I Quit Lending Club Years Ago, But Its Note Trading Platform Won Me Back
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Have you tried investing on Lending Club? You choose the loans to fund, invest as little as $25 in each and they handle all the details.
Six years ago, I invested $2,500 in 36 notes (parts of loans) on Lending Club. I didn't properly diversify, so loan defaults knocked my annualized return down to 5.09%.
I was happy with that, but didn't like having my money tied up for three years. So as the borrowers paid off their loans, I emptied my account.
But last month, I put $3,000 back into my account. This time, I'm testing Lending Club's note trading platform. It's operated by a company called Folio Trading, and it lets you buy and sell existing notes. I bought 165 notes, all with fewer than 16 payments left, so this time I'll get my money back quicker.
Blogger Mr. Money Mustache says he invested almost $30,000 using the platform and made an annual return of over 17% in the first 11 months. He also reported there were so many investors by late 2013, prices were going up and returns, therefore, were going down.
I hope to make just 6%, but with less risk. I'll explain my strategy below.
The Advantages of Trading Notes
You can invest in only new loans on Lending Club.
But there are some distinct advantages to buying existing notes on the trading platform. They include:
1. Your Investment Period Can Be Shorter
You can buy loans with just 10 monthly payments left, for example. All new loans are for 36 or 60 months.
2. You Earn Interest Sooner
When you fund a new loan, you earn no interest until the loan is issued, and it won't be issued if the total funding target isn't met.
With existing notes, you're earning interest the moment you buy — though it may take two days for the purchase to be processed.
3. You Can See the Payment History
Even new borrowers with high credit scores can default soon after a loan is issued. Some investors think a borrower with a year of timely payments is less likely to default.
At least one report says half of defaulted loans on Lending Club have fewer than 10 payments ever made, so seeing a year of payment history before you invest may help reduce your risk.
4. You Can Get a Discount
Sellers set the price, which is sometimes less than the balance and accrued interest due on the loan.
For example, you might buy a loan with a balance of $22.50 for $21.50, potentially putting you a dollar ahead on top of the interest you'll collect.
But be careful about the reason for the low price: Check the payment history.
5. You Can Have Greater Diversification
Notes are at least $25 each when you fund a new loan, but you can buy notes with a few dollars left on them using the trading platform.
So, for example, with $2,000 you can buy a maximum of 80 new notes, but if your average purchase on the trading platform is $10, you can buy 200 notes.
6. It Can Be Safer Than Stocks
Peer-to-peer lending platforms are relatively new, but Simon Cunningham points out on LendingMemo that the consumer lending industry as a whole has never had a losing year. Historically, in the stock market, you can sometimes lose money for an entire decade.
The Basics of Note Trading on Lending Club
It costs nothing to open an account at Lending Club if you're in one of the approved states. Even if you aren't, you might still be in a state where you can buy and sell Lending Club notes on the FOLIOfn Note Trading Platform.
Once your Lending Club account is open, link it with your bank account and fund it. Then click “Trading Account” and open an account with Folio Investing so you can trade notes. All of this is relatively simple and the website has a good explanation. It shouldn't take more than a few days to transfer the money and set things up.
When you’re ready to go, start with at least $2,500 so you can diversify. Performance statistics show that less than 1% of investors who have bought more than 100 notes have lost money. Those statistics are for buyers of new notes, but diversification should also lower the risk when you invest in notes on the trading platform.
My Strategy for Trading on Lending Club
Log in to Lending Club and click “Trading Account.” Click “Browse Notes” and you'll get a list of more than 200,000 notes for sale (at the moment).
In the filter section, click “More” to see every option at once. Select your criteria and choose from the resulting loans (notes).
Note: Even though the Folio Trading platform is technically off-site, the money comes from your Lending Club account and the notes are immediately deposited back there.
In general, my strategy is this: Buy notes with no more than 15 months left that will yield more than 8% and have a record of mostly on-time payments.
To accomplish this, here's what I do with each filter:
I leave the default setting (4 to 29%). Since this is an indication of loan grade (better borrowers get lower interest rates), some investors exclude anything above 7.89 or 11.53% — the cutoffs for Grade A and Grade B loans.
I figure if the person has paid on time for a couple years, they're a good bet, so I look at all loan grades.
I look at 36- and 60-month loans (they're checked by default). I'm buying loans with less than 15 months left anyhow, so why exclude 60-month ones, which have an even longer track record to review?
I leave the defaults. I'm not worried about the balance, since I'm usually buying only $10 or $20 of the loan anyhow.
“Issued” and “Current” are usually checked by default.
I uncheck “Never Late” because I can tolerate a couple grace period payments if they happened a while back (indicating the borrower has since cleaned up his act). I leave the other boxes unchecked because I don't trust loans that are currently late.
I set this for one to 15 months.
Recent Credit Score
I leave this on default (any score) because I feel a couple years of on-time payments are more important than credit score.
Credit Score Change
I check the boxes with the “up” and “stable” arrows to filter for loans to borrowers who have maintained or improved their credit scores.
I make sure the box for the “down” arrow isn't checked, because a credit score that's dropping is probably a bad sign.
Original Note Amount
I'm not concerned about the original loan amount, since I haven't seen evidence of greater default rates on larger loans (and I'm buying only a small part anyhow).
I set it for $0 to $50, so I can fully diversify. My $3,000 bought 165 notes, for an average price of about $18.
Yield to Maturity
I set it for 8% to “Any.” I can click the yield column afterward to sort by highest yield, and start shopping for notes there.
I set a maximum 3% markup. A markup is OK.
For example, if I buy a high-interest note with a $20 balance and pay $20.60 for it (a 3% markup), I might still make 11% by the time all of the interest is paid. On the other hand, if the lender pays off the loan the next day I lose that $0.60 extra I paid (less accrued interest).
So to limit this risk of loss from early payment, I don't pay more than 3% above face value.
I check “Exclude loans I have already invested in.” I want to diversify, so I don't want to accidentally buy a dozen notes that are part of the same loan.
When I click “Apply,” I typically get 10 to 20 loans that meet those criteria on any given day, along with information on each of them.
I look first at notes with the highest yield. Under “Status,” it says “Current” for each note (if you filtered for that). I click that to see the payment history of the note.
It takes about five seconds to see if there have been any late payments. I can live with up to three payments made during the grace period if they weren't recent — that's why I don't check the “Never Late” box in the filters.
The Rest of the Story
This platform is popular with investors, so the best notes go quickly. It took me three weeks to invest my $3,000 using the criteria above. I had to log in almost every day as new notes were added to the system.
Fortunately, once you know your criteria, the process is quick. I've spent as little as three minutes to buy a dozen notes.
I'm about a month into my experiment and I've already received payments on many notes. So I just invested $30 (as I write this) back into a couple more notes.
This time, I bought only notes with less than 15 months left. I'll make it less than 14 months when I reinvest next month, and continue in that way.
My idea is to keep all my money in the account invested, but still have most of the investments mature at around the same time.
As I said, I hope to make about 6% after a few defaults. I'll post an update next year.
Your Turn: Have you used the Lending Club trading platform? If so, what was your experience?
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Steve Gillman is the author of “101 Weird Ways to Make Money” and creator of EveryWayToMakeMoney.com. He's been a repo-man, walking stick carver, search engine evaluator, house flipper, tram driver, process server, mock juror and roulette croupier, but of more than 100 ways he has made money, writing is his favorite (so far).