I've had my eye on peer to peer lending site www.lendingclub.com for a while and decided to start an account after reading a recent post at the Mr. Money Mustache blog. I'm sure most of you guys have heard of this before so I'm not going to get into the details of what it is. If not check out the website, it's quite a novel idea. I'm starting with the bare minimum $250 to open the account and might deposit more if it turns out to be a good investment.
The biggest risks I see at Lending Club:
-Risk of individual notes defaulting.
-LC itself going into bankruptcy.
To try to minimize these risks I'm going to only have a small sum in the account which will be spread out between as many loans as possible. The smallest loan amount is $25 so I'll start with 10 notes and see how that goes. The risk of individual notes defaulting is probably not as bad as it seems. For starters you can screen for certain characteristics that should help to weed out potential deadbeats. It's like using a stock screener. Not only that, but when you receive payments you are getting interest plus part of the principal back. Assuming the borrower makes at least one payment, the loss won't be 100%. The average default rate for the types of loans I'm looking at is 3-4%. I'm hoping my screens will give me better results.
I like the way LC is setup and the yield potential is very high. I'm going to concentrate on the "B-D" rated loans where I should be able to collect at least a 10% yield if everything goes as planned. My screen is pretty strict and consequently I wasn't able to immediately find 10 notes that fit my criteria. That's okay, I don't mind checking back every few days to see if something new is available. So far I have the following notes: B5 (14.09% interest) / C1 (14.33%) / C2 (15.31%).
I'll cross my fingers and see how this plays out. If nothing else I'm helping real people and it's entertaining!
I wish that I could join LC but in Texas I can't so I can only purchasew on the secondary market which I'm not up for doing. I reallt like the idea behind LC. Hopefully everything goes well and you can make some good returns while helping out other people.
ReplyDeleteThanks man. I'm only funding certain types of loans. I'm focusing on debt consolidation and medical. To me these seem like legitimate reasons for taking out a loan. Maybe the debt consolidation will help someone get their finances in order and lead to the next dividend ninja... who knows. I'm not going to fund new pools, new kitchens, vacations and ridiculous stuff like that. I hear after a year or so defaults are more likely so it may take a while to fully understand it.
DeleteCI,
ReplyDeleteBest of luck with the LC experiment. It sounds like investors are making some pretty decent returns on this one. I've known about P2P lending for a while now, as it's fairly popular in the ERE crowd, but just have not been inclined to jump in.
The one thing I'd be wondering about is tax complications, especially with defaults. I have no idea if that would severely complicate anything, but it seems like that could be a small headache. Of course, 13% returns might be worth the headache.
Best wishes!
Yes supposedly it does make filing taxes more complex. I can't say for sure, but I'll report my findings in the future. If a note becomes deliquent I plan to sell it on the secondary market to minimize losses. We shall see, I'm just getting started.
DeleteCI, welcome to the world of peer to peer lending. I have invested on Lending Club for a while and analyzed their historical loan data extensively on my blog at http://andirog.blogspot.com. A few comments based on my observations:
ReplyDelete1. The average default rate of 3-4% applies when you hold large number of notes in your portfolio (law of large numbers). Just see this way if you have only 10 notes in your portfolio and even if one note defaults, default rate for your portfolio is already 10% and likely to increase in the future.
2. An experiment with 10 notes is not a good way to measure returns from p2p platform. For example, a 10 notes portfolio with average yield of 10% per note, every default of note will require two other notes to not default just to break-even on portfolio basis. I suggest minimum of 100 notes portfolio to really measure returns from a p2p portfolio then each note is only responsible for 1% of portfolio.
Note: assumption of a note defaulting as soon as you invest just to present more intuitive example. I use a rule of thumb that to recover from a loss of 10% on a portfolio, portfolio has to gain about 20% to break-even.
Thanks for your oservations. Having many notes (ie in the 100's) does make sense, no doubt about it. I took statistics and a Credit/Collections class in college, I understand the concept. Right now I'm more or less just playing around with the system and I'm not comfortable putting a lot of money into it. I might add $100 a month or something like that as I continue to learn. Having a portfolio of 100's of notes would take a while to build, not many pass my screens. I have yet to even get 10.
DeleteI currently expect to have a default rate of 0% or 10%. It can't be in between because the portfolio is so small. Also I plan to sell a note if it becomes deliquent so it won't be a total loss. I have yet to sell anything so I'll learn more about it when it's time.
I stopped by your blog, and will definitely spend more time there. Right now my screen is: Max Loan 15000, Max Debt to Income 10%, 0 Deliquencies last 2 years, max credit lines 20, loan purpose - Debt consolidation & medical, inquiries 0 or 1, 36 month term, interest rate B-G, home ownership - mortgage & own, 4 years of employment. I then check to make sure everything is filled out and is spelled correctly. I'm not gonna loan you money if you don't know how to spell, sorry. I also make sure the payment is less than 10% of the listed income and credit utilization isn't absurd. I prefer B3 and above for the higher interest rate.
Not many can get through all that, I hope it improves my results. I also realize that no matter what I do bad things happen to people and defaults are inevitable.
Thanks for sharing your thoughts!
I hope you continue to update your progress and let us know how this works out. Sounds very interesting.
ReplyDeleteI will. I think for now I'll slowly add money depending on how I do with my budget. I don't want lending club to interfere with dividend investing.
DeleteI think you explain the whole situation very well.I have no point to raise in against of what you have said.SBA 7a lending
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