Lending Club

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February 5th, 2013 at 10:32:25 AM permalink
AcesAndEights
Member since: Oct 24, 2012
Threads: 5
Posts: 214
Has anyone invested money with Lending Club?

Basic idea is that they are a middle-man for crowdsourcing private loans. By cutting out the traditional financial institutions, lenders can get higher rates and borrowers can get lower rates. It sounds risky, but by buying dozens, even hundreds of $25 slices of different debt, the idea is you reduce your risk substantially. Their boast is that 93% of investors earn between 6-18%, which is pretty amazing, to be honest.

Mint.com had "recommended" the service to me based on my financial profile a while ago, but I dismissed it as too risky. But then I read Mr. Money Mustache's experience and I am intrigued. For those of you unfamiliar, MMM is a blogger who gives advice on early retirement and savvy financial planning; my girlfriend is obsessed with his blog. He generally gives very good advice, although much of it seems obvious to me (i.e. don't carry credit card debt, don't finance vehicle purchases, invest in index funds, live within your means, etc.). I have a CD that is maturing in July and I would like to do something with that money...I feel overexposed in the stock market and CD/Savings account interest rates are disgustingly low. I think I might dump some in here!
"You think I'm joking." -EvenBob
February 5th, 2013 at 4:06:10 PM permalink
AZDuffman
Member since: Oct 24, 2012
Threads: 41
Posts: 1438
I put about $500 in Prosper a few years back, same idea. My observations were:

1. Their write-off period was very short and collections terrible.
2. You have to be very selective, the reason people will pay 20% is because their credit stinks.
3. Of the 5C's a professional underwriter uses you only get access to "charachter" in the form of a credit rating. All else is really undoccumented.

If you do this, take only grade "A" paper, skip the hard-luck cases unless you would rather lose money here than playing Let-It-Die or 3CP. The lower-grade borrowers have a super-high default rate.
The man who damns money has obtained it dishonorably; the man who respects it has earned it
February 5th, 2013 at 4:36:09 PM permalink
AcesAndEights
Member since: Oct 24, 2012
Threads: 5
Posts: 214
Quote: AZDuffman
I put about $500 in Prosper a few years back, same idea. My observations were:

1. Their write-off period was very short and collections terrible.
2. You have to be very selective, the reason people will pay 20% is because their credit stinks.
3. Of the 5C's a professional underwriter uses you only get access to "charachter" in the form of a credit rating. All else is really undoccumented.

If you do this, take only grade "A" paper, skip the hard-luck cases unless you would rather lose money here than playing Let-It-Die or 3CP. The lower-grade borrowers have a super-high default rate.

So based on your general tone, I'm guessing you lost money on it?

The problem is that to appropriately balance and diversify the risk, you really need more than $500. The guy at the blog above found that by explicitly going after the low-grade notes (D-F), you actually come out ahead at the end more often than not. Some of them will default, sure, but the ones who pay the big interest rates make up for it.

Again, diversity is the key. Buying $5000 worth of a single borrower's notes with a grade below C would be ridiculous.
"You think I'm joking." -EvenBob
February 5th, 2013 at 4:44:10 PM permalink
AZDuffman
Member since: Oct 24, 2012
Threads: 41
Posts: 1438
Quote: AcesAndEights
So based on your general tone, I'm guessing you lost money on it?

The problem is that to appropriately balance and diversify the risk, you really need more than $500. The guy at the blog above found that by explicitly going after the low-grade notes (D-F), you actually come out ahead at the end more often than not. Some of them will default, sure, but the ones who pay the big interest rates make up for it.

Again, diversity is the key. Buying $5000 worth of a single borrower's notes with a grade below C would be ridiculous.


I made a small profit over a few years. It has gotten better as at the time there was no secondary market, IOW zero liquidity for 3 years. Expect a 20%+ default rate at >=C paper. The other issue was at the time there were no late-fees to make up for the defaults.

Yes diversify, but take more, better paper. Remember when these people accept 25% or more as a rate on loans it is bacause every professional underwriter out there has declined them for credit.

Have fun with it, but consider it near-gambling at the lowest grade paper.
The man who damns money has obtained it dishonorably; the man who respects it has earned it
February 5th, 2013 at 6:03:44 PM permalink
rdw4potus
Member since: Oct 24, 2012
Threads: 10
Posts: 147
Quote: AZDuffman
I made a small profit over a few years. It has gotten better as at the time there was no secondary market, IOW zero liquidity for 3 years. Expect a 20%+ default rate at >=C paper. The other issue was at the time there were no late-fees to make up for the defaults.

Yes diversify, but take more, better paper. Remember when these people accept 25% or more as a rate on loans it is bacause every professional underwriter out there has declined them for credit.

Have fun with it, but consider it near-gambling at the lowest grade paper.


25%*80%=20% risk-adjusted rate of return. Isn't that MUCH better than getting 100% of 6.8% on A paper?
I'm not wearing any pants, film at 11
February 5th, 2013 at 6:20:16 PM permalink
AZDuffman
Member since: Oct 24, 2012
Threads: 41
Posts: 1438
Quote: rdw4potus
25%*80%=20% risk-adjusted rate of return. Isn't that MUCH better than getting 100% of 6.8% on A paper?


There is an equalibrium point and it isn't a hard equation to set up. In the most simple terms, you must get 1% more in return for each 1% in loss. Look at it this way.

20 subprime borrowers borrow at 25%, with a 20% default rate. $50 each loan for a total of $1,000 invested.

$1,000 + 25% = $1,250.
Charge off 20% $200
Net profit $50, or 5%.

Or you write 20 A-Paper loans at 9% with a 5% charge-off rate

$1,000 + 9% = $1,090
Charge off 5% $50
Net profit $40, or 4%

Not much difference at all. Now, this is very, very simplistic. It assumes all charge-offs are in month 1. They will not be. The A-Paper borrowers will not only charge off at lower rates, they will take longer to miss payments. Surely anyone here can see that extending even one month until charge-off will recover more principal and nearly flip the ROI.

Yes, it is fun juicing someone for 25% and feeling like the bank. But you pay big for that feeling. My best advice is read the site's default info carefully, and do the math before diving into the subprime market.
The man who damns money has obtained it dishonorably; the man who respects it has earned it
February 5th, 2013 at 9:03:44 PM permalink
Mosca
Member since: Oct 24, 2012
Threads: 5
Posts: 180
The A paper there is everyone else's D. Don't expect anyone with a credit score over 600. If the borrower qualified for real money he wouldn't be there trying to get it.

Or, if it was a truly viable way to invest money you wouldn't be asking a bunch of mokes on a spinoff forum of a gambling forum. There would be storefronts all over town.
February 6th, 2013 at 4:14:57 AM permalink
AZDuffman
Member since: Oct 24, 2012
Threads: 41
Posts: 1438
Quote: Mosca
The A paper there is everyone else's D. Don't expect anyone with a credit score over 600. If the borrower qualified for real money he wouldn't be there trying to get it.

Or, if it was a truly viable way to invest money you wouldn't be asking a bunch of mokes on a spinoff forum of a gambling forum. There would be storefronts all over town.


Actually there is some A paper there and I bought a few when I tried it. The A people usually pay off before the 3 year term. Why would they do it? Two reasons. One, a $25K unsecured loan can be hard for even a creditworthy person to get. Second, they get to name their rate. It is a way of shopping.
The man who damns money has obtained it dishonorably; the man who respects it has earned it
February 6th, 2013 at 8:06:16 AM permalink
AcesAndEights
Member since: Oct 24, 2012
Threads: 5
Posts: 214
Quote: Mosca
Or, if it was a truly viable way to invest money you wouldn't be asking a bunch of mokes on a spinoff forum of a gambling forum. There would be storefronts all over town.

I disagree, I think it's viable but the technology just hasn't been there until now to connect the lenders and the borrowers. I just came here asking for a few additional opinions, I'm going to do it anyway :)

Quote: AZDuffman
Actually there is some A paper there and I bought a few when I tried it. The A people usually pay off before the 3 year term. Why would they do it? Two reasons. One, a $25K unsecured loan can be hard for even a creditworthy person to get. Second, they get to name their rate. It is a way of shopping.

Yes, this is a very important point. By cutting out the middle man, borrowers can get lower rates (the site takes something 0.57% for their profit margin, so pretty small). Sure there are plenty of default risks, but I wouldn't be surprised if there are 600+ credit scores borrowing on the site.
"You think I'm joking." -EvenBob
February 6th, 2013 at 9:36:54 AM permalink
AZDuffman
Member since: Oct 24, 2012
Threads: 41
Posts: 1438
Quote: AcesAndEights
I disagree, I think it's viable but the technology just hasn't been there until now to connect the lenders and the borrowers. I just came here asking for a few additional opinions, I'm going to do it anyway :)


Yes, this is a very important point. By cutting out the middle man, borrowers can get lower rates (the site takes something 0.57% for their profit margin, so pretty small). Sure there are plenty of default risks, but I wouldn't be surprised if there are 600+ credit scores borrowing on the site.


If they are lower than 600 you are better referring them to Richie Aprile since they will surely stiff you. 600 is somewhere steins the 20th percentile iirc. Remember FICO is a sort of bell curve. Once you fall out of the middle 3/5 if the population the risk really shoots up.

I still remember when a newer agent asked my why we could not reconsider a guy with a low FICO. He was in the high 500s. I told her, "well, if the population of the USA was represented by a roomful of 100 people 98 of them would be a better credit risk than him."

If you are going to use FICO scores I suggest googling FICO percentile rank and see just how fast the risk goes up.
The man who damns money has obtained it dishonorably; the man who respects it has earned it
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