Thursday, October 29, 2015

How to Pick Lending Club Notes

Darts in the middle of a dartboard

Lending Club is a Peer-to-Peer lender.  Investors are able to review data regarding people who want to borrow money and have to select the borrowers to whom they want to lend.  When Lending Club started, potential lenders were able to question potential borrowers about their needs and plans for the money.  As the platform grew, that feature disappeard.  Now, investors can see a collection of data points about the borrowers, but there is no personal contact and the information is vague enough that your best friend could have an application on the platform and you would not recognize it unless you knew it was there (and probably not even then).

I am writing this article on a Saturday night (yes, I lead an exciting life) and as of this moment, there are 1175 loans looking for funding, probably one of the lower numbers of the week.  There are over 200,000 resale notes available.  How do I decide in which notes to invest?

Read the Listing, Select the Note:

This is the old-fashioned way to do it, and some people swear by it.  However, as the listings today are a set of data points, I don't know how you get any "feel" for the borrower by doing this.  While it may make control freaks feel better, it is time-consuming.

Use Lending Club's Automated Investing:

Lending Club offers an automated investing feature.  Investors either select one of three targeted returns (A&B Weighted, Platform Mix or D-G Weighted) or select their own mix, push the button and let Lending Club select the notes for you.  If you choose to select your own mix, you can determine what percent of your notes should be from which rating and you can use any filters you want to use.

Use Lending Club's Note Browser to Filter and Select Notes:

If you click on Browse Notes on the Lending Club Homepage, there is a filtering mechanism on the left-hand side.  If you don't want to lend to anyone who has had any delinquicies in the last two years, you can filter out those borrowers.  If you want to lend to people who are paying medical expenses, you can filter them in and everyone else out.  It is up to you.  Once you have your filters set, you can save them to run again, or to use with automated investing.  

It is Lending Club's goal to assign the same interest rate to loans that share the same risk of default.  If you filter beyond saying that you want a particular grade of note, you are basically saying that you think you are smarter than Lending Club.  You are looking for notes that aren't as riskly as Lending Club thinks they are.  NSR Platform can help you back-test potential filters, however, Lending Club is running the same kinds of tests, and adjusting their underwriting when they find a discrepancy.  That isn't to say you can't find a filter that could help; only that it won't be easy.

This method offers the advantage of personal control--you see each note before you invest and can decide not to invest if anything looks "off".  It is more efficient than looking at 1100 notes to select 5.  You can start with broad criteria and keep adding filters until you get down to a number of loans you are willing to review.  

Use A Third-Party Service to Pick Your Notes

The main advantage to Lending Club's Automatic Investing feature is its cost--free.  However,it does not make any attempt to beat the average, and people say it goes for the leftover notes, it does not push to the front of the line for the "good" ones.  Third-Party vendors use Lending Club's API (don't worry if you don't understand it; they tell you how to set it up) to purchase notes for your account, and they do push you to the front of the line, so to speak--their computer fires up when Lending Club releases a new batch of loans and quickly selects  the ones it wants for your.  They also try to select what they think are the best loans.  While most of the services offer a certain number of free picks, their goal is to get you to pay them a small fee per note for their help.  Some of these services are:

NSR Invest 

NSR Invest is for people with more than $5,000 to invest and they will fully manage your account (if you want) once it exceeds $10,000.  They start charging when the account exceeds $20.000 and they charge 0.6%.

Peer to Peer Quant 

Peer to Peer Quant uses computer modeling to select the notes it believes will give you the highest returns. As I am writing this, there are about 1100 notes available on Lending Club; 225 appear on their platform.  Those notes are all C, D, and E level notes, except one F.  That is in keeping with Lending Club's published statistics what show them to be the top performers. There are 629 C, D and E notes available as of this writing, so Peer to Peer Quant has decided that 225 of them are better than the others.  They have been using their system since July, 2014 and claim a return of 10.3% in the last twelve months.  If you check Lending Club's Loan Performance Details chart you'll see that for loans issued between the third quarter of 2014 and the second quarter of 2015, the annualized return was 9.5% for C's, 10.9% for D's and 9.69 for E's.  That does not take into account the cash drag that Peer to Peer Quant's return does.

To use Peer to Peer Quant's service, you create an account.  Their website then gives you a list of what they consider to be the best currently available notes, and recommends that you start at the top of the list and work your way down, in order, until your money is spent.  You select the notes you want and how much money you want to invest in each.  The notes are then purchased and put in your account. Peer to Peer Quant gives users five free selections each month so you can kick the tires to see if it works for you.  I have an account with them.  I have invested $1146.71 (they recommended secondary market notes for a while and I tried some of them) in 51 notes.  The weighted average rate on those notes is 16.35%.  I lost $24.44 when one of the notes charged off.  All the others are current.  Two have been fully paid.  I have earned $83.33 in interest, which is about 7% of the amount invested.  If  you subtract the money lost to the default, my return to date (gross, not annualized) drops to about 5%.
Lending Robot  (that's an affiliate link, and I get some free picks if you use it) has several models from which you can choose, or you can design your own filters.  Their advantage is speed.  Lending Club posts new loans several times daily, and those considered desireable by many people are filled almost immediately.  Lending Robot gives you the ability to grab those loans.  When you are trying to invest a large sum of money a speedy tool like this can get you invested (and earning interest) much sooner than any manual method and even faster than Lending Club's Automatic Investment.  The first $5,000 they invest for you is managed for free.  You can earn additional sums to be managed free by getting folks to invest via affilliate links like this one.  The rest of the money is managed at a rate of 0.45% per year.  On a $15,000 account, that is about $3.75 per month.

I have an account with Lending Robot.  I invested in their Credit Refinance portfolio and in their Popular Loans portfolio.  1.3% of my notes in Credit Refinance have defaulted.  4% are currently late.  My weighted annual interest rate is 18.16%.  So far I've earned interest worth 9.3% of my principal.  If you subtract the principal I've lost, and the amounts Lending Club estimates I will lose on my late notes, my return so far is 6.2% of what I invested.  That's not really an APR because each month when payments are made, the money leaves this pot since I'm no longer using Lending Robot to reinvest.  Another way to look at it is that these notes are 14% of the notes I own and 15%  of the defaults.

Peer Cube 

Peer Cube has a lot of statistical information and offers a collection of filters with expected results.  They also have a paid plain for which they chare $19.95 per month and they will automatically invest your money.  

The services above are all new enough that they do not have a long-term track record that could be compared against just buying the platform.
How do you pick your Lending Club (or Prosper) notes?

*Part of Financially Savvy Saturdays on brokeGIRLrich, A Disease Called Debt and Shoeaholic No More*

1 comment:

  1. Great post you have here - very educating indeed. The NSR Invest sounds very good for people with little funds who want to try investing and worried about fees and other charges.