- The default rate is higher than I expected. In the early years, the A credit rating was reported as nearly 0 defaults, and B had few. But now that is not the case. 5-6% of my loans have defaulted. Most are A/B rated Some not even making a single payment.
- The credit standards seem to move a lot
- The quality of borrower is worse than it used to be. When I started I used to scrutinize every loan, I'd be impressed to see how much detail the borrowers would share. I liked to read their stories and learn to trust that they would repay me. Now you don't see much. It's all button mashing. There are enough lenders to fund all the loans, nobody puts the effort in. I don't even bother doing the manual search anymore either.
- The dashboard says my net annualized returns are around 5%. I guess that is about right. But it's not liquid. If I liquidated all the notes today, I'd probably lose all of the gains. If I stopped reinvesting, I'd probably see a bunch more defaults bring my returns down before i got all the principal back
What I ultimately ended up doing, and maybe this was their goal, is just to sign-up with their auto-invest system. They lowered the minimum down to something small like $5000, and you can twiddle a few pretty coarse knobs to say what kind of risk exposure you want. At that point it's completely hands-off for me, and I just track the progress - every time I accrue $25 worth of cash from the existing investments, they buy another note on my behalf.
I'd definitely be careful how much cash you throw at this, I thought it'd be an interesting experiment and my portfolio has done fine, but it's hard to quantify the risks. If the economy tanks, how much will the default rate increase? Also as others have mentioned, the secondary market for these notes is really poor - you'd take a huge loss to liquidate your position.
So, in my case, I did three portfolios - a fully manual hand-picked small portfolio, a blended approach with a higher risk, and then a portfolio of all high-interest, high-risk loans.
The hand-picked ones did extremely well, netting me 8.5%. The very high-risk ones got around 5-6%, and the blended around 4%.
It wasn't bad returns, but the interest income (iirc) is taxed as income, and that wasn't ideal for me.
EDIT: because I opted not to reinvest, all the numbers above are what my return is as my portfolios all wind down. At the beginning the returns were much better, 13-15%, but a significant percentage of people get about 75% of the way through paying off their loans and then get behind and default.
It gives you a model for 3-30 month returns, adjusted for losses. I have an experimental amount invested in LendingClub, about 85% loaned out at the moment, and have been in for only a quarter year so far. I've been hand picking loans in small increments, but it's too early to say anything about the quality of my pick criteria because so far there hasn't been so much as a late payment yet.
edit: correcting default stats.
Most such reports probably won't end up in the comments here.
Of course, as far as I can see this is just a checkbox saying "I agree and meet these standards." No way for them to verify.
The notes are also not liquid. You will suffer huge losses if you need to sell. I thought this would mean that I could get other people's notes at deep discounts...typically sellers want to offload late notes to avoid a full loss. However, in my test of buying about 30 late notes, I discovered the real problem - if a borrower makes a payment on your note while the transaction is still "settling" (typically 24-48 hours after you purchase the note), the transaction is cancelled. You can't cancel the transaction during the settling period if no payment is made though. So, what ended up happening was I was building a portfolio of junk notes that defaulted 98% of the time - the advantage is definitely with the seller and I suspect that is why there is a huge lack of buyers on their platform.
You can find yields substantially higher than 6%. There are mortgage REITs that have yields well above 10%, and there are plenty of closed end funds and MLPs that yield better than 6%. Ditto for preferred shares.
Really want yield? MORL, a leveraged ETN that tracks the Market Vectors Global Mortgage REITs Index, has a current yield of around 20%, and CEFL, a leveraged ETN that tracks the ISE High Income Index, sports a similar yield.
Investors today are not challenged by a lack of yield but rather appropriately priced risk. In most cases, today's yields do not adequately compensate for risk. The "6% returns in a ZIRP environment are actually quite fantastic" mentality is going to cause a lot of investors a lot of pain. Chasing yield and ignoring risk is a game very few people win.
However, the return has been rising. Through 2008 my annualized return was negative (-4%) and has since been closer to 8%, with double the returns coming from lower credit scores.
P2P is fundamentally shifting how people gets loans- banks should definitely be paying attention.
http://www.lendacademy.com/forum/index.php?topic=2612.msg225...
"The cost of that revenue growth swung LendingClub from profit to loss. In The first half of 2013, LendingClub had net income of $1.74 million. In the same period this year, the company lost $16.49 million.
The company’s sales and marketing costs jumped from $16.12 million to $39.81 million when comparing the first half of 2013 and the first half of 2014."
"LendingClub doesn't loan out its own capital and collects fees of loans that are originated on its platform from both individuals and more sophisticated investors alike."
Lending Club owns a subsidiary fund that invests in the platform as well.
Investors should be aware that LC is both a platform, and an investor in it's own platform which, if not monitored closely, can be potentially dangerous.
[Source] http://www.prnewswire.com/news-releases/lending-club-announc...
As LendingClub has grown it has transitioned from a purely P2P model where individuals made the majority of the loans to a whole loan model where banks and other accredited institutional investors make up the majority of the loaned capital. They still have the original platform but their growth isn't coming from Joe off the street it's coming from big banks etc... who see this as a cheaper way to do underwriting.
In the early days LC invested their own capital more heavily to make sure loans were fully funded, and to ensure the community was active enough.
This is why they have "funded_amnt" and "funded_amnt_inv" to denote how much of the loan was funded by investors vs. internally.
The return isn't amazing, but I'm not doing anything else with that capital right now, and don't care to toss it in a different vehicle right now. It's fun to use for me.
The exact model to use is tricky though. You could train a classifier to detect whether a loan will default or not, but this doesn't weigh the chance of default with the interest rate. I then thought of doing a regression on the expected return, which would properly balance between interest rate and default rate. At some point, though, you need to make the binary decision of whether to invest in the loan or not, again classification.
Another complication is that since LendingClub has been growing exponentially, the majority of the loans they've issued haven't matured yet. Utilizing this partially complete data is even more tricky. You could ignore non-mature loans, but that would reduce your training data significantly and make your data at least 3 years old.
Check out lendingmemo.com and lendacademy.com for more insight on how to invest properly in the platform.
