Friday, June 20, 2014

My updated Lending Club screen

I have updated my Lending Club screening process in how I find notes in the secondary market. As Lending Club is becoming a bigger and bigger part of my portfolio, I have created its own page. Of course it'll have its own spreadsheet. You guys know how I love my spreadsheets!

I actively avoid the normal platform. The place where people can fund brand new loans. We have over 5 years of data that Lending Club provides us and I found that about 80% of all defaults occur within the first year. If I can avoid this time frame I can give myself a huge edge. So I invest on the trading platform where I buy existing notes. After a loan is funded everyone gets a note with a principal value of whatever they contributed. This is now a financial asset and can be bought and sold in an over the counter market.
The advantage here is there is a lot of screening tools available to pick what type of loan I want.

The following is my screening process.

1: 700+ credit score. I want to focus in on the people who have made good past financial choices and are just needing help to get out of debt.
2: Rising credit score trend. Are they making good choices outside of their Lending Club loan in turning their finances around or are they just using me as another stop gap to bankruptcy?
3: Never late or missed a payment.
4: 40-50 payments remaining. I want to avoid most of the first year default range but I want enough time to work with a solid borrower to make interest from.
5: 4% maximum markup by the seller. I understand they want to make an extra payment or two and am willing to work with them but I won't be gouged. A couple months of interest is what I will give up.
6: 16%+ net interest. Lending Club tells you the interest after fees and seller mark up. I want to be sure I hit a nice level.

After the screen is ran then I screen further manually
7: "Credit Card Consolidation" or "Debt Consolidation". I want to work with people who understand they made mistakes and wanting to get out of debt. I have no interest in giving you a 20% loan for a motorcycle or 25% loan to cover your margin call in the commodities market (I have seen those!).
8: Debt-to-Income < 20%. I hold myself to a high standard of keeping my expenses down so that I have room to absorb emergencies in my life. I expect my borrowers to do the same. Emergencies will always come up and we have to be prepared for them.
9: Revolving Line Utilization < 90%. Along the same line, I want my borrowers not to have used me as their lender of last resort and have wiggle room for emergencies in their life if they need additional credit. I'd prefer a 60% or 70% but I do have to understand most people coming to Lending Club are at the end of their rope.

With these requirements I hope to avoid the majority of defaults and allow me to hit high net yields. I will still get some defaults, Lending Club gets their cut, the seller of the note will get their cut, and there will be taxes. My goal is to have a 12%+ net interest yield after taxes.
Right now I have 11.97% pre taxes but it is drifting higher.

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial adviser, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

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