Archive

Archive for the ‘LendingClub’ Category

LendingClub Trading Platform Reflections – July 2011

July 29, 2011 Leave a comment
LendingClub Reflections - July 2011

"Jump" by frederico stevanin on freedigitalphotos.net

Look before you leap!

That’s my main reflection at this point in time. The LendingClub Trading Platform is nothing like the basic LendingClub Platform. You aren’t able to get in at the ground level and lend money directly. You are only able to trade notes that are listed on the trading platform, which is a secondary platform. Let me brain-dump some pros and cons.

Pros

  • At least I get to participate in peer to peer lending through a secondary market
  • I get to see the payment history of existing notes before I invest
  • I get to see the credit history graph of a borrower before I invest
  • I am able to go back and review the original listing
  • Notes that are bought are seamlessly transferred from the Folio platform to the LendingClub platform

Cons

  • New notes being sold at par are rare finds
  • Notes that are at a discount usually have payment issues
  • You end up paying more than the remaining principal on notes most, if not all, of the time
  • The same threat of default is there
  • You will probably get less percentage yield than someone who was in at the ground level of the same loan
  • There aren’t as many high quality notes available on the secondary market since most people want to sell their riskier notes

I wouldn’t hesitate this to someone who is already familiar with buying and trading bonds. There are similarities and if someone knows how to trade bonds, then they can figure out how to invest in the LendingClub secondary market. For those who have experience in the stock market, that experience is not enough. There is a lot more math involved here and people misprice their notes left and right. I can’t tell if they’re shady or just uneducated. I’ve seen prices as high as double the remaining principal. Why in the world would you buy a note that will never pay you back 100% of your principal?

Verdict So Far

I haven’t had any defaults so I still have a positive outlook on this income stream. So far I have received the first payment from 13 of 27 notes. The rest are upcoming and I am hopeful that there won’t be any missed payments. I’ll write a more detailed article later on about how everything has gone in the month of July. The fact of the matter is, I still haven’t broken even with my what I spend on buying the notes. I am probably a month or so away from breaking even. I’ll elaborate on what I mean later for those who have no clue what I am talking about.

I maintain that the LendingClub Trading Platform should be looked into by those who are knowledgable about investing in bonds. For everyone else, I would suggest that you hold off and learn as much as you can through my articles.

Categories: Investing, LendingClub

LendingClub Note Selection – Payment to Paycheck Ratio

July 21, 2011 Leave a comment
Payment to Paycheck Ratio

Screenshot from lendingclub.com

Please note that I have read some other articles after the writing of this article that covers the same subject under different names. I don’t claim to have invented the “Payment to Paycheck Ratio”, I just used it before I read any articles that talked about similar topics.

I pay very close attention to what I call the “Payment to Paycheck Ratio” when searching for a suitable LendingClub note to invest in.

Think about it. The basic necessities of life come before paying off a debt. What would be your choice if you had to choose between food, shelter, or paying off a debt one month? For this reason, I do not invest in borrowers whose payments are a large percentage of their monthly salary. My theshold is 10%. This means if someone makes $5,000 a month, I will consider investing in a note where the borrower has to pay up to $500 a month. Anything more and I have to read the fine print.

The screenshot above shows an example of someone with a validated monthly income of $6,667 per month. Their payments are $275.72 per month so that equates to about 4%. I would consider investing in this note, and it is actually a note that I am currently invested in.

This rule that I follow is a tool to mitigate risk. Just because this ratio is over 10% does not mean the note is a bad one or will become a bad one. I am attempting to find higher quality notes by using this parameter. The other side is true as well. Just because the note meets my constraint, that does not mean it is a good note or will pay to maturity. There are many other factors that can make even a 4% Payment to Paycheck ratio fail, such as high rent or high expenses.

Categories: Investing, LendingClub

LendingClub Portfolio Composition

July 18, 2011 Leave a comment
LendingClub Portfolio Composition

Screenshot from lendingclub.com

I had spoken about risk mitigation in my introductory post about LendingClub and I want to expand on that topic here. My research revealed to me that LendingClub screens their applicants fairly well and only a small percentage actually are approved to borrow on the site. Most of my research has been studying their SEC 10-K and 10-Q filings. Most people don’t know about these reports, but they contain important financial information and insight on how the company operates. Since I am an experienced stock market investor, I comb through SEC filings regularly as one of my research tools.

Mix Up the Risk

Another article about diversity. Oh boy, when will people stop talking about this subject! Never. Some believe diversity is the “only free lunch.” I know diversity is an important tool in risk mitigation. I have included my current composition chart on LendingClub by Grade. As you can see, I have invested in as many Grade A notes as I have in Grade D loans. I wanted to strike a balance of higher returns and lower default rates so I decided to go with a dumbbell type composition. Actually, I take that back. The truth is I messed up at the beginning and didn’t quite do enough research so I ended up investing in a lot of lower grade notes that resulted in a huge hit to my principal.

I’m trying hard to bulk up my portfolio with more A Grade notes bought at par. I can’t seem to find any good ones selling below par, which is to be expected. I can only assume that the people who sell high grade notes at par need the cash in the near future or believe their note is riskier than its original grade. You have to be careful and review these carefully!

A balanced portfolio consists of all types of notes. You can easily make modifications by investing heavier on A Grade if you want to be more risk adverse. The opposite is true if you want to take on more risk. There is no magic formula. It all depends on how much risk you want to take on, which really depends on how much risk you can afford to take on. Let me remind you. Only invest money at LendingClub that you can afford to lose, similar to investing in the stock market.

Interesting Information

A scan of the latest 10-Q filing revealed that the current default percentage of A2 through A4 notes are actually lower than A1 loans. The actual numbers are below.

  • A1 – 0.83%
  • A2 – 0.52%
  • A3 – 0.68%
  • A4 – 0.53%
  • A5 – 1.08%

There was also an interesting correlation with the percentage of notes 30+ days late. The actual numbers are below.

  • A1 – 4.00%
  • A2 – 0.00%
  • A3 – 0.76%
  • A4 – 0.33%
  • A5 – 0.68%

My theory behind this is that many A1 Grade borrowers are new to borrowing and end up defaulting because they miscalculate how much they can safely borrow. A high credit score can mean very little borrowing has occurred in the person’s lifetime. A lot goes into calculating how much a person is able to borrow and people who have not borrowed before miss many of the factors.

I find it interesting that the A1 Grade notes are actually the second riskiest A Grade notes, behind A5 Grade notes, according to the most recent “default” percentages that the 10-Q shows. The A1 Grade notes actually have the worst “30+ days late” percentage of all the A Grade notes!

Are you scratching your head? I am!

Categories: Investing, LendingClub

LendingClub Payments Received

July 14, 2011 Leave a comment
LendingClub Payments Received

"Dollars and Cents" by posterize on freedigitalphotos.net

I have received payments on 4 of my notes and they have all been on time so far. I have not invested fully yet because I wanted to wait until a few rounds of payments came through before I continued. Let me reiterate at this time that notes priced higher than their remaining principal should not be bought unless you are sure you want to take that chance. Read up on the mistake that I made, which could cost me 3% on the principal of my purchased notes right of the bat.

As of right now my loan status is as follows:

  • In Funding (0)
  • Issued & Current (11)
  • Late 16 – 30 Days (0)
  • Late 31 – 120 Days (0)
  • Fully Paid (0)
  • Default (0)
  • Charged Off (0)

I’ll get into percentages later when there is actually something worth while to report on! My thoughts right now on this lending platform is mixed. It seems like a really good way to help other people and make a bit of money by way of interest payments. I guess I am anxious because I already got blindsided right off the bat. It was my own fault of course.

We’ll see what happens as time progresses.

Categories: Investing, LendingClub

LendingClub Trading Alert

July 7, 2011 Leave a comment
LendingClub Trading Alert

"Man Looking at Loss" by digitalart on freedigitalphotos.net

As I do more and more research in the LendingClub trading platform operated by Folio, it seems riskier and riskier. The notes trade very similar to bonds and if you aren’t knowledgable on bonds and how they are priced, then you can lose a lot of money. Let me try to explain one pitfall that I see for the average person out there that thinks they’re doing something similar to lending if they buy a note.

Principal

The “principal” is the base amount of money that the borrower borrows. This value is one of two basic parts of every note. The other part will be covered further down. A portion of every payment that a borrower makes goes to the principal of the note. If a borrower pays more than the minimum payment, the extra amount all goes to paying the principal. This brings me to point #1, if the borrow pays the loan off early then you will miss out on future interest. This is not a huge problem if you are an original lender since you are promised to get your principal back. This is a huge problem if you are a buyer of a note that has been priced above its outstanding principal. More on this later.

Interest

The “interest” is the extra amount of money that a borrower pays for the privilege of getting a loan. It depends on the loan’s interest rate, which depends on many other factors such as the borrower’s credit worthiness. The interest portion of a note is not guaranteed. The only way you get the full amount is if the borrower pays every month through full life of the loan. If the borrower pays the loan off earlier, then you miss out on all interest that hasn’t been paid.

Danger

Here is the danger when you are buying notes on the trading platform. If you buy a note at a price that is higher than the outstanding principal left on that note, then you have more to worry about than the loan defaulting. You also have to worry about the borrower paying the loan off early! We all know we lose money if a loan defaults. I am not going to explain defaults here. I do want you to pay close attention to the outstanding principal on notes and make sure you want to take the risk of paying more than what’s left.

Say you see a note for a loan that originated at 15% and the borrower has been paying the loan off on time for a year. You may be tempted to purchase the note at a premium and still be able to receive a  perceived 13% return if all goes well. Chances are that you will be paying 2-3% more than the outstanding principal left on the note. These are not exact numbers, but they’re close to how it works. If the borrower decides to pay the loan off in full the next month, you’ve lost 2-3% on your investment.

I would suggest that you purchase notes that are selling at a discount or as close to par as possible. Keep in mind that there is probably a good reason that a note is selling at a discount so do your research!

Categories: Investing, LendingClub

LendingClub Notes Purchased

July 6, 2011 Leave a comment
LendingClub Notes Purchased
Screenshot from lendingclub.com

Oh yeah! I purchased my first few notes today after scouring the available notes for hours upon hours. My fund transfer finally completed and I was surprised to see a few extra cents in my account. Apparently LendingClub debits less than a dollar from your bank account to confirm that the account is yours. You enter the amount you see on their website and then your bank account becomes linked. They deposit the money back though!

There really weren’t that many notes on the trading platform that I was interested in. I have extremely particular requirements, though they are subject to change as I learn more about the market that I am in. There was a moment, towards the middle of my research, where I decided to open up some of the most grossly delinquent loans just to see what their descriptions looked like. I had pictured bad spelling, little information, and high revolving debt amounts. I was horrified to see that many of them would have been the types of notes that I would have invested in!

All it takes for someone with great credit to default on a loan is job loss or an unexpected emergency. For example, I saw a note where the borrower had a few thousand dollars in recurring debt, a $6,000 a month confirmed salary, and a LendingClub loan payment of $300 a month. Under normal circumstances, a 5% payment would be easy. This note is now multiple months late and a collection agency has taken over. Needless to say, this note was listed at pennies on the dollar and I wouldn’t touch it with a 10 foot pole.

In true engineering form, I made a spreadsheet of the notes that I purchased today. If all goes well and there are no defaults, my percentage gain will be 9.4%. That is just slightly off the 9.6% average that LendingClub advertises.

I’ll go into the strategies that I am using once I become more invested. Right now I am only slightly invested and am mostly still in cash.

Categories: Investing, LendingClub

LendingClub Money Transfer

July 2, 2011 Leave a comment

LendingClub Money Transfer

Call me a silly goose, but I got excited this morning when I saw that my LendingClub funding had transferred out of my bank account. I immediately logged into LendingClub, but to my dismay, the money had not posted there yet. So right now my money is floating somewhere between my bank account and my LendingClub account. I feel a bit weird about that. LendingClub probably has it in their coffers, but they have not transferred into my account yet. My bank account doesn’t show the transaction as pending so I know it is no longer in there. How interesting!

I am really excited to start buying notes at LendingClub for various reasons. So many of the top financial bloggers that I read have found success at LendingClub. This is by no means a “get rich quick” scheme. You’re lending money to someone and they’re making monthly payments to you. I’m not able to lend directly to a LendingClub borrower here in Texas, but I will be purchasing notes on their trading platform. I like the fact that I can see the borrower’s payment history, which is something that is not available if you’re funding the new loan.

Multiple income streams can lead to financial independence. This site isn’t about financial independence as much as it is about net worth growth, but I won’t complain if I find financial independence as I grow my net worth! LendingClub is one of many income streams that I hope to build. Here is a small list of possibilities.

  • LendingClub
  • Dividend Stocks (including Master Limited Partnerships)
  • Savings Account
  • Rewards Checking Account
  • Certificates of Deposit
  • Bonds

I hope to figure out some more streams of income as I learn more about new financial instruments. Afte I get my LendingClub account going, I plan on setting up a dividend stock portfolio. I’ll keep everyone up to date about that through our monthly newsletter. If you want to stay updated, please subscribe by clicking here.

Categories: Investing, LendingClub