Lending Club (October 2010 Update)

As promised here is another quarterly update.  If this is your first time reading about this, please read my original Lending Club review for more details on loan selection, and how I am investing.  According to Lending Club’s stats, I’m up 40 basis points in my NAR (Net Asset Return) from my previous update in July.  I’ve also almost doubled the interest received.  Since then I’ve added only $50 in new money to invest.  I’m doing pretty well with the notes I’ve invested in so far.   Though I suspect one note will more than likely default this quarter.  This should lower my NAR by 1-2%.  I’ve decided I will not invest in any borrower who has ever defaulted or been a late payer at anytime.  Since these are unsecured notes I only have their honor they will pay the note back in full.

Lending Club Current Returns

I’m noticing there are many more 5 year notes available than the 3 year notes.  Based upon my filtering criteria, I’m barely seeing 10 notes available for me to invest.  Unfortunately, the 2% premium for 2 additional years in my opinion isn’t worth the additional risk. Because it’s an unsecured note, I would rather invest in other short term investments like dividend stocks.  I have a CD in my CD ladder coming due this month, and I plan on taking some of the proceeds and adding an additional $2,000 to Lending Club.  Based upon the amount of quality 3 year loans available, I may have no choice but to purchase some 5 year notes.  I will still keep them to a minimum.

In the past few months I’ve noticed more press about Lending Club and discussions about it as a serious investment product.  Could it be that P2P lending will become mainstream?  I think right now is a perfect time to invest in Lending Club loans because many bank rates on credit cards are much higher than the rates they offer.  This means people are seriously paring down their debt and lowering their interest rates by using Lending Club.  I suspect this trend will continue after all of the additional rules and regulations required for credit card providers become law this year.  This means a niche Lending Club should be able to fill with lower lending rates.

4th Quarter Lending Club Goals

  • Invest another $2,000 to max out my goal of $5,000 investing in Lending Club for 2010
  • Reinvest any fully paid loans and any money returned from paid loans.  Keep doing this until I get to three years into investing with Lending Club.
  • Review FOLIOfn for any notes I might be able to buy at a discount; increasing my returns
  • Add an additional 80 notes to my portfolio, getting close to the magical 200 notes within my account.
Get a $100 bonus for investing $2,500 (terms and conditions apply).
Sign up as a Lending Club Investor!

Comments

  1. @Yakezie says:

    Looks like fun! When do you dump big bucks in it i.e. $20,000+ and stuff?

    • Investor Junkie says:

      First it was $10k, now it's 20k you want? Is that because of inflation? ;-O This year it's no more than $5k. Yes it's a small part of our asset allocation, but I'm still testing the waters. I'm not happy about how hard it's finding 3 year notes. I don't think 5 year notes are worth the additional risk for the small (2% more) return.

  2. Dan B says:

    But Yakesie does bring up an interesting point though…………….& that is when are you & me & other investors going to commit "real" money into LC?
    I can tell you that I'm not going to anytime soon as I still have a number of reservations about their long term viability. Consider that they're having some real problems right now getting new investors……….as evidenced by their ever increasing new account bonuses. And current investors like myself & yourself are being very cautious in committing new money despite the ridiculously low rates we can get at the bank. I'm not naive enough to equate LC & cds………….but a lot of people do. Here's another issue………….I've been with LC for almost a year & I haven't seen any headway in getting this peer lending concept available nationwide. Right now it's still not available to 22 states. You want another problem? When will LC stop burning through cash? Not anytime soon if they keep self funding the loans like they did end of September & likely every month since the beginning. I could go on & on with potential pitfalls & I haven't even touched upon the common concerns of default rates etc…………..but suffice it to say that I don't have the high confidence about its long term viability as you do.
    Dan B.
    10k+ invested with 12.8% return on 400+ notes

    • Investor Junkie says:

      Hi Dan. What do you consider "real" money??? Some people might say $10k is a lot of money to be invested in anything. I guess it depends upon your perspective. Also like I state you wouldn't invest 100% in stocks would you? Proper asset allocation is needed for Lending Club also.

      The other points you raise are valid objections. Though as far as p2p lending not becoming mainstream? "The Simpsons" just mentioned it in last week's episode, so to me that's a pretty big milestone.

  3. Dan B says:

    "Some people" do in fact consider 10k to be a lot of money……………but those people don't read blogs called Investorjunkie. Sorry, but they really don't. :)
    Another reason why I'm saying that 10k isn't "real money" is actually specific to p2p lending & LC. In reality 10k should be the bare minimum in order for one to have reasonable confidence of an "average" return. At LC that average return is 9.6%. Why do I say all this? Because if you go to LC's site & click Statistics you will see a graph that will state that if you are invested in 100+ notes ($2500+)………you have a 18% (ie 100-82) chance of getting a return of under 6%. 18% is almost 1 in every 5 investors within that group that has over 100 notes. In fact you'd have a 4% chance of doing even less than 3%. Don't believe me? Look at the graph carefully & make sure to click where it says 100+ notes & do the subtraction. Now click 400+ notes (over 10k) & that number translates to 100-88.6 which is 11.4. Meaning that even at 400+ notes, 11.4% of all investors are doing under 6% returns. That's 1 out of every 9 people with more than $10k invested. Now click 800+ notes which is at least $20k that number is still at a significant 9% of investors getting below a 6% return. And before anyone says that 6% is damn good in todays environment………….pls. keep in mind that LC doesn't calculate for idle cash or funding time. In a real world calculation you can subtract an additional 1 to 1.5% from any LC official return rate. Now, all of the above isn't LCs or anyones fault. It's simple standard deviation & even at 800+ loans you're going to get a 8-9% chance of falling outside the expected range of return. Now LC doesn't have a 1400+ loans on their graph, but if they did, the numbers would fall to 4-5% chance of doing less than 6% return. Here endeth the Math lesson for the day. :)
    So, imho if you don't put at least 10k into LC……….then it's not really an investment, it's just an experiment or a flyer. It's the same as going out & buying 1 stock. You can call it an investment but you can't really set any realistic expectations for it. You could be up 30% for the year or down the same amount, right?? 10 years later you good have made a fortune with that stock or be holding worthless paper. Same here, except your upside is limited.

    • Investor Junkie says:

      Yes all great points that I never discussed on my blog.

      With regards to $10k invested and 400 notes so it's statically significant. That is my eventual goal.

      The reason I haven't thrown it all in at once is really because of two reasons:
      1. I wanted to get my feet wet with Lending Club and understand it more. I think I'm almost at this point
      2. I'm picky. My lending criteria is pretty specific and the amount of notes available are pretty small based upon my filter. So even if I did have all the money invested in Lending Club it would sit idle for a long period before I purchased all of the notes.

      With regards to #2 I also should pursue using folioFN more.

    • Lisa says:

      << "Some people" do in fact consider 10k to be a lot of money……………but those people don't read blogs called Investorjunkie. Sorry, but they really don't. :) >>

      Don't underestimate those of us who, at this point in our lives, think 10k is a lot of money. I am a recent college grad, newly working and paying off student loan debt, but that doesn't mean I neither am interested in investment nor wish to educate myself about it in preparation for the future. :)

      • Investor Junkie says:

        Congrats on starting. I too started young and small in my investments when I was in my early 20's. The interest earned might be small, but your skills are scalable. As you grow your portfolio the only difference should be the amount of money your earn/profit. Believe it or not it was much more exciting for me (and scary) investing $1000.00 when I was 22, than $100,000 now 39.

      • Dan B says:

        Lisa……..a little bit of knowledge can be extremely dangerous to ones financial well being. When I was your age I was already very very informed about almost every type of investment out there. At your age ( I assume you're in your 20's) you have a lot of things going on & your life is rapidly changing year to year. Coming to the internet & getting investment tips from God knows who (myself included) isn't real wise.
        Take my advice………….Go out, have fun, travel as much as you can & enjoy life. You're only young once. And if you have some money to invest, then set up an automatic monthly deduction to a no load, low expense stock mutual fund from a company like Vanguard & then just look at it once a year or so. That's it…………..If you do just that consistently, time will work in your favor & you'll be in as good, if not better financial shape 10, 20 years from now than anything you learn here…………..& with no effort to boot. Now stop reading this bs & go have fun. :)

  4. Dan B says:

    I hear you………..I'm picky as well & am having a lot of difficulty finding 36 month loans to invest in……………..The Folio trading platform is excellent IF you're a large investor. LC routinely blows out their own "self-funded" notes there at 3-4% discounts after holding on to them for 5-6 months. They're probably not that thrilled that some people realize the significance of the timing since they're unloading them to some unsuspecting investors right before lates & defaults occur……………but oh well. The other problem is that they rarely if ever sell them in amounts smaller than $100. They had a whole bunch in the 200-400 range just a week ago. Way too rich for our blood. But then hey, I unload loans there too. In fact I do it right before they enter the "in grace" period. That is the only thing that is keeping my returns up. But it's a daily routine & I'm guesstimating that I spend 10-15 mins a day looking after my LC account everyday. I enjoy it so far, but I can see how it could become a chore.

    As for 10k & 400 notes, yes you can call it significant, but 20k & 800 notes is a lot more as well in terms of achieving a predictable return. You see I realize that there are a good number of small investors who invest in 20 or so loans & either have gotten real lucky & do 14-15% or unlucky & do 2%. I don't want to be either of those people…………… because the difference between them is in actuality just a couple of defaults. I want predictability & consistency in my returns. I've been at LC for 11 months now & my return has never been lower than 12% or higher than 13%. My goal is to keep it within that range.

  5. Dan B says:

    FYI………. Here's your chance………2% cash bonus on deposits of $7500 or more to existing accounts before end of October.

  6. Dan B says:

    Are you sure? Because I just re-checked it & on mine it says $7500. Maybe their customizing the offer for each members' account.

  7. Dan B says:

    Well that doesn't sound fair………….
    I mean what if I had 100k in there? Where would the bar be set then? 75k………..just to get the bonus? So the more you invest the tougher LC makes it for you to get a bonus?? If anything it should be the other way round. That's BS & I'm going to tell them that tomorrow morning.
    Did you read the fine print? Everything has to be invested by Nov 30th & Folio purchases don't count.

  8. Dan B says:

    You're correct of course. I suppose the whole thing just rubs me the wrong way.
    Here's one you might find interesting. It's regarding income &/or employment verification & it's taken from LC's prospectus………….."In the limited cases in which we have selected borrower members for income or employment verification, for the year ended March 31, 2010, approximately 64.1% of requested borrower members provided us with satisfactory responses to verify their income or employment; approximately 11.0% of requested borrower members withdrew their applications for loans, and approximately 24.9% of requested borrower members either failed to respond to our request in full or provided information that failed to verify their stated information"………………..

    I don't know about you but stuff like this is why I only lend to borrowers that have "verified incomes"!!

  9. Dan B says:

    Don't get me wrong……..Despite all the negatives I've mentioned here, .I still think that LC is a good investment, if one is adequately diversified (800+ notes). I want to get to the number as quickly as possible………….without being reckless in route.
    There's just a few things about LC that leave a bad smell & contradict their very PC statements about being upfront & transparent etc. Like their "imaginary" return numbers, & their gloating about setting record after record on the number of loans originated (when they're funding part of it themselves with money that they've borrowed no less), ……………And how they're apparently now referring to this stuff as "Prime Consumer Notes" as if to imply that the average borrowers are "prime borrowers". I mean please! Where's the honesty in that? Their average borrower wouldn't be able to get an unsecured personal loan from a bank if their life depended on it. They're trying p2p because it's either that or the payday loans at 190% per annum. That's the reality of it these days. So called it whatever, but don't call it prime.

  10. Todd H says:

    My question is the area in the prospectus about the default status. “”If the borrower member fails to make a required payment on a member loan within 30 days of the due date, we will pursue
    reasonable collection efforts in respect of the member loan. Referral of a delinquent member loan to a collection agency on the 31st day of its delinquency will be considered reasonable collection efforts. “”

    Sounds like they put loans in default and collections very quickly which can eat 30 to 35% very quickly. While the loan is in default for being late, initiating collections that fast sounds like a money making scheme for LC.

    • Investor Junkie says:

      Hi Todd H,

      That’s a good point. I agree their collections process, from what I know about it, could be better.

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