much of the money I’ve recently put to work (2 x $1000 in July and August) haven’t been repaid yet. Lending club investments are based on a laddered system, where there is a delay in interest payments to be collected due to the time between a loan is issued and when the first payment is made.

Because of these two large deployments, and that I make regular investments each week, my ROI will always be a little low because of the delay. (FYI: I think I had something like a 6 week delay when I bought my first home vs. when I paid my first mortgage payment.)

Oct 13, 2010
1:59 am
#17 David :

Check out this site if you haven’t already seen it, it’s pretty interesting. Some guy basically downloaded the raw loan performance numbers from Lending Club and crunched out various calculations on his own:

http://lendstats.com/

Interestingly, the net ROI for all Lending Club loans since 2007, defined merely as interest collected minus defaults, is only 2.85%. Various extremely basic filters immediately increases that ROI to between 7 and 9 percent.

Oct 13, 2010
1:46 pm
#18 Matt SF :

@ David,

That’s precisely why I refuse to use the automatic investing system Lending Club offers. I’ve seen some really dumb loans applications, even someone who got suckered into the old Nigerian “I’m trapped in Nigeria and need $5,000 to fly home” scam, so I want to use my own very tough metrics, read the Q&A section, and get a gut feeling either way about the borrower.

Oct 22, 2010
6:14 pm
#19 Ed :

I have been following your posts on Lending Club and can agree with your position and reasoning on selecting your own “notes” to fund. It would seem to me to be far worth the time and effort it takes to individually select the ones that fit your criteria rather than to dump all your eggs into whatever note-basket that happens to be available on any one particular day.

And on a related subject, my initial concern on investing by grade levels (A1 to G5) was that of most others…is the increase in risk level worth the potential return? By taking the prospectus that Lending Club offers and using a couple of tables in it, I have entered the data into Excel to come up with a table showing how each grade level compares to the next in % of Average Annual Return when accounting for defaults and prepays. For the sake of argument, I’ve assumed that you make little or nothing on prepays, and on deaults you could lose anywhere from 0% to 100% of your investment. I know this isn’t “real world”, but I had to use something so I went with 0%, -25%, -50%, and -100% losses with defaults. The results have been an eye-opening experience. Turns out that if you are going to invest anything at all, you may as well avoid A1 and A2 and go with A3 because A1 and A2 loans actually have a higher default rate than does A3 AND it has higher return. Another tidbit is if you are comfortable with the risk involved with an A5 loan, you may as well go with B1 loans for the >2% higher rate more than makes up for the increase in default rate. This has led me to favor the following grades whenever possible: A3, B1, B3, C1, D2, D5, E3, E5, F5, G1, G5. Of course this is predicated on the risk increase being linear through all risk grades. Thanks, oh and could you add me to your e-mail contact list?

Oct 24, 2010
11:23 am
#20 Matt SF :

Ed,

Thanks for the research. I honestly don’t pay much attention to the default rates on loan grades because, as much as I love quantitative analysis, I personally (perhaps incorrectly) like to give qualitative analysis a bit more priority when it comes to investing in Lending Club personal loans.

The problem with this that it’s subjective, but as you’ve correctly identified, the defaults per loan grade have been a little “off”. I recall a presentation where, over the span of one year, that Grade E notes had a higher rate of default than Grade F (not sure if it’s exactly E or F, but the higher risk notes had a lower default rate).

So while it makes sense upon first glance to stay with high FICO score borrowers for low risk tolerant investors, higher FICO scores doesn’t always mean less risk.

Personally, I’d rather go with someone who has a 660 FICO and 20 years on the job whose credit score was deemed “high risk” because he only has 2 credit cards and owns his home free & clear, versus a 775 FICO score with 2 years on the job, a ton of student loan debt, and a DTI ratio greater than 25%.

The FICO/credit score equation is imperfect, to say the least, and I think if you’re willing to filter the notes and do your due diligence, you can find some exceptional borrowers in those “higher risk” notes.

And welcome aboard the investment club. There are around 25 of us now so it’s getting fairly popular.

Nov 7, 2010
8:00 pm
#21 Jim :

I’d like to get on the email list too. I am just researching lending club now.

Nov 15, 2010
9:18 am
#22 Joe :

I would like to get on your mailing list also.

I have been wondering about whether or not selling notes the minute they are late on the folio trading platform would boost returns?

Nov 15, 2010
9:33 am
#23 Matt SF :

@ Joe

Welcome aboard. It’s possible, but if you’re going to attempt to sell, I would bet FolioFN buyers are savvy enough to figure out the note owner is late. They might also demand a slight discount for the note since the buyer is having difficulty servicing the note and/or a habitual late payer.

Nov 15, 2010
9:34 am
#24 Matt SF :

@ Jim,

I’m about 99% sure I added you to last week’s list. If you didn’t get an email, let me know.

Nov 30, 2010
11:30 am
#25 Dave :

Please add me to the email list as well!

Nov 30, 2010
11:34 am
#26 Matt SF :

You got it.

Dec 2, 2010
4:55 pm
#27 Cathie :

Investing with Lending Club now.
Would love to be on your email list.

Thanks

Dec 3, 2010
11:37 am
#28 Matt SF :

Sure thing Cathie. Sent you an email to confirm.

Dec 9, 2010
6:08 pm
#29 Joe C :

Hey, just found this site, would like to join the club :)
I’ve got about 15% avg return, and no defaults so far this year. Started in Feb. Have about 10k in there. Looks like we pick notes the same way.

Dec 9, 2010
7:08 pm
#30 Matt SF :

Sure Joe. Sent you an email to confirm.

Dec 10, 2010
6:25 am
#31 Dan B. :

Wow, your 15% is giving me a nosebleed. You know for most of 2010 my balance was in the $8k+ range (so not quite twice the size of yours) & I’ve been with LC for only 14 months.

My NAR is at 9.5% now (but was around 13% for my first 12 months) But wait, I’ve received almost 8 times the interest you have.

How is that even possible? I can only think of 1 way.

So your 15% sounds fantastic…………but how old is your AVERAGE note? 3 months, 4 months?? Each note default I had cost 0.75% or so off my
NAR………..I’ve had 4 & that’s out of almost 400 notes.

Do you want to guess what each default is going to do to your NAR in your small 200+ note portfolio??

And I don’t care what methodology you’re using, the defaults will come. I’ll come back before next Christmas prepared to eat my words & beg forgiveness………..& yet somehow I’m certain it won’t come to that. :)

Dec 10, 2010
5:37 pm
#32 Matt SF :

Hey Dan,

These days, I’m around $6400 @ 15.6% NAR, so the portfolio has gotten a little larger with a bit more risk after 18 months.

I haven’t done an update this quarter but plan on doing one before end of December so the numbers might make more sense then. But the notes range anywhere from 18 months of age to just purchased yesterday (12/9/10).

Regarding interest made, many of the higher rate notes at this stage of the game were fairly new (< 6 months old). An additional reason is that I was heavily invested in 10-13% NAR notes when I began, but only recently expanded into 14%+ notes. I’ve also been dabbling in the 20%+ notes, so those are probably helping up the NAR calculation, but haven’t had a chance to starting adding to the interest dollars yet.

Thus far, I still haven't had a default. However, I do have a single borrower who filed Chapter 13 bankruptcy (which means I probably gave an interest free loan), but the jury is still out here.

I also have 2 notes that are 30+ days late, so while I can say I'm still "default free", I'm probably knocking on Mr. Default's door now that I have ~275 notes.

I'd love to say you'll have to eat crow on Christmas 2011… lol… but I would also wager that I will get hit with the default before then.

Dec 10, 2010
7:32 pm
#33 Dan B. :

Yes I know what the range might be but the crucial question remains………how old is your AVERAGE note?

If your average note is less than 4 months old, which it has to be, it’s virtually impossible for it to default.

More importantly your interest received explanation makes no sense, I’m afraid. Interest is credited monthly, so as long as a note is 1 month old or more you’ve already received interest.

I mean come on. How is it possible for me to make 7-8 times the interest you’re making with a portfolio less than twice your size………..& with you outperforming me by 6% no less!……….. unless the average note in your portfolio is incredibly & unbelievably young.

Or perhaps I’m just a magician or outright liar.

Dec 11, 2010
3:58 am
#34 Dan B. :

And incidentally…….One of my defaults from last month was a Chapter 13. It was discharged in court & the note charged off as a total loss.

Dec 11, 2010
2:55 pm
#35 Matt SF :

Is there a Lending Club “average age of note” calculation readily available? If so, I can’t find it within the account summary or details pages, or within the monthly statements.

If you know where this is located, please give me the navigation path. If you calculate it yourself, please give me directions and I’ll try to accommodate your request.

I invest in several notes every week, rather than investing $X once a month or once a quarter, so calculating my average note age won’t be easy unless LC doesn’t this automatically.

As far as my interest explanation making no sense to you, I don’t know what to tell you. However, as the post mentions, I did invest ~$2000 in notes in June and July, and being that this post was published in September, some of those notes may have only made 1-3 repayments at most.

As of today (12/11/2010), my numbers are: balance = $6,459.36, interest = $288.52, NAR = 15.60%. 3 notes are 30+ Days Late and 1 note 15 days late. So interest collected basically doubled in less than 3 months time.

And yes, it is definitely possible to have a note less than 4 months old default. I don’t know why you say this is “virtually impossible” considering a borrower can get hit by a bus, move to a different country, or just file for bankruptcy protection shortly after receiving their loan.

Supporting evidence: my Ch.13 bankruptcy note made only 3 payments.

Plus, I know several Lending Club investors, who also happen to be personal finance bloggers, who invested in borrowers that never made a single payment and defaulted/charged off soon thereafter. If you want, I can direct you to them.

Dec 11, 2010
2:59 pm
#36 Matt SF :

Here is the reply from Lending Club’s collection team and/or legal department regarding a question I sent them asking if my Chapter 13 bankruptcy borrower will default, be an interest free loan, or pay a reduced interest rate:

Thank you for your further inquiry as to the referenced loan.

Please note that as this Borrower is in a Chapter 13 bankruptcy proceeding, a proposed “Wage Earner Plan” is pending before the Court awaiting a hearing at which point, unless there are objections submitted by the Chapter 13 Trustee or a creditor, it will be confirmed.

Payment plans vary in the amount that they pay (based upon a Borrower’s “best effort”) to unsecured creditors from 1% to 100% with the predominant number of plans being in the lower range of this spectrum.

All unsecured creditors (which includes all Lending Club Investors on the loan) will not receive their pro rata share of any eventual payment until all priority, administrative and secured creditors are paid.

Lending Club is receiving periodic distributions from the Chapter 13 Trustees across the country in other loans, but the timing and consistency of such remittances remains irregular.

Bottom line, if the Borrower is able to fulfill and consummate his Chapter 13 Plan (most plans are 5 years and some are 3 years in duration), you may receive some limited return on your original investment, but the anticipated start of such payments is months away.

Dec 11, 2010
3:30 pm
#37 Dan B. :

Anecdotal evidence to the contrary non-withstanding, you have to get to 120 days late before defaulting.

To the the best of my knowledge 120 days is 4 months…………therefore you’re not in default until you’re late 120+ days. Therefore it’s virtually impossible to default within the first 4 months.

If a borrower gets hit by a bus, gets abducted by aliens or moves to Kathmandu his note doesn’t evaporate. If payments aren’t made, it will still go through the late 120 day route & therefore won’t default within the 120 day period.

Or his estate is responsible for it & the process remains.

The only exception is when someone takes out a loan then declares bankruptcy a month or two later. Assuming they actually notify LC that they’ve done so then the process “might” get sped up & the note “might” get charged off within the 120 day period. Hence the term “virtually impossible”.

Dec 11, 2010
4:00 pm
#38 Dan B. :

Unfortunately LC doesn’t provide average note age info for us or for their own portfolio. Based on the info you supplied, yours is reasonably easy to guesstimate.

It sounds like you’ve invested $2000+/- in June/July2010, $2000+/- between the time you started & May2010………& finally $2000+/- between August 2010 & now.

Those investments plus interest & you’re at $6300+/-………close enough for a rough calculation.

Assuming that you’ve invested in $25 notes since you’re start………your average notes’ age is about 5 months……..basically your average notes are those you bought in June/July.

So I was one month off, but then I was working with the info from your original posting figures & not the updated ones.

Pls. understand that all of this conversation on my part isn’t meant to denigrate anything you’ve achieved. Like I said previously, I was at 13%+/- for almost a year with only 10% in 5 yr. notes, mind you.

So I’ve breathed the thin air as well. There’s an easy way to keep the numbers up & that is to shorten the average age of the portfolio……in other words invest more & more as time goes by. It’s something I don’t want to do, nor am I suggesting that you have.

Dec 11, 2010
4:11 pm
#39 Dan B. :

Interesting………& here’s my response to that that is copy/pasted directly from the loan detail page at LC:
Loan ID…..501044
12/5/10 (Sunday) Charged off. Bankruptcy: account dischargeable

Interesting…
And here’s my response to that taken from LC loan details page directly.
LOAN ID….501044
12/5/10 (Sunday) Charged off. Bankruptcy: account dischargeable
11/2/10 (Tuesday) Borrower responded to lawsuit. Hearing pending
10/30/10 (Saturday) Borrower filed for Chapter 13 Bankruptcy.

Dec 11, 2010
4:17 pm
#40 Dan B. :

Please feel free to forward that to LC. I’d love to hear how they “spin” that one.

Dec 12, 2010
11:17 am
#41 Matt SF :

Hmm… that’s interesting.

You’re borrower’s case was expedited compared to mine.

I wonder if my note will be any different:

9/30/10 (Thursday) Borrower filed for Chapter 13 Bankruptcy

If it’s 3 months old, the court must have a serious backlog or the bankruptcy attorneys must be duking it out.

(Note: the grasping of straws and shots of hopium keeps me believing some good – and money – will come from this.)

Dec 12, 2010
4:44 pm
#42 Dan B. :

If you or I (being unsecured creditors) were to have to be repaid on a Chapter 13, then one would have to question the wisdom of filing a Ch. 13 in the first place. Of course one can always hope. LC (in a long winded explanation that says little) seems to ultimately say that you MIGHT get as much as $3-$5 back……………. within the next 5 years.

Dec 13, 2010
11:26 am
#43 Matt SF :

Basically, yes. Some return is better than none, but in my specific case where the Ch 13 filers were two peace officers filing ~ 4 months after taking out the loan, I’m wondering how much will be discharged. If any.

Dec 14, 2010
3:00 am
#44 Dan B. :

What do you mean by two peace officers filing? Could you explain?

Dec 14, 2010
9:28 am
#45 Matt SF :

A dual income family where both were employed as law enforcement officers.

For whatever reason, I thought cops were trustworthy individuals, at least finance wise. Either something serious happened health wise (and let’s hope not), or they knew how to game the system.

Dec 14, 2010
12:16 pm
#46 David :

I know that you weren’t originally planning to go into the FOLIOfn platform for note trading as you are focused on a more long-term “buy and hold” strategy, but in lieu of your recent defaults / late payments, and the possibility of more, take note of the following:

Notes in grace period will sell on FOLIOfn for anywhere from a 10-30 percent discount from face value, depending on the circumstances of the individual note and how long you are willing to wait for the sale. Notes that are current, yet have had grace period payments in the past, will sell anywhere from between a 5 percent markup and a 5 percent discount (again, depending on the particularities of the note). It’s also possible to sell >15 and >30 day late notes, and even defaulted notes, although the discount margins are predictably high.

Myself and other investors I know have utilized this “dump risky notes” strategy as means towards risk mitigation (in other words, selling any note that goes into grace period immediately). Although, given the amount of money lost through selling a handful of notes at steep discount every month, it’s not entirely clear to me that this strategy will end up saving more money in the long term than simply holding onto all notes and swallowing the defaults. We would need more historic default data to be fully sure.

Dec 14, 2010
12:43 pm
#47 Matt SF :

@ David,

I think that’s definitely a winning strategy. I do something similar w/ my equities portfolio (stop loss orders below technical support levels, trailing stops, etc.), where losses are minimized but on a consistent and reasonably predictable level.

I’m still holding out of FolioFN to determine if my current investment strategy will pay off, but once my portfolio becomes a bit more seasoned (or I could simply create a 2nd one with the “assign notes to a portfolio” function), I will give serious consideration to adopting a similar/identical technique as yours.

Dec 14, 2010
4:11 pm
#48 Dan B. :

My experience has been similar to Davids’. I’ve sold 100 or so notes on Folio in the past year. About 60 have been 6 month or older “currents” with either a history of going into “grace” or severely declining credit scores. Surprisingly I’ve had little trouble selling them consistently for 2-3% premiums, net of the service fee. I’ve also managed to sell around 30 “currents” about to go into ‘grace” at par or 1-2% under net of fees. The rest were in grace or late & they’ve been tough to sell even at steep discounts.

Dec 14, 2010
5:31 pm
#49 Dan B. :

My gut feeling is that opportunities to sell notes of any type at a premium will become a thing of the past as LC notes become approved to states that are currently closed off. I’d never ever pay a premium to buy a note period…………but thankfully, as they say, there is one born every minute.

Dec 14, 2010
6:53 pm
#50 David :

I agree, I think the fact that certain states are cut off from investing anywhere other than the trading platform. However, it also seems that there is currently massive investor inexperience and flat out misunderstanding of what the default risk is for someone with a plummeting credit score and/or or late payments. All this is making for some pretty “interesting” trading on FOLIOfn at the moment.

I imagine that when (or I should say if) the platform becomes more mature (all states allowed, >5 years operation time), note buying will get a bit more rational.

Dec 14, 2010
8:37 pm
#51 Dan B. :

I couldn’t agree with you more. My concern is that the lack of understanding you’ve described is going to increase as more investors discover LC…….& that ultimately there will be boiling over & a call for regulations to limit the range of opportunities on the trading forum. Just recently I recall reading an irate investors comments on LC Facebook demanding that LC take action to limit the premium that one can ask for.

Also & slightly off topic………. the trading platform itself isn’t remotely user friendly & contains at least 1 major weakness. On more than one occasion I’ve bought a note over a weekend that simply vanished come Monday. Once purchased money comes out of ones account, the note goes into the proper “bought” category with a note saying “pending”. All that is correct so far.

But apparently if a payment is made on that note during the weekend ( 2 non-business days) then the transaction will be cancelled. I understand the reasoning given by LC for this & have no problem with it. The problem is that there is no record whatsoever of the note being cancelled or any record of it being purchased in the first place. The entire transaction simply disappears as if it never happened. In fact unless you keep a separate record you won’t even be able to tell which note you bought & whether the money was re-credited back to your account. Quite unbelievable really!

Dec 14, 2010
9:27 pm
#52 David :

Yeah, calling the trading platform “unwieldy” or “primitive” would be a huge understatement. It’s incompetently designed, no ifs ands or buts about it, and what is truly bewildering to me is that many changes could be implemented with *literally* about 10 to 20 man-hours of programming time (i.e., probably about a hundredth of what they spend in promotional cash-back offers every month).

For example, a YTM screener at the very least should be added (similar to the Yahoo bond screener at http://screen.yahoo.com/bonds.html), which doesn’t permit the user to search for notes with a yield-to-maturity less than 1%.

There should probably also be some sort of “alert” pop-up screen whenever someone attempts to purchase a distressed note (defined as below a certain credit limit or past 15 days due) for more than a predetermined discount explaining the risks involved, then giving the buyer the option to continue or stop the sale.

I’ve expressed my concerns about the trading platform’s design to Lending Club before, but they claimed to me that the matter is “out of their hands,” as they don’t yet have a brokerage license from the SEC, only a license for the issuing of securities, and hence are forced to outsource trading to the third-party FolioFN corporation.

Dec 18, 2010
1:46 pm
#53 app :

I love the idea of being the banker so much I have put in 25 hundred and have another 25 on the way…sign me up for your newsletter…the more info the better…

Dec 21, 2010
2:45 am
#54 Greg :

Please include me on your mailing list.

Thank you.

Dec 21, 2010
12:28 pm
#55 Matt SF :

You got it. Sent you an email to confirm.

Dec 28, 2010
3:41 am
#56 Dan B. :

Here’s another number from LC website that is rather illuminating.
“77.54% of investors have earned between 6-18% net annualized returns since inception”.
And since no one makes more than 18%, you can flip this around & it says that 22.5% of investors have earned under 6% NAR since inception. In other words………..1 of every 4.5 investors have made less than 6% returns. Sobering, don’t you think?

Jan 19, 2011
1:33 am
#57 Traci D. :

I’d love to be included on your mailing list.
Thank you.

Mar 1, 2011
7:54 am
#58 Sammy :

Please add me to your mailing list.

Mar 5, 2011
9:52 pm
#59 Miguel :

Please add me to your LCIC mailing list. Also, thanks for your site as it’s good to know that there are people like you that are willing to provide examples of how well LC works, especially for my more skeptical friends.

Mar 6, 2011
9:32 am
#60 Matt SF :

No problem Miguel. Just sent you a confirmation email.

If your friends have any questions, it might be advantageous have them email me directly with their concerns, ask them to read these 3 links (see below) and I can send them a recent copy of our Lending Club investment club email.

I’m not affiliated with Lending Club in any way, so I tend to think my endorsement and a transparent blog carries a bit more weight than the standard prospectus, so investors turned bloggers offer a degree of comfort rarely provided in the investing world.

http://steadfastfinances.com/blog/2011/03/03/tracking-performance-of-lending-club-investment-returns/

http://steadfastfinances.com/blog/2010/12/30/lending-club-update-earning-15-6-nar-on-p2p-lending-investments/

http://steadfastfinances.com/2009/09/01/my-plan-to-beat-the-lending-club-peer-to-peer-investing-average/

Apr 9, 2011
10:46 pm
#61 Chris :

Please add me to the Lending Club group list. Thank you

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