One of the more popular posts on this site has been the one where I talk about Lending Club, which is peer-to-peer lending. Find that article here.
Looking back on it now, things have changed a bit, and I want to 7 updates based on what I’ve learned from the last 6 months or so of investing with them.
First off, my state of Alabama is now open to investors. When I started before, I could only do Folio Trading. That’s basically buying loans that others have already bought and are wanting to sell.
Which apparently isn’t the best idea…
I can sort by loans I’ve purchased directly and loans I’ve gotten through Folio trading, and my Folio loans have an adjusted return of about 1% whereas my directly purchased loans are at about 10%. A number of them have been late on payment and eventually gone into default. Eventually they “charge off” the loan – basically write it off as a loss. Two were from people going bankrupt, one poor guy died, and another one seemed to just disappear off the map.
Is that because they were Folio loans? Maybe, maybe not. Here’s some other contributing factors.
Second, every single loan of mine that’s in default (or charged off) is a Debt Consolidation loan.
So there’s a quick, easy lesson I learned. I’m not buying any more debt consolidation or credit card payoff loans. You can’t borrow your way out of debt. It just doesn’t work.
Now sure, I don’t have a huge variety of loans yet, so I don’t have a large trend to look at. But of the 150 or so loans that I own, the 5 that are in bad shape are debt consolidation. So I’ll be avoiding them in the future.
Third, Lending Club has a cool little overall statistics section that shows the quality of loan and average return of each loan. It’s under the Statistics link at the top, then under Loan Statistics.
This basically lays out the average return for all the different quality of loans after you account for loans charging off or defaulting.
The interesting part is that the highest overall returns on on D, E, and F/G loans! In other words, despite the fact that many of them will default and charge off, the returns are still pretty good. And while A and B loans have a pretty low default rate, the interest you get from them just isn’t huge.
So for the most part, I’ll invest in C, D, E loans with a handful of B and F loans.
Fourth, you can set up Automated Investing. This is super cool, because now your money can get invested automatically rather than having to go in there every week and buy a loan at a time. Or if you have a bunch of money to invest, Automated Investing can do it for you, or even over the course of a week or more if there aren’t enough loans at one time.
You can tell what percentage of what quality of loans you want, and it will buy them based on your preference.
But more importantly, you can save a specific set of search criteria and it buys loans based on those restrictions. You simply set your search criteria one time and save that search, then tell it to apply that as a filter in the Automated Investing section. Pretty easy peasy.
Fifth, so what do I now consider a good loan? What are my search criteria? Let me tell you!
If I don’t mention a particular search criteria, then that means I just leave it wide open.
- Total Collection Amount Ever – 0
- Public Records – Exclude Loans (check that box)
- Credit Score – 720-850
- Interest Rate – ALL – when setting the Automated Investing, you can tell it what percentages of each to buy. If you don’t want a particular loan, say A or F and G, then simply put a 0% in those. If you uncheck them here, it completely eliminates the possibility of buying them. So I just leave them all checked.
- Max Loan Amount Up To – $25,000
- Accounts Now Delinquent – 0
- Exclude Loans Already Invested In – Yes (check the box)
- Loan Purpose – select all except the first 3 (Refinancing Credit Card, Consolidate Debt, and Medical Expenses). The rest of them are good.
- Collections Excluding Medical – 0
- Loan Term – I changed my mind since the last blog post and now invest in both 3 and 5 year loans.
- Revolving Credit Balance – <$50k
- Revolving Balance Utilization – One of the trends I found for loans that had charged off or were late were a high credit utilization (like in the 80% level). In other words, they were getting close to maxing out their credit limit every month. Another red flag. I set mine to 40%.
Now, of the 1400 loans that were available when I wrote this, those filters narrowed it down to a mere 24 loans. If you’re trying to invest $5000 or something, obviously this isn’t enough. But if you start automated investing with these criteria, then it shouldn’t be too long before it will get fully invested. And then down the line as your cash builds back up, the automated investing will keep buying loans to achieve the distribution of loans you set up!
Sixth, what’s my distribution for what loans to buy? Here you go (though keep an eye on this as it may adjust over time):
- A – %0
- B – %10
- C – %30
- D – %35
- E – %15
- F – %8
- G – %2
Seventh, what’s my max Note Amount (this is only in the Automated Investing section)? I keep this to $25 per loan. That way if one does default, you’re only out $25. Plus there’s plenty of loans out there to keep you busy! Not worth the risk to me to go higher.
So bottom line – does it work? Honestly it’s hard to tell a mere 6 months in. But I’ve learned a good bit in 6 months, and hope to keep refining these parameters and getting better returns! So far it’s been looking very promising.