Search Results for: lendingclub

P2P LendingClub and Prosper Loan Portfolio Update – December 2012

As the last part of my ongoing Beat The Market Experiment, here’s the December 2012 update for my consumer loan portfolio. See also my $10,000 Benchmark and $10,000 Play portfolio updates for December 2012.

On 11/1/12, I deposited $10,000 split evenly between Prosper Lending and Lending Club, and went to work lending other people money and earning interest. Here’s how I’m doing it:

  1. 8-10% target return, net of defaults and fees. Each site provides an estimated return based on the interest rate and expected delinquency rate, but I am also using specific filters to try and maximize my return. Overall, I would say my risk profile is moderate/conservative. If I can get an 8% net return over the next 3+ years in the current interest rate environment, I’ll view the portfolio as a success.
  2. Minimal time commitment. I’ve done the manual loan-picking thing, and I’m over it. 400 loans at $25 a pop would take forever. Both sites allow you to save customized loan filters and use an automated investment algorithm to pick a portfolio for you.
  3. Loan Filters. I’m constantly tinkering with the loan filters, but you can get a good idea of what I am using by reading this best Prosper filters post and this older LendingClub filter post. Nothing too fancy, just some broad filters based on historical inefficiencies that may or may not persist.
  4. Loan term lengths and reinvested interest. I thought about only buying loans with 3-year terms in order to have a clean ending timeframe to this experiment, but in reality that would leave a lot of cash at the end as many people pay off their loans early. Also, higher rates are found in 5-year loans. Given the ample liquidity I found in secondary market, if I wanted to end the experiment I could just sell all my loans and cash out. (In October, I sold all of my existing loans on the secondary Folio market in a matter of days, quite easy as long as you’re willing to sell at a discount.) This way I will reinvest any additional cash into new loans maximize return.

LendingClub Details
Below is a screenshot of my LendingClub account as of 12/3/12:
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Prosper vs. LendingClub: Credit Card Debt Consolidation Loan Comparison

What is the best place to lower your interest rates and consolidate credit card debt in order to pay it all off? The first thing to try is to call up your credit card company and negotiate your existing rate down. If that isn’t satisfactory, you could switch issuers and do a balance transfer to a new card with a low introductory rate. If you have qualifying credit, you can take advantage of no fee 0% APR balance transfer offers for up to 15 months.

I would say the next option to consider is P2P lending, which in my experience has lower rates than personal unsecured loans from banks. P2P is gradually becoming an accepted source of loans as shown by announcements of new institutional money coming in from hedge funds. Prosper has been around since 2006 and has done over $300 million in loan volume since inception, and LendingClub has been around since 2007 with over $500 million in loans. Both are now registered with the SEC.

Prosper vs. LendingClub Similarities

  1. Unsecured loans. Such loans are backed only by the borrower’s promise. If there is a default, the lender can’t repossess any property or garnish wages. The primary deterrent to defaults is a poor credit score that will increase future borrowing costs and potentially other side effects including affecting employment.

    Alternatively, you may be considering paying off your credit card debt with a home equity loan. This would change your unsecured debt into a secured debt. The danger is now if you don’t pay off that loan, you could lose your house. If that added risk doesn’t make a difference to you, then a home equity loan or line of credit will probably offer you a lower rate.

  2. Flexible amounts. You can borrow more or less than your actual outstanding credit card balance, and you’re usually given a choice of amounts for the same interest rate. But remember, the purpose of consolidation is to help speed up the process of getting rid of that debt.
  3. Fixed rates over the entire term. The problem with credit cards is that the rates are often unpredictable. “Variable” rates are linked to a benchmark rate, but even “fixed” rates that aren’t guaranteed for X months can just mean they’re fixed until you get a notice that they are now “fixed” at a new, higher number. Given the current low interest rate environment, you should be wary of rising rates.
  4. No prepayment penalties. You can pay off your loan early at any time, with no fees.
  5. No application fee. There is no fee to apply for a loan. If your loan successfully funds and you get the cash, then you will be subject to an origination fee that is rolled into your monthly payments.

Prosper vs. LendingClub Differences

  1. Minimum credit scores. Prosper minimum stated credit score is 640, LendingClub minimum FICO score is 660.
  2. Maximum loan amounts. Prosper maximum loan amount is $25,000, LendingClub maximum loan amount is now $35,000. Both lower the limits depending on credit profile.
  3. Slightly different fee structures. Both companies charge an origination (closing) fee once you successfully get your loan. If you don’t get the loan, no fees. They have slightly different fee schedules, but both have origination fees ranging from about 1% to 5% for the majority of loans. Both charge $15 fees for late payments or failed payments.
  4. Different loan term lengths. Depending on your requested loan amount and other factors, each lender may offer different terms. For example, LendingClub told me that loan amounts from $1,000 to $15,975 are only available with a 36-month term, even though they do offer 1-year and 5-year loans in other cases. However, with a $10,000 loan at Prosper I was given the choice of 1, 3, or 5-year terms. In general, the longer the term, the higher the interest rate at both places.
  5. Check processing fees. LendingClub charges a $15 processing fee per payment made by check. Prosper does not. Both companies allow you to make payments via automatic ACH withdrawal from a checking account with no fees.

Prosper vs. LendingClub Interest Rates?

Their full criteria for determining what rate you’ll pay is not disclosed but is based on a number of factors. Really, the best way to see which one will give you the best deal is to ask each one for a free quote. In both cases, getting a rate quote will involve looking at your credit report, but it will not result in a credit inquiry and will not hurt your credit score. If you do decide to move forward and get the loan, only then it will show up on your credit report.

My experience. I applied for a $10,000 debt consolidation loan at both places. I was offered a 1-year loan at 8.17%, a 3-year loan at 7.49%, or a 5-year loan at 10.85% annual interest rates at Prosper. I was offered a 3-year loan at LendingClub at 6.62% interest rate. For a $10,000 loan over 3-years and including all fees, my LendingClub payment was $307 per month and Prosper payment was $311 per month. So even though the interest rates seem rather different, the final monthly payments ended up closer than expected (though still a $150 difference in total payments over the whole 3 years).

LendingClub 1099 Forms and Tax Reporting Questions

If you’re a newer investor in Lending Club P2P notes, you may be wondering how to handle your investments at tax time. Will I get a 1099? Even if you do get a 1099, it might not cover all your loans. Unfortunately, the documentation provided by LC is often inadequate on its own. Here is what their website says you will receive in terms of tax documents;
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LendingClub Investment Criteria – What Loans To Avoid?

LendingClub.com (LC) is a website that securitizes person-to-person loans so that you can lend money to other people in as little as $25 increments, and you earn the interest. The idea is to replace banks and credit cards as the major middlemen used for lending. Here’s an illustration from their site:

Now, if you read my previous posts on LendingClub, you know I’m skeptical about getting 9.5% returns in the long run. My LendingClub Net Annualized Return is currently 6.8% after fees. If I can stay in the 4-6% range, I’d be happy as I view this activity as a hobby. My favorite loan so far is helping a young couple purchase a tiny 200 sf house-on-wheels.

The investment process is set up such that LC examines the loan application and assigns it a credit grade with an interest rate from 6.39% – 21.64%. All you have to decide is whether to fund the loan or not in increments of $25. You can’t change the rate. Therefore, the key is to quickly fund the relatively attractive loans and avoid the unattractive ones.

You can view historical performance data at the LC website, but it is very raw. I recently came across a new site called LendStats.com that has been sorting through the data and presenting it in some very insightful ways. The owner KenL uses a nice, simple formula for return on investment (ROI) and one can see from the data several ways to improve your returns.

Loan Factors To Avoid

Business loans. If you look at all the loan categories, only the ones under the Educational and Small Business categories have negative ROIs. (Educational loans have a much smaller sample size.) In general, perhaps it is a form of adverse selection when someone with a business idea must resort to making a personally-backed loan from strangers to fund their idea. Also, it may be that the economy is so tough that only select new businesses survive.

Borrowers with mortgages. Until recently, a mortgage holder was deemed more credit-worthy than a renter. That person had to have the means to make a 20% down payment and pass underwriting from a bank. Now, with so many people underwater in their homes, the ROI from renters is higher than mortgage-holders. Renters have greater flexibility with their cashflow. I suspect many people find themselves so bogged down by their mortgages that they decide to simply declare bankruptcy and forget about all their other debts as well.

Loan amounts greater than $20,000. Loans over $25k have a negative ROI overall, with $20k loans not doing much better. Bigger loans means bigger risk, which apparently isn’t adequately compensated for by higher interest rates. Also, I am wary of people doing the “borrow-and-bankrupt” route where they try to amass as much debt as they can and then declare bankruptcy after either a huge party, leaving the country, or hiding assets.

Borrowers with more than 2 credit inquiries within last 6 months. Average ROI consistently goes down as the number of inquiries on your credit report goes up. This indicates that you are also trying to get credit from others, and thus your debt-to-income may be higher than reported. In general, this also increases the likelihood of either desperation, fraud, and/or impending crisis.

Any F and G rated loans. The general trend is still supporting my original plan of only buying the highest-rated A loans, however there are some improvements in the B through E grades. Loans with the lowest grades of F and G continue to have negative ROIs. These are also the loans with the smallest sample size, but since there are so few of them anyway I find it easier to simply avoid them.

LendingClub P2P Loan Investment Returns Update 2010 Q3

LendingClub.com is a website that securitizes person-to-person loans so that you can lend money to other people in as little as $25 increments, and you collect the interest after some fees. The idea is to replace banks and credit cards as the major middlemen used for lending. “Investors earn better returns, borrowers pay lower rates.” I’ve been investing some money with them since they started in 2007.

Last time I wrote about LendingClub in May, I expressed concerns about their historical performance data living up to their marketed 9.65% returns and then LendingClub responded on why they thought things weren’t that bad. It’s been 3 months, so I figure it’s a good time for another update.

The first part of their argument is that they think that loan performance over time will go like this, with a drop and then significant recovery near the end of the term:

However, I don’t see that behavior happening. As you can see below, the older the loans, the lower the overall performance. Returns just keep dropping for loans going from 1.5 to 3 years old. There is no rise or recovery at the end of the three-year term. Data was taken from actual LC loans with observation date of August 17th, 2010.

Loans Originating Second Half of 2008 (about 1.5-2 years old)

Loans Originating First Half of 2008 (about 2-2.5 years old)

Loans Originating 6/1/2007 to 12/31/2007 (about 2.5-3 years old)


Note the change in the y-axis scale

Now, the next part of their argument was that all the loans that originated before they changed their credit requirements and interest rates at the end of 2008 weren’t a valid data set to be analyzing. (That doesn’t make me feel much better because as an early adopter, I hold a lot of those loans.) While improved underwriting may make the average returns higher, I don’t see why it should affect the overall performance behavior over time.

2009+ Loans Only

Okay, so the newer vintage loans that originated after January 1st, 2009 take into account their current lending criteria. In the end, we’ll just have to see if people really get higher returns. From now on, I’m going to try and track the performance every quarter. Here is the performance of loans originating in the first half of 2009, as of August 17th, 2010. Since it a loan has to be late for 4 months to be actually considered in default, this means the loans only have effective ages of 1 to 1.5 years.

So far, not too bad at about 8% return. Here is the performance of loans originating in the first quarter of 2009 with two observation dates (May 2010 and August 2010) overlaid on top of each other. You can see that the loan performance has decreased slightly over the last 3 months. I hope that I am wrong, and that the performance does start to improve.

You may call me a LendingClub basher, but I still consider myself an active investor and supporter. I want them to have awesome returns, but the data simply doesn’t support the likelihood of earning 9.5% annually. Investors should go into it with realistic expectations, and ideally an interest in P2P social lending. Despite this, if LendingClub can average, say 6% returns going forward, that would still be quite an accomplishment for this new business model. I know I’d be happy with that.

To Prospective Borrowers
Honestly, LendingClub is more attractive as an option for borrowing money and/or credit card debt consolidation. You can borrow up to $25,000 and you can know your rate before actually applying for the loan. If the rate quote they give you can be beaten elsewhere, then just walk away with no obligation. When writing your loan application, try to include as much applicable information as possible (reason for loan, how will you repay, monthly budget breakdown) and answer all lender questions promptly for the best results.

LendingClub Responds To Concerns About Investment Return

LendingClub requested an opportunity to clarify the Net Annualized Return measure and overall Lending Club performance discussed in my updated analysis based on historical return data. I’m just going to go ahead and share it in its entirety. The following is provided by from Renaud Laplanche (CEO) and Rob Garcia (Sr Director of Product Strategy).

Is Average Net Annualized Return Meaningful?
The first question raised was whether or not the aggregate 9.64% net annualized return is representative of a track record that is long enough to be meaningful, considering that it includes many loans issued recently. This is a valid question, and we believe the answer is positive: the average age of the Lending Club portfolio is around 12 months and, considering that it takes 4 months for a loan to default, a 12-month average age is really reflective of an 8-month track record. In a 3-year unsecured loans portfolio, defaults typically occur faster in the first 6 to 8 months, after which they start to level off. See for example data provided by our friends at ZOPA, who service a portfolio with characteristics similar to the Lending Club portfolio.

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LendingClub Default Rates vs. Loan Age Graph

LendingClub is supposed to provide me with an official response to my updated analysis of their loan performance numbers. Hopefully it will shed more light on how their advertised returns are calculated.

While I’m waiting for it, here is another chart I put together for prospective lenders using data from LendingClubStats.com, which pulls directly from LendingClub’s own statistics database. The full term for LC loans are 36 months (3 years). This chart organizes all loans by their age, allowing you to compare new loans and old loans on a more equal basis. Only officially defaulted loans are included, not late loans with payments up to 120 days late. The numbers are sorted by credit grades A through G.

I’ll let the numbers speak for themselves for now, and save my opinions for another time.

New Lender Incentives – Free $25 to $250 Bonus
If you are interested trying P2P lending with no risk, you can still use this special $25 lender sign-up link to get a free $25 to try it out with no future obligation. There is no credit check and you don’t even have to deposit anything. After you are approved, the $25 will show up in your account balance, and you can lend it out immediately.

If you’ve done your research and are willing to jump in with both feet, those that are willing to invest at least $2,500 at once and link a bank account can get a $100 bonus when you get a referral from an existing member. (Yes, you must actually invest $2,500 in loans.) Send me an e-mail if interested.

You can also view my personal LendingClub portfolio details here.

LendingClub Updated 2010 Review: Historical Returns and Trends

I’ve been investing with LendingClub for over two years now. They securitize person-to-person loans so that you can lend money to other people in $25 increments, and you collect the interest after some fees. The stated interest rates are about 7-16%. On their home page, they boast of very impressive returns:

If you had invested $10,000 in Lending Club Notes in June 2007 (when we started issuing loans) and continued to reinvest your returns, you’d have made over 9.5% net annualized returns to date, outpacing a high yield corporate bond index, the NASDAQ, S&P 500 and even 1-3 year treasuries.

While I can only assume this statement is technically true, you have to remember that the way they state the numbers includes a lot of new loans that have not had a chance to “age” until maturity. LendingClub notes are all for a three year term. It would be more informative, in my opinion, to specifically look at the return of only loans that have completed. Since LC is so new, how about as old as possible.

For that, I go to the Statistics section. I should point out that the date range is for the origination date of the loans. The observation date is today. Accordingly, the default view of “Show All Time” shows every single loan from mid-2007 until today. Again, this includes a lot of new loans, many of which are impossible be classified as defaulted yet (must be 120+ days late). Instead, let’s narrow down the origination dates so we can look at loans of a set age.

June 1, 2007 to December 31, 2007
We’ll start with the loans that originated in 2007, their first year of operation. Even though these loans aren’t all completely done, they are the oldest loans available with an average age of about 2.5 years. Here are the average returns and average interest rates, sorted by credit grade:

Here are the average returns by loan amount:

The interest rates being charged (blue) are predetermined by LC, and as you’d expect they increase as credit quality decreases. However, the returns (green) are not what you might expect. Grade A loans appear to have performed the best, but other than that there is no real direct relationship between return and credit grade. I see no clear relationship between loan size and return, either. Most importantly, by visual estimate, the average return for all of these loans is only approximately 2%. This is way off from 9% returns.

(Read on for more…)
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LendingClub P2P Loan Portfolio Performance Update

Wow… The last time I wrote about LendingClub was about 6 months ago. Since then, I haven’t really been keeping up with person-to-person lending, which in this case are unsecured credit card-like loans between individuals. Looks like they got a new logo and revamped their website! I kind of miss the old Halloween colors.

Lending Club Portfolio
Back then, I had 62 loans outstanding, of which 58 were current, one was 30+ days late, and three were paid off early. Today, my portfolio has 90 loans, of which 77 are current, three are 30+ days late, one was charged off completely, and 9 have already been paid off early. My current invested principal is ~$1,800, and I’ve received over $1,100 in payments already (principal + interest). The new loans must have been acquired close to October, as I don’t even remember the last time I logged into this account. I suppose that’s good in terms of it being a low-maintenance investment. :)

Performance & Commentary
In the last 6 months, my portfolio’s “Net Annualized Return on Investment” based on my interest payments received went from 9.14% to 4.45%. LendingClub puts me in the sad 12th percentile of investors:

What happened? Some bad loan-picking, perhaps some bad luck, but mostly age. The sharp drop itself is due to my recently charged-off loan and how their return calculation takes into account late loans. A “late” loan will affect your calculated return because you’re not receiving those monthly payments. On a $100 loan that might be $3.xx a month. But most late loans eventually turn into defaults. After 120 days late or so, LC will officially recognize the fact that you’ll never see the rest of your $100, and your return will suffer accordingly. Quick example – If you have 50 equal-sized loans, and two go bad immediately, that’s 4% of your principal gone.

As I stated before, if you have loans that are younger than 1-2 years old, do not expect your current return number to be your final return to maturity. One major reason why the advertised average return is so high, is that the average investor has very young loans in their portfolios. My oldest loan was issued back in December 2007. If you just look at the loans that are already 2 years old (full term is 3 years), you’ll see that the average return is only about 4-5%.

This doesn’t mean investors won’t still capture some risk premium for their loans, but I wouldn’t expect 9% returns over 3 years. This is not a low-risk investment, even though I still like the idea of making some fun and helpful loans. With much more data now available, I’ll be looking more into performance trends in a future post.

New Lender Incentives – Free $25 to $250 Bonus
If you are interested trying P2P lending with no risk, you can still use this special $25 lender sign-up link to get a free $25 to try it out with no future obligation. There is no credit check and you don’t even have to deposit anything. After you are approved, the $25 will show up in your account balance, and you can lend it out immediately.

For those that have done their research and are willing to jump in with both feet, those that are willing to invest at least $2,500 at once and link a bank account can get a $250 bonus when you get a referral from an existing member. (Yes, you must actually invest $2,500 in loans.) Send me an e-mail if interested.

If you’re looking to borrow at LendingClub, it’s relatively straightforward. Give some information, and see what interest rate they offer you. Compare it with your credit card, Prosper, or other financing options. If you like it, fill out your application carefully (verify income if possible) and go for it. If you don’t like the rate or the full amount is not funded, you can either accept partial funding or walk away with no obligation.

LendingClub Offers No-Fee IRA

Speaking of LendingClub, I saw that they now offer a IRA with no opening fees and no annual maintenance fees. Previously, there was a $250 annual fee. However, it does now require an increased $15,000 minimum opening balance, which essentially restricts it to a 401k rollover or the transfer of existing IRA funds.

Since P2P loan interest is taxed at ordinary income rates like interest from savings accounts, the ability to place them in a tax-deferred account is attractive. But since person-to-person lending is such a new asset class, I would hesitate to make it larger than say 5% of my portfolio, which would require a total portfolio size of $300,000. So, I’m out.

It is interesting that the custodian EntrustCAMA allows a lot of options in their Self-Directed IRAs like holding physical precious metals, investing in private small businesses, and investing directly in real estate. I’m not sure if you can only hold LC notes in this free IRA.

P2P Lending Update: LendingClub Loan Performance (+$25 Bonus)

Here’s an update for my person-to-person (P2P) lending activity at LendingClub, which are unsecured loans between U.S. residents. It could be to help people pay off credit card debt, home improvements, business financing, or even buying a house. You can think of it as taking out the bank middleman, which pays tiny interest on checking account balances and then charges much higher rates to borrowers.

LendingClub Portfolio
I now have made 62 active loans with $1,680.08 in outstanding principal. Most are A grade, with a decent spattering of Bs. Keep in mind that a borrower has to have a 660 credit score as well as other additional requirements just to make their lowest G grade. (Only about 10% of loan applications are accepted.) Although they do have an automated service to pick for you, I tend to pick my own loans to try and find both a combination of good risk profile and also a person who I want to help out. It’s kind of a hobby of mine. Here is a screenshot from my account page:

Performance & Commentary
The good news is that out of my two previous late loans, one of them is now current again and the other one is on a “payment plan”. I am not sure if that means they lowered the amount due, or that they are just allowing a slower payback temporarily, but it is again showing regular payments (and contact) from the borrower. Much better than reading “left voicemail. left voicemail. we haven’t heard from them in 4 months…”. I have no defaults to date.

According to LC, my “Net Annualized Return on Investment” based on my interest payments received so far is 9.14%. As an investor, I would not expect this rate to be my actual rate to maturity, but so far so good. While my goal is to get a substantially higher yield than from a online savings account, it also comes with a healthy dose of risk. Don’t put your emergency fund here!

$25 New Lender Bonus
If you are interested trying P2P lending with no risk, you can still use this special $25 lender sign-up link to get a free $25 to try it out with no future obligation. There is no credit check and you don’t even have to deposit anything. After you are approved, the $25 will show up in your account balance, and you can lend it out immediately.

If you’re looking to borrow at LendingClub, it’s relatively straightforward. Send in your information, and see what interest rate they offer you. Compare it with your credit card or other financing options. If you like it, fill out your application carefully (verify income if possible) and go for it. If you don’t like the rate or the full amount is not funded, you can either accept partial funding or walk away with no obligation.

P2P Lending Update: LendingClub Loan Performance

Here’s an update for my person-to-person (P2P) lending activity, which for me are unsecured loans between U.S. residents. It could be for credit card debt consolidation, car financing, business financing, or even buying a house. You can think of it as taking out the bank middleman, which pays tiny interest on checking account balances and then charges high interest to borrowers.

LendingClub Portfolio
I do my P2P Lending at LendingClub, where you can loan as little as $25. You can read more background in my previous update. Although they do have a service to pick for you, I tend to pick my own loans to try and find both a combination of good risk profile and also a person who I want to help out. It’s kind of a hobby of mine.

I now have a total of 49 active loans with $1,548.42 in outstanding principal. Most are A grade, with a decent spattering of Bs. Keep in mind that a borrower has to have a 660 credit score as well as other additional requirements just to make their lowest G grade. (Only about 10% of loan applications are accepted.) Here is a screenshot from my account page:

Performance & Commentary
According to LC, my “Net Annualized Return on Investment” based on my interest payments received so far is 9.06%. The bad news is that I now have two late loans in my portfolio. One has negotiated a temporary reduced payment plan, while the other seems to be dodging phone calls. Also, one loan was paid off early. But I suppose this is par for the course, you get late payments and defaults. If your interest rate is high enough and you have enough diversification in loans, you’ll still end up ahead. We’ll see what happens, even with a default my rate of return so far is still higher than what I’d have gotten with an online savings account. But the risk is still certainly there for more downside.

What really baffles me is that both of my late loans are A-rated. According to the LC stats page, out of all the A loans issued so far, there are only 12 late loans out of 943 still active. That’s a tiny 1.3% late rate with zero defaults for LendingClub in general, and yet I managed to invest in 2 out of the 12 late ones. So either I’m very unlucky or I stink at picking loans, or… both. :P

$25 New Lender Bonus
If you are interested trying P2P lending with no risk, you can still use this special $25 lender sign-up link to get a free $25 to try it out with no future obligation. There is no credit check and you don’t even have to deposit anything. After you are approved, the $25 will show up in your account balance, and you can lend it out immediately.

If you’re looking to borrow at LendingClub, it’s relatively straightforward. Send in your information, and see what interest rate they offer you. Compare it with your credit card or other financing options. If you like it, fill out your application carefully (verify income if possible) and go for it. If you don’t like the rate or the full amount is not funded, you can either accept partial funding or walk away with no obligation.