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Revisiting Lending Club

April 13, 2011 by Lazy Man 16 Comments

It’s been a long time since I’ve written about Lending Club. Truth is that I’ve been a little disappointed by the peer-to-peer lending space. I was an early adopter and I got burned. I put some significant money in Prosper and bid on a bunch of sub-prime loans. I might as well been in the mortgage business, right? (Is it too early to make those jokes?)

I realized that I may have judged the entire industry too early. After all, it was just a baby of a couple of a years old. No one knew what worked and what didn’t. After the Prosper debacle, I decided to give Lending Club a chance with a smaller amount of money. I also changed my strategy completely and started to lend the money ultra conservatively.

What were the results?

Well, I didn’t lose money like I did with Prosper. To date, I’ve made a Net Annual Return of 4.78% on my money. I was pretty depressed by that number because Lending Club says the average is 9.68%. I am in the 16th percentile. That means 84% of Lending Club investors do better than me. As my wife can attest, sometimes I can get a tad over-competitive. With the information that so many people are doing much better than me, combined with the fact that on average they are doing much better than me, I was down on Lending Club.

It recently occurred to me that maybe I’m looking at it wrong. Perhaps Lending Club is better at coercing the people with riskier profiles to pay. (I going to take a minute to imagine them sending out emails of broken thumbs.) If this is the case, then perhaps I was doing myself a disservice by being so conservative. This seems to be true when you look at Lending Club’s statistics:

The average return on A grade loans is 5.55%, while the G grade loans are 13.55%. As you can see, this factors in defaults. By focusing on the highest of A grades, it seems I was essentially putting myself in the worst performing loans possible.

I think I learned a couple of lessons.

The first one is to make fair comparisons. While 4.78% looks bad compared the 9.68% that is Lending Club’s average, 4.78% is pretty good compared to what I’m getting in my savings account. (Note: Lending Club investment opportunity is more like the bond market and obviously has risks that savings accounts do not. It is an entirely different investing vehicle with an entirely different purpose.) Even if the average was 4.78%, it is a better place for some of my cash – while still ensuring that we have a six-month an emergency fund in liquid. However, the potential to make 9 or 10% on my money in this economic environment is nice. That would compete with the average for stock returns.
The second lesson I learned was not to discount something too early. I wrote off investing in peer-to-peer lending because of an initial bad experience – this is especially true because the failure was due to my own actions. If I had gone back and asked, what I could have done better earlier, I would have done better.

In the end I’m signing up for Lending Club was a good move for me. If it sounds like something you’d want to try, sign up for Lending Club here.

Lending Club Update – September 2009

October 8, 2009 by Lazy Man 2 Comments

I almost forgot to update you on my Lending Club account. I’ve been opening that up for all to see:

Last month, I had expected payments of $71.21 coming in. This month I have $74.47. A key word there is “expected.” It’s not a guarantee, but it is fairly diversified. Also, you may note that I have around 50 active tradeable notes with only 1 late. I should add that I didn’t put in any new money this month, I just reinvested payments from previous loans.

If you want to get started with Lending Club, they will start you up with $25 if you sign up through this link (full disclosure: I’m compensated as well).

Before you open a Lending Club account, I should mention that Lending Club notes are a very new type of security. There isn’t a long history of performance to rely on. As such, I would exercise caution with putting a large portion of your portfolio into Lending Club. Generally, I don’t think I’d put much more than 5% in it. I would use Lending Club as a way to diversify a portfolio. If stocks drop a lot as we saw earlier this year, the Lending Club portion could help stem the losses as it did for me last year.

Lending Club Update – August 2009

September 10, 2009 by Lazy Man 12 Comments

While I was writing my alternative income for August, I remembered how I used to count projected interest from my Prosper account. I had stopped that in part because it wasn’t a significant number, but also I had made the mistake of many by lending out money to anyone at 29% thinking that it would have to pay off. I have admitted my mistake there. However, I noticed that my Lending Club account was different. In fact, it was best investment in 2008. Maybe taking the more conservative approach is the way to go. So why not start to add the projected income from that investment to my alternative income… and why not open up my Lending Club account for all to see?

As you can see, I’ve had over 100 loans and only 6 of them are late or charged off. My more recent lending (in the bottom half – i.e. tradable notes), I have only 1 late in 47 loans – perhaps the result of being more conservative or a better economy.

This is a good time to do it too since Lending Club is having a couple of promotions. They are offering to start you out with $25 if you sign up through this link (full disclosure: I’m compensated as well). If you are their 25,000 lender (projected to come in September, you’ll receive $2,500. You can read more about that here. Just conjecture on my part, but I would guess that they are within 1000 of that milestone. If I’m right, then your odds aren’t all that bad at winning.

Before you open a Lending Club account, I should mention that Lending Club notes are a very new. There isn’t a long history of performance to rely on. As such, I would exercise caution with putting a large portion of your portfolio into Lending Club. I would use Lending Club as a way to diversify a portfolio. If stocks drop a lot as we saw earlier this year, the Lending Club portion could help stem the losses.

Lending Club’s Interesting Definition of Risk

March 4, 2009 by Lazy Man 4 Comments

I was using Lending Club to buy some notes the other day and noticed something very interesting. Take a look at the following images…

Did you see what I saw? Look at images A and B. You see that I can choose between a 9.74% interest rate at a 0.47/1 risk ratio or a 16.95% interest rate at a 0.79/1 risk ratio. (In truth there’s a whole spectrum of choices in between.) From these images, it seems clear that the higher the risk ratio, the more risk you are taking on. That’s all good until you look at the images in C and D. Note that the risk ratio is the same whether I’m investing in an A-rated loan or an E-rated loan. That risk is a high 1/1.

This leads to a very curious case when you compare images B and C. The B image seems to show less risk and a greater return. Why would anyone want to invest the way that image C shows?

I found this curious, so I asked Lending Club. It turns out that the answer is one of diversification. You’ll note that risk ratio in images A and B is the result of three loans. In images C and D there is only one loan. The lesson here is that Lending Club’s risk ratio is determined by a combination of loan risk itself and diversification. If you have enough money to put into loans at one time that risk ratio will be very low.

Lending Club admitted that this can be seen as a little interesting in the way I described it. They also said that they were looking into updating how the risk ratio works. I proposed that the risk ratio instead reflect the risk of the current set of loans on my whole Lending Club portfolio. I’m curious to see if they take my suggestion.

What do you think? How should Lending Club report risk? Let me know in the comments below.

Uncrunch America with Change.org

August 1, 2011 by Lazy Man 8 Comments

While most blogs are probably planning their New Year’s Resolutions, I’m taking action. I just voted to support Uncrunch America campaign in Change.org’s Solving the Credit Crisis From the Bottom Up. That’s quite a mouthful (or is it ten-fingersful since I’m typing?). Allow me to explain a bit.

Obtaining credit is getting more and more difficult in this country. For so long, it was really easy to get credit – too easy. We found that out all too well with the sub-prime mess. In an attempt to right the wrongs, lenders have over-corrected… they are requiring pristine credit scores to lend. “Once bitten, twice shy” isn’t just a Great White song to them. Uncrunch America has a plan to solve that.

Uncrunch America is looking to get people to lend to other people. If you think this sounds like peer-to-peer lending, you are right, Lending Club is one of Uncrunch America’s partners. It’s not just Lending Club though. Supporters also include Credit Karma (of which I should note has a great credit blog that tell me what is a good credit score) and popular online budgeting tool, Geezeo – two companies that I’ve talked with extensively in the past. Throw in On Deck Capital lending to small businesses and a public relations firm and you’ve got an organization with some clout.

However, some clout isn’t always enough. This is where Change.org comes in. This nonpartisan group is simply trying to create a platform where the people can vote on ideas of change. The Top 10 ideas will be presented to Barach Obama on Inauguration Day, January 20, 2009. After that Change.org supports an organization (in this it would probably be Uncrunch America) in getting the idea implemented. The details of all this are a little fuzzy to me, but you can read the FAQ here.

So if you think that this idea for helping make credit available should get Barack Obama’s attention, please vote for Solving the Credit Crisis From the Bottom up at Change.org. I would stress that this is the last day for round one (I just heard about the campaign myself), so you may have to put down your champagne for a minute or two. However, it’s close to reaching round two, and if it does votes there will be appreciated as well. Sadly, you do have register for the site, but the sign-up form is 4 input boxes and took me about 45 seconds of my time. I figure it’s the least I can do to give the idea a shot.