Why I Don’t Use LendingMatch To Invest With Lending Club

Peer-to-peer lending site LendingClub has a feature called LendingMatch that allows you build a portfolio of multiple notes simply by choosing a desired risk profile. Even though I’ve funded over 30 loans, I never touch the thing. Now, I think in general LC does a decent job rating their loans from A1-A5, B1-B5, all the way to G5. But sometimes I just don’t agree with their assessments, and other times I have a more personal objection to the loan. Today, I found an example that fit both.

This loan passed through all of my usual manual filters. A/B grade only, 714+ credit score, debt-to-income ratio < 10%, and zero delinquencies within last two years. The assigned grade was A5, which is quite good overall.

But then I read the details. (If you're a member, it's loan #411092.) His reported gross income is $26,000 per year. He's only been at his current job for only one year. He has been delinquent on accounts before, but last time was over 4 years ago. He has about $18,000 in credit card debt currently. He has 70% of his annual income as debt? To me, that's like someone making $100k a year before taxes having $70,000 of consumer debt. Seems like quite a burden.

Already skeptical, I then read the loan description. Here it is, after I stripped out what I felt was not important:

This loan will be used to consolidate the remaining balance on two credit card balances and for home improvement. Looking to payoff some credit card debt and add a sunroom to my home. I am coming to the lending club community to help me build a nice sunroom to enjoy a cold glass of iced tea.

Honestly, I didn’t even know what a sunroom was until I looked it up. According to this site, a small 80 sq. ft. sunroom would cost from $5,000 to $15,000. He already has 70% of his gross annual income as debt, and he wants to add another $5,000 to it? That would result in a debt-to-annual income ratio of 90%.

I like the idea of helping people pay down their credit card debt by lowering their interest and consolidating into one payment. But this guy seems to really like being in debt. Now, that’s his choice, but I don’t like the idea of supporting it. Am I alone in thinking this way? I’m thinking I might not be, as his loan request didn’t fund the first time.

You can read about the other details of my LendingClub portfolio here. My annualized return after fees so far is 8.8%.

Comments

  1. I agree with you 100%. I’ve been lending with the club for more than 6 months now and I don’t like the idea of Lending club picking loans for me just because of this reason. As you explained, I don’t think this guy is ever going to pay back the loan. Also their DTI calculation seems to be a bit off in cases like this. I have more than 20 loans now and I even lent to some D and E category loans. But I always read the details and try to make up some idea about the person and his ability to handle debt. Hopefully my assumptions won’t go wrong ;).

  2. That loan description is hilarious. I agree that the LendingMatch feature is a bit flawed. I primarily use it as a reminder that my cash balance has reached $25. Re-investing is the best way to maximize your returns.

  3. Hmm is that the listing you were refering to:

    https://www.lendingclub.com/browse/loanDetail.action?loan_id=411092&previous=browse

    I generally screen for Credit scores of 714+, A rated, no delinquences( and no history whatsoever of them ever),DTI less than 10%, and a solid employer.

    You know what, I think you should ask the person about the sun room.

  4. I agree 100%. I have very strict “underwriting” standards, which often leave me unable to put more than $50/mo into Lending Club. Sometimes I don’t even know what my standards are, if I look at a listing which fits the numbers, but I get a bad feeling, I walk away. Unsecured lending is risky enough, so why push it?

  5. this reminds me of this particular prosper listing. This lady had HR or an E credit score (in prosper’s standards, I think that’s about 500 FICO) about 4 delinquencies and some substantial debt. She was applying for a 10k load to fix up a boat she “would like to enjoy in the near by lake” haha

  6. I completely agree too. I switched over to Lending Club from Prosper and have been very happy, but I think Lending Club needs to do a better job on some of their ratings. I would also like to see them require more detailed descriptions on what loans are being used for. I won’t even touch the highest rated loan if the description is only one sentence long.

  7. How long have you had your loans? I know that for Prosper many loans would default ~2 years into the loan, which reduces your returns considerably.

  8. I’m about 2 years in to my prosper loans and only 1 has defaulted and 2 have been paid in full. I never had that many loans over there. I had transfered another $500 over there after they reopened, but had to pull it all out again when they decided to go silent for the second time.

  9. Frankie says:

    Hey Johnathan I joined LC because of your suggestion and am having great success with it. If you ever find loans that you do like and are funding, feel free to pass along the word here. I’d probably follow you into funding them.

    I agree, I found an A or B loan two weeks ago where the dude didn’t even say what he needed the money for. Everything was spotless but he had a very lazy description which set off alarm bells.

  10. Yep, using that feature is like investing in index funds. If you’re lazy and don’t want to do the work, then using Lendingmatch (to just throw everything at an “A5″) or choosing the S&P500 (to just throw everything at the largest 500 US companies) is better than just throwing darts, but if you’re willing to put in the work and care about what you invest in, you’ll pick and choose your investments, whether they be Lending club members or individual company stock. Sure it takes a lot more work to come up with enough people/stocks to be diversified, but its worth it (you think this guy has crushing debt?, take a look at some of the companies in the S&P500).

  11. blegume says:

    I am approaching my lending club investing very differently it seems. I am letting this be my more risky investment so I am invested in D,E,F and a little G. I do use the lendingmatch feature to make an initial suggestion of loans I could invest in but then I go through them and discard the ones I am not interested in. I am investing is some of the loans that seem a little goofy but am spreading out the risk as very few of my investments are over $25.

    So far I am averaging a little over 13% but expect that to go down when some of these loans default. So far (4 months in so far) I have had two loans be late but they eventually paid. I have one that looks like it might go south. I have over 270 loans so I feel the risk is spread pretty wide.

    There are some amazing loan descriptions so I am watchful. There is one that Lendingmatch kept popping up that a lot of people had invested in but the description just read “test”.

    I am enjoying the connection to people as part of the investment. it is very addictive. I must look at the site at least twice a day to see if I have more to invest.

    I also limited my entire investment in Lending club to be something I would be willing to lose in the event the whole thing went bust.

  12. I wish Texas allowed Lending Club…

  13. Could anyone suggest a why to accomplish this without using lending club at all? I too have found that their assessments can be a little dubious at times to say the least. I also have a problem with the fact that I am unsure of why some of the loans are going through while others are being kicked back even though the criteria is nearly identical. What kind of voodoo is this?

  14. Tom Lutzenberger says:

    Caveat Emptor. Nuff’ said.

  15. How did he pass the “debt-to-income ratio < 10%” Filter when it is really closer to 70%??

  16. I tried asking the borrower through LC and he never responded. I assume he knows he shouldn’t be taking out this loan to build a sunroom. It’s ridiculous.

  17. The debt-to-income ratio as defined by LC seems to exclude mortgages and also is a matter of cash flow. If your payment structure is $200 a month and you earn $2,000 a month, your debt-to-income is only 20%, even if your actual *balance* is $10,000. I like comparing income to total debt better.

  18. Joaquin says:

    The beauty of LendingMatch does not reside on tightness or not of the lending criteria which, as you pointed out, is not perfect. No matter how good Lending Club judgment or your own judgment is, the worst thing you want to do is invest all your money in *only* 30 loans. LendingMatch is a tool that provides you with a guided selection based on risk/reward when you don’t have the time to cherry pick all your investments. Most importantly its a tool for automatic portfolio diversification which is the key to minimizing risk. So instead of lending $3000 among 30 individuals with the possibility that only 1 blow-out would cause you a 3.33% loss up front (assuming you lend out equal amounts) LendingMatch would try to spread out the risk by recommending 100 individuals with a mix of grades that satisfies your risk appetite while exposing you to only to a 1% loss in case of total default of one individual. If you are a busy person like me hat do not have time to go over all and each loan and inspect them very carefully, this is a great tool for trying to hit a decent return while minimizing risk. In fact, portfolios built with LendingMatch tend to do much better than hand-pick ones specially when these are low in number. Obviously, if you do diversify and also pick by hand they you would have done the best you can, at the cost of time (which is also money :-)

    I suggest you read the following articles if your interested in this topic:
    http://blog.lendingclub.com/2007/06/23/tech-series-no-1/

    http://blog.lendingclub.com/2007/07/07/tech-series-2-determining-the-optimal-mix-of-loan-grades-in-lendingmatch%E2%84%A2-portfolio-recommendation/

  19. I agree, Joaquin, and you make good points. If you have a lot of money to invest at once, LendingMatch is a good tool to save time and diversify. I think for me, I definitely want to have good returns, but it is not the sole factor for me, so I like looking through loans manually.

  20. A and B grade only??? That’s is awfully conservative. I do not bother looking at A’s or B’s at all. The whole reason that I am a lender with Lending Club is to earn a high return while mitigating my risk using a lot of the other criteria you mentioned. I also prefer to lend to proven entrepreneurs instead of regular consumers just trying to consolidate their debt.

  21. Isn’t the description for the purpose of the loan self-declared? Are you just teaching the borrowers to stay mum about their sunroom? If they figure out what the lenders like, e.g. “pay off high interest credit card debt” wouldn’t they all say that? I’m still a skeptic in this ‘amateur underwriter’ game.

  22. Here’s another one (I cudn’t resist myself from posting it)!!!
    Loan id :411282. Asking for a loan of $2500.00 to pay for “dream vacation” while he already has a mortgage and credit balance of $27,385.00!!!!

  23. One thing to note is the return math on a loan is different then if you putting your money in a bank. I took their 9.32 rate for a high qualtity borrower. subtracting 1% fee. Then converting that to an equivalent compound interest APR its only a 4.2% return. Now Yes……this is better then what banks are offering but I still have a 4% add on CD.

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