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Lending Club


MVP444300
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Holy cow!  I was  browsing through some of the notes on Lending Club to just check out what the site is about and see what type of loans people are wanting.    I see loans for debt consolidation, weddings, home improvements, and to go on vacations.

 

 

https://www.lendingclub.com/browse/browse.action

 

As an example I found this person who wants to borrow $8,000.00 at 15.31% interest to go on vacation and attend a wedding.  The length of the loan is 36 months with monthly payments at $278.54; currently the loan has been 85% funded.  I'm assuming the person has no collateral to back up such a high priced vacation and her FICO score didn't look that great.  At that interest rate I think I'd stay home.  Wow!

 

Hmm, I wonder if I could use this site as a tax right off by loaning myself money to go on vacation and then the lazy scoundrel doesn't pay me back.  lol

 

 

Borrower Member_1751700

 

    Loan Submitted: 8/20/12 3:25 PM

    Review Status: Approved Approved

    Monthly Payment: $278.54 (36)

    Member Loan#: 1492007 Prospectus

 

(all information unverified unless otherwise denoted)Borrower Profile

 

    Gross Income: $4,433 / month

    Home Ownership: RENT

    Length of Employment: 10+ years

    Debt-to-Income (DTI): 22.4%

 

(as reported on credit bureau on n/a)Borrower Credit History

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(not verified)Loan Description

Borrower added on 08/23/12 > The purpose of this loan is to go on vacation and attend a wedding.

 

Please view the complete listing here.

Report ListingQuestions and Answers

 

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Well i wouldn't write them off on the basis of one borrower.  I think most of the loans are credit card/debt consolidation in which case you'd actually be lowering the person's monthly payments.  See here:

 

https://www.lendingclub.com/public/steady-returns.action

 

We approve fewer than 10% of the loan applications, based on stringent credit criteria designed to focus on the most creditworthy borrowers. The majority of our members use the loans to pay off high interest rate loans, most often credit card debt.

As of August 14, 2012, the average Lending Club borrower shows the following characteristics:

715 FICO score

14.25% debt-to-income ratio (excluding mortgage)

15 years of credit history

$69,274 personal income (top 10% of US population) 2

Average Loan Size: $11,750

 

Here they have a graph of all the rates and how they set them based on FICO scores

https://www.lendingclub.com/public/how-we-set-interest-rates.action

 

They give an example of how they evaluate a borrower at the bottom.

 

Here are some more stats:

 

https://www.lendingclub.com/info/statistics.action

"71.34% of Lending Club borrowers report using their loans to consolidate debt or pay off their credit cards.1"

 

The other thing is that these are 'real loans' in that they will do collections, and they will report the person to the credit rating agencies if they don't pay.  They also use all sorts of historic & industry date to calculate their lending rates.

 

Anyway, I've been investing with them for about 2 years I think.  It's a small investment, in the alternate/just for fun category :-)  And it hasn't had a single down month since I started!  If anyone wants $300 on their initial 10K notes investment pm me.  I'd be happy to send you a referral which will give you that.  (of course that 300 will have to be in notes, so it's not like it's cash up front, and I don't get anything for the referral either.).

 

Oh and if you think lending club's borrowers are bad, you should get our prosper!  Although I think they've cleaned up their act in recent years.

 

Here's an article on the way lending club calculates things vs prosper:

 

http://www.doughroller.net/p2p-lending/prosper-vs-lending-club-smackdown-who-has-the-best-interest-rates/

 

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MVP, it's definitely and 'alternative investment'.  My yield is about 7-8%, which looks like it's on the lower end of average:

https://www.lendingclub.com/public/diversification.action

 

and most of my notes are 3 years (they have 5 year notes too).  Generally speaking you can't get your money back right away.  There is an 'aftermarket' where you can sell your notes, but the last time I looked at that it didn't look particularly appealing, but that was at least a year ago, maybe it's improved since then. 

 

https://www.lendingclub.com/public/mainAboutTrading.action

 

In theory the aftermarket makes sense since some people want to wait a few months or a year before investing so they can get notes that are more stable.  But in practice I remember seeing more notes that had failed to pay..  That said, I've found that at least some percentage of notes you 'bid' on don't get issued, and that there are probably enough people who buy out their notes early.  As such, I'm always rolling over some portion of my portfolio.  I could guess it's 5% a month turnover.  Also I focus exclusively on Credit card/debt consolidation loans, since as I mentioned, those actually reduce a person's payments which in my eyes makes them become more credit worthy than they were before.  But that's just opinion, not backed up by any serious research :-)

 

That said, I totally agree that it's not for everyone (even for me :-) I sometimes go back and forth on whether I should jumped in or not.).  The taxes are a bit of a hassle too..  But it's kind of nice to have one part of my portfolio earning a steady return, never fluctuating with the market!

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  • 2 years later...

I analyzed their database of loans (50k+) and on average you'll lucky to be making 5%. There's a reason why credit cards charge people high interest rates... to make up for the losses. As long as they can issue more loans they can keep the stats on their loans looking good.

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MVP, it's definitely and 'alternative investment'.  My yield is about 7-8%, which looks like it's on the lower end of average:

https://www.lendingclub.com/public/diversification.action

 

and most of my notes are 3 years (they have 5 year notes too).  Generally speaking you can't get your money back right away.  There is an 'aftermarket' where you can sell your notes, but the last time I looked at that it didn't look particularly appealing, but that was at least a year ago, maybe it's improved since then. 

 

https://www.lendingclub.com/public/mainAboutTrading.action

 

In theory the aftermarket makes sense since some people want to wait a few months or a year before investing so they can get notes that are more stable.  But in practice I remember seeing more notes that had failed to pay..  That said, I've found that at least some percentage of notes you 'bid' on don't get issued, and that there are probably enough people who buy out their notes early.  As such, I'm always rolling over some portion of my portfolio.  I could guess it's 5% a month turnover.  Also I focus exclusively on Credit card/debt consolidation loans, since as I mentioned, those actually reduce a person's payments which in my eyes makes them become more credit worthy than they were before.  But that's just opinion, not backed up by any serious research :-)

 

That said, I totally agree that it's not for everyone (even for me :-) I sometimes go back and forth on whether I should jumped in or not.).  The taxes are a bit of a hassle too..  But it's kind of nice to have one part of my portfolio earning a steady return, never fluctuating with the market!

 

Interesting. Why don't we try to place bids for 1 cent on the dollar on those failed loans here and then hire collect agency. Maybe we can make a lot of money this way.  :D

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Guest Schwab711

I analyzed their database of loans (50k+) and on average you'll lucky to be making 5%. There's a reason why credit cards charge people high interest rates... to make up for the losses. As long as they can issue more loans they can keep the stats on their loans looking good.

 

Completely agreed. I've had a few hundred dollars on the site at various times over the past 4 years. The best I've done is ~9%-10% by going for the 12% loans. The pre-payment risk is greater than you think and there's not enough depth of excellent borrowers to have a very large portfolio (maybe ~10k). I've had some friends try the junk-loans (15%+) with terrible results (~5%-6% returns after losses and pre-payments). Also, the lack of depth significantly hurts the ability to compound your results or you are forced to drop underwriting standards at times.

 

I only went for credit consolidation loans (no business/wedding/vacation crap) and gross income > $100k. There is some money to be made stalking the OTC market but there isn't much opportunity for flipping with the 1% sales charge. I would expect returns to converge towards 5%-8% with enough money (depending on risk level), which isn't bad. These loans should do well in the face of rising rates and falling stock market which makes them a nice hedge. Overall, it was too much work/research required and I don't fully understand the T&A [i'm pretty sure you cannot take collections into your own hands :)].

 

I've also looked at borrowing money to fund stock investments but the monthly repayment schedule makes it so you only get to use 80%-85% of what you borrowed to keep some cushion (or take on other risks). This makes it a lot less attractive.

 

In summary, the returns were too low for me, all things considered. I think the real money is in starting a small community bank and using LC instead of loan officers and having borrowers come to you for mortgages. Not too different from Bank of Utica.

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Do you guys think Lending Club and similar lenders will survive the next downturn?

 

It seems there are at least two risks:

- the lenders will implode because they currently don't price the loans for downturn

- the regulators will step in once unsophisticated lenders get hurt.

 

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  • 2 weeks later...

I put together a post on this: http://www.oddballstocks.com/2015/06/benzinga-interview-plus-thoughts-on.html

 

A few things.  Investors aren't really investing in those loans.  You're buying a note to LC and then LC directs payments to you, just a contractual thing.  But this means that investors can't go after defaulted loans.  And if LC goes belly up investors in the notes have no recourse against the parent company.

 

An investor is just buying a derivative note without anything underlying.  It reminds me of the China reverse mergers.  You'd invest in a shell that had a contractual revenue/income/dividend relationship with the Chinese company.  But we know how well these things worked.

 

LC doesn't care as much about credit quality as they need to keep the ball rolling.  They make money originating and on fees, not by holding the loan.  As long as there are investors who want to pony up $25 at a time for these things I'm sure they'll be able to find borrowers.

 

The GS angle is interesting.  They're looking at this as a bundling business.  They'll originate, bundle, trade.  They make money on the origination as well as the trading revenue.  This is a market where I really wouldn't want to be on the other side of Goldman.  They made the loans, bundled them and now they're selling them. 

 

Jurgis,

 

Don't think of LC as a lender, they're just an originator dumping these loans on investors.  They don't have any risk themselves.

 

The irony here is LC claims their IT platform allows them to make these loans that would otherwise be unprofitable.  But compared to banks with $9b in loans, or ones that do similar volume the banks have much lower operating costs.  The problem is LC is like Groupon, they need a giant sales and marketing team to keep volume up.  If that origination volume drops the business is done.  The 1% interest stream doesn't cover much for them.

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Oddball,

 

Thanks for the post. Good explanations and details.

 

Jurgis,

 

Don't think of LC as a lender, they're just an originator dumping these loans on investors.  They don't have any risk themselves.

 

Yeah, I understand that. But my previous points still stand:

 

- the lenders (investors) implode during downturn because they don't price the loans for downturn. The volume for LC dries out.

- the lenders implode, they cry to the regulators. The regulators step in to deal with LC derivative notes and regulate them once unsophisticated lenders get hurt. This may or may not happen - perhaps regulators will say caveat emptor and do nothing. But if they do LC suffers.

 

What you described in the post does not seem to save LC from either of these issues. :)

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