Lending Club is a peer-2-peer loan company. People can apply for a loan, Lending Club will review them just like a bank would: credit check, employment check, etc. They set a risk level and interest rate but then do not loan out the money. They open it up for funding to other members of Lending Club. We can all pitch in and share in the risk and share in the profit of giving someone a loan.
I had invested through Lending Club back in 2009 but wasn't happy with their monthly statement reporting and how they provided no tax forms to help their investors. But I realized they were new so wanted to come back to them in the future. I did so in the beginning of 2014 and found my concerns were corrected. My style of investing with Lending Club however is not typical.
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.
I had invested through Lending Club back in 2009 but wasn't happy with their monthly statement reporting and how they provided no tax forms to help their investors. But I realized they were new so wanted to come back to them in the future. I did so in the beginning of 2014 and found my concerns were corrected. My style of investing with Lending Club however is not typical.
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.
Interesting investment strategy...I see you just started investing in LC this year. I would be interested in seeing the results after a year. I have to admit that I am probably too conservative with my Lending Club investments.
ReplyDeleteWishing you continued success!! AFFJ
hope you were able to participate in the recent Lending Club IPO.
ReplyDeleteYour lending club strategy really makes a lot of sense. I've been buying notes on foliofn for a year now. Am an ultra conservative type. I didn't study up on it much , just jumped in with what made sense to me .
MY screens: FICO 700+... rising credit score...no greasers , I mean grace periods...12 to 30 remaining payments....1% or less markup ... 10% + yield to maturity ...debt consolidation loan...debt to income < 20%...line utilization < 62% .....my returns...8.88% trending higher ...
I had thought about it but did not get involved. While I have access to tools and information when selecting loans to invest in I didn't have that data for Lending Club the company.
DeleteSounds like we have much in common with our screens. What is your average rates on your portfolio. Not your return but what grade of loans? I was going pretty heavy in the 19% average range but the early pay off loans are hitting me with costs. Trying out 15% now.
Thanks for stopping by!
Majority of notes I buy are B and C grades. Use patience as a weapon same as in stock trading .
ReplyDelete