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Now, on with Lending Club...
We began investing in Lending Club in June 2012, so we've been at it for about ten months. During that time, we've increased our stake there from our initial investment of $250 to a current investment of about $10,000.
At time of writing, our net annualized return on our investments is 16.65%, which I think is pretty darned amazing! So far, we've not taken a penny from our investments, instead rolling our borrowers' principal and interest payments into new loans.
Our Current Lending Club Strategy:
As a brief recap, our investment strategy has evolved into the following, though I admit that much of this is speculative on my part (we'll have to see our ROI after an extended period of time):
1. Only invest in three-year loans. This certainly leaves interest on the table, but it also minimizes risk. Psychology suggests that borrower motivation changes over time, where borrowers are motivated to pay on time both at the beginning of their loan, when it is new and they are driven to do the right thing, and at the end of their loan, where they can see the full loan repayment on the horizon. It is the middle portion that is the most hazardous to a lender, as the borrower's initial commitment might have worn off and they can't yet see the final payment ahead. In addition, as the months stack up, the chances for life changes-- layoffs, other unexpected financial strains, etc.-- begin to accrue. So, to minimize that dangerous middle period, we have limited ourselves to three-year loans, instead of five-year ones.
In addition, this allows us to cash out before our possible career transition in four years without having to go to the note trading platform to do so.
2. Only invest in loans that are about debt consolidation. When I look for notes to invest in, I always apply a keyword filter like "debt," "consolidation," or "credit card," as I'm on the lookout for people who want to get out of debt as their primary motivation. This captures the mood of many right now, as many people have finally realized the damaging nature of consumer debt. I want to invest in these people. In addition, I want those who want to pay off their loan in three years, instead of five, as I think this demonstrates a high level of commitment (in much the same way that we are paying so much extra on our monthly mortgage, so that we are able to pay it off in 15 years instead of the 26 that would otherwise remain). I'm also simply not interested in people who want me to finance additions to their house, medical payments, business opportunities, or anything else aside from getting rid of debt!
3. With those two primary filters applied, invest in the highest "risk" loans possible, to maximize our overall potential return on investment with higher interest rate loans. We currently have a high number of B, C, and D grade loans and I've noticed that higher risk loans are generally unavailable with 36-month loans.
4. In addition, with the exception of a couple of accidental misfires, I've only bought $25 worth of each loan, resisting the temptation to buy larger amounts in individual loans. This has helped to increase the total number of my notes, leading to a more diversified portfolio.
I no longer apply any of the other filters that I used to apply and accept the percentage risk of default that the underwriters at Lending Club tell me history suggests will be the case for each note that I buy.
At time of writing, we have 320 total notes issued, creating passive income, with about $1750 worth of notes still "in funding," meaning that I've placed an order, but they are not yet through Lending Club's vetting process. One note here: it takes a long time to get a large amount of loans through the vetting process, often a month or more, so if you intend to invest $1000-$2000 at a time with only $25 notes, expect the process to take some time. Ultimately, this might be the real advantage of also using Prosper, as it will simply open up more lending opportunities for larger amounts of money.
Late Notes / Lending Club Note Trading Platform:
Of the 320 notes we currently have, we've only had one go late, and since it is relatively early in the loan (the loan was issued in December 2012), I want nothing to do with this late loan, so I've placed that late note on the note trading platform to see if I can sell it.
Here's the late loan, where you can also see Lending Club's correspondences with the borrower (interestingly, you can also see that I allowed this note to get through my system in two ways: 1) it was $50; and 2) it was for both debt consolidation and a home repair, instead of just for debt consolidation):
Lending Club shows the corresponding hit to the borrower's credit rating:
So, off to the note trading platform, where the remaining value of the note (in principal and interest, if actually paid) is $50.76. I attempted to sell the note at 80 percent of its remaining value ($40.61), but it didn't sell after three days.
I then repriced the note at 75 percent of its remaining value ($38.10), where it still didn't sell, and I'm proceeded to lower the price by 5 percent every three days until it sells. I will update this post with its final selling price once it sells so that you can get some sense of how much a 31-120 day late note sells for on the secondary market! (Update: as you can see in the comments below, the borrower fired Ch. 7 bankruptcy on 19 March! I'm guessing I won't get this note sold on the secondary market now!)
Now that I'm at $10,000 worth of investment at Lending Club, I'm going to begin a steady march toward $10,000 in its primary competitor, Prosper, so that I can provide all of you with a solid comparison between the two services.
With a nearly 17% return on investment so far at Lending Club, I'm really happy that I've chosen to invest there. Compared to the Ally Bank savings account where our emergency fund sits at .82% interest, which is itself high in comparison to many other savings accounts, it is increasingly hard to watch our money sit in savings and do next to nothing, except remain safe. No doubt we'll close out these loans with a number significantly below the current 17%, but if we land around the 10% mark, I'll ultimately be pleased.
What are your strategies for P2P lending and how have your results been so far? Let us know in the comments below!
If you are interested in investing with Lending Club, you can sign up with as little as $250 here. You can sign up for Prosper here. Both are affiliate links and help to support our site at no additional cost to you! Thanks!