Liquidating My LendingClub Loans Using Folio Investing

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I recently finished liquidating the remaining loans in my $5,000 LendingClub P2P portfolio, but due to a unfortunate crash I lost many of my notes and screenshots. I can still share the most important parts like my final results and selling recommendations.

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As when liquidating my $5k Prosper P2P portfolio,
I used the “Trading Account” option – run by outside brokerage firm Folio Investing – which allows me to sell my notes to other individuals which . For residents of many states, the only way to buy LendingClub P2P loans is on this secondary market as they are not allowed buy them directly. In my opinion, this makes the pricing of the notes more competitive than with Prosper.

Prospers allows an auction format for selling notes, but LendingClub does not. Instead, you must set a price and either someone volunteers to buy it or not. Folio Investing charges a 1% transaction fee to the seller of the note after a completed transaction. If the note does not sell, then you simply keep your note and pay no fees. It’s hard to know the market value of each note, as there is no real-time data based on past sales of similar notes available.

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Due to the constraints of this setup, if you want to optimize your selling price and don’t care about your time spent, you should initially list all of your loans at a significant premium of say 5% above principal. If they sell, they sell. Usually there is a large enough group of bidders that if they don’t sell within a day, they probably won’t ever sell. If they don’t sell, then you lose nothing but time. Next, reprice your notes after 24 hours and lower the markup to say 4%. Rinse and repeat at 3% premium, 2% premium, 1% premium, par, 1% discount, 2% discount, and so on until nearly all your notes should be sold within a week.

After that, you’ll probably be left with loans that have a previous late payment or two somewhere in there, which note buyers seem to avoid like the plague even if the loans revert to current. If you really want to sell those last few loans, you may have to put them up at significant discount of 10% or more.

(LendingClub does not allow the sale of loans that are currently late or in default. This can be annoying when a loan become late after you list it for sale, and thus gets pulled. So close!)

However, I was impatient and I just wanted to sell my notes with minimal time spent. I basically put up all of my notes at par (no markup or discount) and the vast majority of them sold within a few hours. In retrospect, I could have definitely listed them at a higher price. Then I started discounting the remaining loans heavily so they would also sell quickly. I reasoned that missing out of 1% of my entire $1,400 portfolio was just $14. In then end, I got back 98.8% of my principal before the 1% fee, or 97.8% of my principal after the 1% fee.

Once the trade clears, transfers from LendingClub to my bank account were very, very quick. I initiated the transfer during a weekday during work hours and at midnight my bank alerted me that an electronic deposit had been made.

So now the only thing left in my portfolio is a single 30+ days late loan that I can’t sell, with a remaining principal of $6.09. I doubt I’ll ever see that money anyway, so I consider my account completely liquidated. The good news is that it should be fully charged-off by the end of 2015, so I won’t have any more tax concerns past the 2015 tax year.

Recap. In my experience, you should be able to liquidate your current LendingClub loans within a week while still roughly maximizing your the market value of your notes. You should have the money in your bank account by the end of the second week. For current notes, you should be able to average a gross sale price very close to or even higher than the current face value (principal + accrued interest) of your loans. Keep in mind the 1% transaction fee paid by seller. You may have some “leftover” late loans that will take a few more months to fully charge-off and realize losses.

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Liquidating My Prosper Loans Using Folio Investing

My Money Blog has partnered with CardRatings for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. Thank you for your support.

As stated in my last P2P loan experiment update, I am liquidating all of my notes from Prosper Lending and Lending Club. When you own more traditional investments like ETFs or individuals stocks that trade on a major exchange, you can sell your holdings in literally under a minute and have the trade settled just a few days later. A P2P loan portfolio is less liquid, with the process taking a few more steps, a bit more time, and with additional transactional costs (although there is a potential for profit). Here’s a rundown of how I sold off my remaining Prosper notes (with lots of screenshots), including some potential mistakes and the total timeframe. Skip to the end if you want the short version.

1. Create a separate Folio Investing account. In order to trade your Prosper notes, you need to open a new brokerage account at a company called Folio Investing. To start the process, go to “Invest” at the top dropdown menu and look for the “Trade Notes” link (click on any screenshot to enlarge):

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To qualify, you must already have a Prosper lending account and reside in one of the approved states for Prosper lending:

Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming.

You must also provide them your name, address, Social Security number, and all the other details any new brokerage account will require. Here’s a screenshot of the application page:

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I was approved online instantly, with no paperwork to mail in or anything.

2. Put your notes up for sale in either auction or fixed price format. You will be able to pick through any of your current notes and put them up for sale either at a fixed price of your choice, or via a 7-day auction where you can set the initial bid. You cannot sell any notes that are late or worse. If the listed loans become late while on the marketplace, they will be removed. (If they become current again, you can re-list them.)

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You can set the price at the remaining principal balance at settlement, or you can have it be at a premium or discount. For example, a high-interest loan with a consistent payment history and improving borrower credit score may sell at a premium. Meanwhile, a lower-interest loan with a few missed payment and a dropping borrower credit score would likely sell at discount. There is a 1% transaction fee charged upon sale (1% of the note’s face value).

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How to set your price? Since your loans are little unique things and there aren’t a million buyers out there all the time, there are a few ways to go here. If you want to maximize your sale price with no regard to time spent, you could go the fixed price route and set a very high price like a 10% premium, wait a bit to see if anyone bites, and then manually re-list it at progressively lower prices until it sells. Alternatively, if you are desperate, you could list everything at a fixed price and 10% discount and everything will most likely sell in 24 hours.

Given that I am lazy but not desperate, I just chose the 7-day auction. I did a very basic screen and set all my loans with improved credit scores to a 1% premium (meaning after the 1% transaction fee I’d break even), and set all my loans with lower credit scores to a 0% premium. Here’s a screenshot of some notes with a 1% premium (some are rounded off):

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3. Either re-list or collect your money. After that first week, all my higher-quality 1% premium notes sold but only a few of the lower-quality 0% premium notes sold. Many notes had multiple bids, which made me more confident that there was a least a semi-healthy buyer’s market. Since I didn’t want to waste any more time, I set everything to a 5% discount and just let the auction handle itself. Everything sold! In the end, 105 notes sold from between a 5% discount to 5.6% premium, with most somewhere in between. On average, it looks like I just about broke even on the gross sale price but fell behind about 1% net due to the 1% commission.

After the sale, I needed wait another 3 calendar days for settlement. I could the request a cash withdrawal to my linked bank account, which takes 3 business days.

I am still left with 6 notes worth about $100 in remaining principal that have past-due payments and thus can’t be sold on the secondary market. I’m pretty sure that they’ll be charged off by the end of 2015. If the go current again, I’ll just re-list them and expect them to be sold in a week.

Recap. If I had started my auction prices at a steeper discount initially, I would have been able to liquidate the vast majority of my loans within a week, and then add roughly another week for settlement and funds transfer into my bank account. I lost roughly 1% on my remaining principal upon sale (mostly due to the 1% transaction fee). There are still a few remaining late loans (5% of original number of notes) to be charged-off over time or become current again, so I’ll still have to monitor the account occassionally. Given that my primary goal was to generate all my taxable events in 2015 and thus be done with everything by tax filing in April 2016, I think that will be an achievable goal.

My Money Blog has partnered with CardRatings for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

LendingClub Realistic Return Expectations Chart

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Thinking about investing in P2P loans? Even though I still believe that decent returns are possible, I think it is important to have realistic expectations. I’ve given out the following warnings since they started:

  • You won’t get the stated interest rates on your loans. Let’s say the loans you invested in are charging 12% interest to the borrowers. First, there are fees to pay. Second, these are unsecured loans to faceless individuals on the internet. You don’t get to repossess a house or even a car. All you can do is hurt their credit score. They could empty their bank account and walk away the next day. Defaults are gonna happen; you should expect it.
  • Your reported return will decline over time. I see many people who have loans being very happy about their 10% reported returns after a year or so. Well, expect it to drop 1 to 3% or possibly more by the time the loans actually finish their full terms. If you keep rolling over your interest into new 3 year loans, that means your average loan age will likely remain around 1.5 years (often even younger due to high prepayment rates).

Recently, LendingClub started showing this on their performance and statistics pages:

This chart illustrates how returns typically decline over the life of an investment. If your account is relatively new, it is likely that your returns will decline over time as some of your Notes become past-due and charge off. This chart is not a prediction of how your portfolio will perform and actual results may vary.

Here’s the chart with a focus on the beginning (3-9 months = 9.8% median return):

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Here’s the chart with a focus on the end (24-30 months = 7.2% median return):

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That’s a performance drop of 2.6% over 21 months if you take the average loan ages (6 months to 27 months). I can see why the chart starts at 3 months, as no loan can be charged off until the payments are at least 90 days late. I’m not quite sure why the chart ends only at 30 months though, not 36 months, as I think the numbers would drop even further. (As an aside, I know than some investors basically try to sell their loans on the secondary market at full expected value after 12 months or so to maximize returns. If you could find buyers at that price, that might not be a bad strategy.)

A historical 7.2% median annualized return is still pretty solid. For a rough approximation, here are the returns of some corporate junk bond funds, probably the closest publicly-traded asset class available. Per Morningstar as of 4/14/2015, the 3-year trailing total return of the Barclays High Yield Bond ETF (JNK) was 6.67%. As of 4/14/2015, the 3-year trailing total return of the Vanguard High-Yield Corporate Bond Fund (VWEHX) was 7.21%. Given that the timeframes don’t match up perfectly, I would only go as far as saying that the return figures are in the same ballpark.

It is worth noting though that the mutual funds offer the same broad diversification for everyone, whereas an individual investor at LendingClub has more scatter in returns (either higher or lower than average). As for me, apparently I’m below the 10th percentile myself with my 4.3% annualized returns. Arrgh!

My Money Blog has partnered with CardRatings for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.