Alright time to get to the reason I am in Lending Club, my strategy for making money. I've seen a lot of ideas out there involving both the primary and secondary markets, using LC for income off the interest to flipping notes for capital gains. There are lots of different ways to make money with LC so how am I going to do it?
As much as I love dividends it should be no surprise that I will be focusing in on the income. I acknowledge that one can make money flipping notes but I see mark ups of a month or two of interest payments. A strategy of funding a loan, then putting it up for sale so you can get $0.60 profit and start over isn't my idea of time well spent. Yes its risk free but I don't want to be chasing pennies.
I'd rather search for a loan so I can make $9 total interest over a 5 year loan. Its a matter of how much is my time worth in actively spent going through the LC markets.
Hold to maturity: When I find a note I want to hold it to maturity. I understand that you won't be getting as much interest as time goes on but its the same yield.
When a note is young a $0.70 payment will be $0.20 principal and $0.50 interest. Yet those last few payments are going to be reversed at $0.50 principal and only $0.20 interest. It can seem like you aren't making as much money.
Here is the thing though that I think many miss, those smaller $0.20 interest payments are on smaller amounts of principal. They are both $25 notes but one is worth $24 and has 5 years of payments left and the other is worth only $10 with a year or two left. Its not like you can sell your $25 note for a full $25. Thats not its worth its just what it started out as.
Both of these notes in my example are going to give you the same yield on the remaining principal so I am going to skip the work and time in finding the sweet spot and only taking the early months of a loan.
Secondary Market only: I have to realize I will not be in the primary market where loans get funded. I meet the requirements but I do not want to be hovering over my computer racing against everyone else to fund a loan. Even though loans are released four times a day in batches, they get funded in minutes because of the institutional investors doing automated investing. I can't blame them as they have hundreds of thousands of dollars ready to be invested. I don't want LC to be a second job for me.
Next lets talk about what type of person and note I want to be invested with...
Credit card or debt consolidation needs only: I want to be invested in the people who have hit a financial rock bottom. Where they have struggled with money have few other choices and realize the mistakes they have made. Now that might seem harsh but these people are going to be deadly serious with the loan and thusly, deadly serious with my money. I don't want the people starting a new business. I love the idea of people creating jobs and pursuing their dreams but this is an unsecured loan. If they default then I am out of luck. I don't want the people who think a $30,000 loan @ 18% interest is a good idea for their wedding. That seems like they are just beginning their debt lessons in life. I want to be at the end after they realize what lifestyle that leads to. I also do not want the person who things an 18% loan for a new deck in their back yard and remodeling is a good idea. They may have good reasons and they may be disciplined enough to handle these choices but I don't know them personally. I just have the information available so instead of taking a chance, I'll go with what seems like a safer bet.
10 months history minimum: Multiple 3rd party sites offering data from LC, bloggers, and commenters in discussions point to the majority of defaults occurring in the first year of a loan. It makes sense why this would occur...
If people are going to scam LC and just take the money, they are going to do it early.
If people are going to use LC as a lender of last resort and are struggling with old habits they refuse to change, they are going to default early.
However if people are truly wanting to turn their financial life around and are being truthful that they can meet their current payments they just want to free up some cash, then they will never even be late with a payment.
So I want notes that have been around for 10 months and have never even been late on a payment.
Rising credit score: If a person is turning around their financial life then they either consolidated all their debt into this LC loan or they freed up cash to pay off other debt. Either way their credit score should not be dropping further and in fact should be rising. If its dropping then I take that as meaning they have other obligations they are not meeting. Perhaps they lack the discipline to pay their debts on time or they are not being smart with their money. Either way I don't want my money with those people.
The way credit scores work is that if you pay your debt on time your credit at worst stays flat. As you lower your debt to maximum allowed debt by paying them off and not taking on new debt, your score increases.
I don't think credit scores are the best indicator of a person's financial habits but its the best one available to me through LC.
I don't want flat credit score, I don't want dropping. I want rising, improving credit as proof that this person is being serious in managing their debts.
Those are the three biggest priorities for me. I have a few others that is best shown in a screenshot of my screen...
15% interest minimum. If I am avoiding the majority of defaults then I feel I can take on more risk vs the 4% loans.
Never been late.
60 month duration only.
5% mark up only. I get it that a person wants to make a little money and I am willing to meet them halfway but don't be ridiculous.
700 credit score or higher. Again, I want people who have shown they are disciplined and turned their financial life around.
As you can see from the screenshot, there are currently over 300, $25 sized notes. $7,500 available at this time. Over the course of the past month I've seen it be 300-500 so there a market for me here.
I feel that this is a very conservative screen that will avoid most, but not all, the defaults allowing me to take on the high yields for a high net yield.
Tell me what you think of this screen.
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.
As much as I love dividends it should be no surprise that I will be focusing in on the income. I acknowledge that one can make money flipping notes but I see mark ups of a month or two of interest payments. A strategy of funding a loan, then putting it up for sale so you can get $0.60 profit and start over isn't my idea of time well spent. Yes its risk free but I don't want to be chasing pennies.
I'd rather search for a loan so I can make $9 total interest over a 5 year loan. Its a matter of how much is my time worth in actively spent going through the LC markets.
Hold to maturity: When I find a note I want to hold it to maturity. I understand that you won't be getting as much interest as time goes on but its the same yield.
When a note is young a $0.70 payment will be $0.20 principal and $0.50 interest. Yet those last few payments are going to be reversed at $0.50 principal and only $0.20 interest. It can seem like you aren't making as much money.
Here is the thing though that I think many miss, those smaller $0.20 interest payments are on smaller amounts of principal. They are both $25 notes but one is worth $24 and has 5 years of payments left and the other is worth only $10 with a year or two left. Its not like you can sell your $25 note for a full $25. Thats not its worth its just what it started out as.
Both of these notes in my example are going to give you the same yield on the remaining principal so I am going to skip the work and time in finding the sweet spot and only taking the early months of a loan.
Secondary Market only: I have to realize I will not be in the primary market where loans get funded. I meet the requirements but I do not want to be hovering over my computer racing against everyone else to fund a loan. Even though loans are released four times a day in batches, they get funded in minutes because of the institutional investors doing automated investing. I can't blame them as they have hundreds of thousands of dollars ready to be invested. I don't want LC to be a second job for me.
Next lets talk about what type of person and note I want to be invested with...
Credit card or debt consolidation needs only: I want to be invested in the people who have hit a financial rock bottom. Where they have struggled with money have few other choices and realize the mistakes they have made. Now that might seem harsh but these people are going to be deadly serious with the loan and thusly, deadly serious with my money. I don't want the people starting a new business. I love the idea of people creating jobs and pursuing their dreams but this is an unsecured loan. If they default then I am out of luck. I don't want the people who think a $30,000 loan @ 18% interest is a good idea for their wedding. That seems like they are just beginning their debt lessons in life. I want to be at the end after they realize what lifestyle that leads to. I also do not want the person who things an 18% loan for a new deck in their back yard and remodeling is a good idea. They may have good reasons and they may be disciplined enough to handle these choices but I don't know them personally. I just have the information available so instead of taking a chance, I'll go with what seems like a safer bet.
10 months history minimum: Multiple 3rd party sites offering data from LC, bloggers, and commenters in discussions point to the majority of defaults occurring in the first year of a loan. It makes sense why this would occur...
If people are going to scam LC and just take the money, they are going to do it early.
If people are going to use LC as a lender of last resort and are struggling with old habits they refuse to change, they are going to default early.
However if people are truly wanting to turn their financial life around and are being truthful that they can meet their current payments they just want to free up some cash, then they will never even be late with a payment.
So I want notes that have been around for 10 months and have never even been late on a payment.
Rising credit score: If a person is turning around their financial life then they either consolidated all their debt into this LC loan or they freed up cash to pay off other debt. Either way their credit score should not be dropping further and in fact should be rising. If its dropping then I take that as meaning they have other obligations they are not meeting. Perhaps they lack the discipline to pay their debts on time or they are not being smart with their money. Either way I don't want my money with those people.
The way credit scores work is that if you pay your debt on time your credit at worst stays flat. As you lower your debt to maximum allowed debt by paying them off and not taking on new debt, your score increases.
I don't think credit scores are the best indicator of a person's financial habits but its the best one available to me through LC.
I don't want flat credit score, I don't want dropping. I want rising, improving credit as proof that this person is being serious in managing their debts.
Those are the three biggest priorities for me. I have a few others that is best shown in a screenshot of my screen...
15% interest minimum. If I am avoiding the majority of defaults then I feel I can take on more risk vs the 4% loans.
Never been late.
60 month duration only.
5% mark up only. I get it that a person wants to make a little money and I am willing to meet them halfway but don't be ridiculous.
700 credit score or higher. Again, I want people who have shown they are disciplined and turned their financial life around.
As you can see from the screenshot, there are currently over 300, $25 sized notes. $7,500 available at this time. Over the course of the past month I've seen it be 300-500 so there a market for me here.
I feel that this is a very conservative screen that will avoid most, but not all, the defaults allowing me to take on the high yields for a high net yield.
Tell me what you think of this screen.
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.
Fascinating! I am quite intrigued by your decision to exclusively use the secondary market, although I think it gives you a tremendously unique advantage over those scraping for the same loans during release times. All things being equal, how are you selecting notes from the available 300? Based on discount, return to maturity, or something else?
ReplyDeleteAfter my screen I pretty much go straight for the "yield to maturity". This field is a nice new addition that I have found since returning and back in 2009 I had to try to calculate real returns by hand. Too much work to be chasing a couple dollars per note.
DeleteYield to maturity is the interest rate with lending club fees and the markup taken out. It should be the true annual yield you get.
It makes it easy to avoid the 22% yield but 8% markup notes so you have a 14% net yield vs the 18% notes with only a 1% markup leaving you with a higher net yield.
What you pay for in the secondary has a huge impact on your actual return. You can find $25 notes going for $20. What a deal! Until you see that there are only 3 payments left and you will only be paid $2.50 total so you are looking at a -90% return.
Its probably something I should talk about in its own blog entry.
Thanks for commenting w2r it was a good question.
One further comment. Lending Club does charge a little bit for trading in the secondary market. That is why my fees back in 2009 were 3.5% and it was high. Its a bit more than the $0.01/payment fee they charge the actual loan payment (and the secondary markets still get charged that).
ReplyDeleteI'm eager to get a couple months of statements so I can better estimate future returns. A lot of changes have occured since 2009.
I'm still not sure that answers the fee question since only the seller of notes picks up the additional 1% trading fee in the secondary market. Perhaps your fee calculation included/netted the discount/premium you were paying for notes.
DeleteAs for the above question, I figured the yield to maturity field was your go-to. Having dabbled in the secondary market myself, I was curious to see your process.
That was my understanding too W2R. That the seller pays the fees. However if you get a definition of what yield to maturity is, they mention it includes lending club fees. I suppose that they could mean that $0.01 per monthly payment but that would be a bit odd to list if there as they don't mention it in other terms of yield.
DeletePlease pardon the self-promotion, but have you tried LendingRobot.com? Like you, we didn't want LC to be a second job for us, and we found that automating investments was the only way to compete again institutional investors.
ReplyDeleteI don't mind self promotion at all as long as it is on topic. The "Great post I really got a lot of this www.mycrapsite.com" is the stuff I hate and delete.
DeleteI have heard and thought about the 3rd party applications and services. I want to do things manually for a couple months at least to get a good feel and understanding of LC. Afterwards I'll take a look at alternate ways to improve but when I do I'll check out lendingrobot.
I literally bookmark'd this one inside my investing folder. Like ... it has it's own spot alongside seasonals, inverse currency scanners, etc.
ReplyDeleteWhere was that portion you mentioned previously, about the breaks given to people, since 21% is obviously too high to be charging someone?
ReplyDelete