p2p lending — 3/4 — Beating Broke

Lending Club Returns 1Q2012 Update

April 18, 2012 By Shane Ede 15 Comments

If you’ve been following along, you know that I’ve been performing a bit of an experiment. I’ve been taking 10% of my earnings from this and other online ventures and splitting it evenly between Lending Club and Sharebuilder accounts. The idea was to see what kind of returns I could get from the two, and to test for stability. I’ve been running the experiment for a little over 6 months now, and I’m calling it done. The difference has been so drastic, that I don’t think there’s any point in running it any longer.

In short, Lending Club is kicking Sharebuilder’s butt. Really, the only thing that the Sharebuilder account has going for it is that the chance of default on any of the investments is extremely low. So, I suppose that it is possible that in 5 or so years, the gains on the Sharebuilder account could potentially be better. However, as I’m about to show you, the short term results are strongly in Lending Club’s favor.

My Lending Club Returns

As of today, Lending Club is telling me that I’m seeing a return of 13.15% on my account. My Sharebuilder account is currently reporting a return of -16.42%. It doesn’t take a math major to come to the conclusion that Lending Club is performing far better. To date, with a bit over 2 years of total history, I haven’t had a default in my Lending Club account. I’m pretty sure that has more to do with just getting lucky, than with any effort of my own. Some other interesting numbers, besides the return: The portfolio has grown enough that it brings in enough in principle + interest payments to reinvest monthly now. The monthly interest gains, as of the end of March, have now exceeded $4 monthly. It’s not much, but it’s been fun watching that number grow.

My Lending Club Portfolio

When I first started out investing in my LC account, I was investing in mostly A, B, and C investments. I’ve recently shifted that to be mostly C and D investments. Why? Well, as I mentioned in my post on selecting Lending Club investments, I have to purchase my investments through their trading platform rather than directly invest in the loans. What that means is that in most cases, I have to absorb a small percentage of profit to the original investor. So, a loan that has an actual interest rate of 14% might only return 11% to me because I bought it at a higher price than what it was worth in principle at the time. Because of that, I have to invest in the higher grade loans in order to maintain a higher return rate. But, I’m OK with that. Even the worst graded loans that LC has are still well above what a traditional bank or credit union would lend to. And, at less than $25 per investment, I can afford to take the risk. I’ve diversified the account so that one or two defaults isn’t going to destroy the account. Sidenote: If you can buy your LC loans directly, I suggest you check out Peter at SocialLending.net’s post on how he’s investing in 2012. He’s got several filters and some interesting insight into how he’s set up his investing that are worth the read. They’re somewhat useless to me because of the way I have to invest, but will be useful to someone who can invest directly.

Lending Club, Going Forward

With the end of the “experiment”, I’m now putting the full 10% that I had been splitting into my Lending Club account. The overall total for the account is still at less than 3% of my overall investment portfolio (including retirement investments), but it is growing. At some point, I’ll have to decide if I want to continue to add to the account or not, but with the returns that I’m getting, and the luck I’ve had in the default area, I can’t see wanting to stop investing in the account.

Have you given Lending Club a try yet? How have your returns been? What’s your default rate?

The Lending Club IRA : Peer-to-Peer Enters the Retirement Realm

February 3, 2012 By Shane Ede 8 Comments

You already know that I like Lending Club as an investment vehicle. The returns are good (or great, depending on your default rate), and I like the idea that my money isn’t going to line the pockets of some corporation, but is being used to help someone who needs a loan get a better rate than they might get at a financial institution or through credit card usage.

Recently, Lending Club started offering IRA accounts to the lenders. My first thought, was something along the lines of “that sounds kinda cool”. But, then I got to thinking about it. Many of us struggle to put money away for our retirements. Do we really want what little money we have put away in an investment that carries as much risk as Lending Club notes carry? I like risky investments, but even I don’t think I’d want all of my retirement money in these notes.

One use that could redeem it is using it as a supplemental IRA. If you’ve already got a 401(k) and an IRA that you use to invest in more traditional, lower risk, investments, you could use a Lending Club IRA as a way to diversify further and add a little more risk to your portfolio. That would also allow for keeping a higher percentage of your 401(k) and standard IRA in investments that are a little less risky. Of course, that would also mean balancing your investment portfolio over several accounts.

I tried to figure out some of the finer details of the Lending Club IRA through their site, but either it isn’t all that clear, or I’m just a bit dense. 😉 So, I emailed them to get a few questions answered. Here’s what I found out. The accounts are administered through a company called Self Directed IRAs. I’m not all that familiar with what a self directed IRA is, but it basically looks like an IRA account that you can use to invest in just about anything. They offer several different IRA “types”, so it will depend on which the LC IRA falls under to determine what other investments you can add to your account besides the LC notes. It doesn’t seem out of the question to assume that you would be able to invest in stocks and such as well. (I’ve replied to the email I got to try and determine this for sure) Based on what I was seeing on the administrators website, it was looking like the account might be pretty heavy in fees. The email from Lending Club managed to answer that question as well.

There are no fees associated with a Lending Club IRA with a balance of at least $5,000 in the first year (you have all year to reach this), or $10,000 in the second year and beyond.

If you don’t meet those requirements, the account carries a $100 annual fee. Pretty hefty if you don’t meet the requirements. There’s two ways to look at that, however. If you’re IRA is large enough, it shouldn’t be a problem to keep $10,000 in Lending Club notes and still keep your risk diversification. If you’re IRA is smaller though, you’d be automatically raising the risk of the account my meeting the requirements.

Anyway you look at it, I don’t think it will be the most popular IRA account around. But, it’s nice that they offer it for those of their customers who want a tax sheltered way to take advantage of peer-to-peer investing. You can read more over on their site: Lending Club IRA.

What are your thoughts on the Lending Club IRA? Too risky for retirement funds? Good as a part of the retirement portfolio?

Selecting Lending Club Investments – How I do it

August 24, 2011 By Shane Ede 22 Comments

As I mentioned in my previous post on finding a Real Rate of Return for My Lending Club Portfolio, I am unable to invest directly into the loans on Lending Club. There’s some regulatory issue between Lending Club and my state that makes it that way. So, I have to purchase my investments through their note trading system called foliofn. Not a huge deal, but it makes it a bit more interesting.

Using the Lending Club foliofn Search

First, I have to search for available investments. They’ve got a decent search, but it’s missing a few key things that really would make it top notch. Here’s what you’ve got as far as filters for the search, and, also how I usually set it up when I do a search.

I don’t like seeing anything that’s been late, or is currently late. Late payments don’t show any intention of improving your situation, so I’m not going to take a risk on you if you don’t take it seriously enough to pay on time. You’ll notice that I also change the remaining payments to 56. The max is 60, but it’s hard to eliminate those who have been late if they haven’t had the chance to be late, so this makes it so that a few payments have to have been made. Of course, there are shorter term loans available in Lending Club, so you’ve got to keep an eye out for those. I don’t really limit the rates at all. I’ll explain why in a moment. Here’ s a sample of the results you’ll see when you do a search (click to see bigger).

Selecting Lending Club Investments

As you can see you get a really basic overview of the available loans. They’re all sortable. I usually sort by Asking Price because I usually have a set amount of available funds in my account and I want to purchase investments that will come as close as possible to exhausting those funds. There are three things that I pay very close attention to when I’m shopping for investments here. The first is the Credit Score Change. This is a visual indicator of whether the borrower’s credit score has gone down, up, or stayed the same since the loan was issued. I only buy loans where the credit score has gone up. It’s indicated by a green arrow that points up and to the right. Again, this is a personal preference, but I want borrowers who are want to improve their situation. It’s what this site is about, and something that I feel strongly about. I like to think of it as ethical investing.

The second thing that I look closely at to compare the term of the loan with the remaining payments. This goes back to the late/never late thing. I’m able to eliminate loans that have been late through the search if the term of the loan is 60 months, but not if it’s anything shorter than that. I’m looking for loans that have made at least 2-3 payments. Finally, and most importantly, I look at the Yield to Maturity field. If I could change one thing about the search on foliofn, it would be to add a way to filter by this field. Here’s why. Because foliofn is a secondary market for these investments, you aren’t necessarily paying the price of the remaining principle. The seller is able to set his own price for the investment. So, the interest rate on the loan isn’t necessarily what you will earn on the loan. The Yield to Maturity field shows what the yield on the loan will be when it is paid off. This field will vary. That’s also why I don’t limit the interest rate in the search, although you could if you were looking for a certain credit level of loan to invest in. If you look at the example above again, you’ll see that the investments shown would be very, very bad choices. Where you draw the line for the yield will vary based on your personal preferences, but I usually won’t buy any of them unless they are at least 5%.

Further Thoughts and My Results

My goal is to maintain a higher interest rate than any savings account, while maintaining a medium-high risk level. This means that my portfolio is weighted towards the C-D range loans. I still keep it diversified amongst the different rate levels, but it’s heavier in that area. You’ll notice that the results don’t show what range the loan is. For that reason, it’s handy to know, generally, what the interest rate ranges are for each of the loan credit ranges. Using the interest rate (not the yield to maturity) field, you can guess where the loan lies.

So, all that goes into it. I look for an investment that has a upward trending credit score, that hasn’t been late and has made at least 2-3 payments, and that has a Yield to Maturity of greater than 5%. My portfolio is still rather small, so I try to keep individual investments to a $20-$40 range. I just don’t want to put too much of the portfolio in one loan and then get caught with my pants down if it defaults. As the portfolio grows, I’ll likely increase the upper end of this range. So far, I have had 4 of the investments paid off. Two of them have been paid off early. I have had no defaults. That’s a screen grab of my real return on the left. Adjusted for inflation, using the formula in my previous post, it’s still above 10%. Try and get that anywhere right now. My 401(k) is at -0.85% YTD, and my local bank pays 0.25% on savings accounts. Sure, it’s riskier, but I feel the increased return outweighs the increased risk, and I think it will keep it’s place as part of my investment strategy.

I feel that I should make a disclaimer here. I’m not an investing professional. None of this should be taken as advice, but merely an amateur sharing information on my portfolio. See an investing professional if you’re looking for advice. Otherwise, feel free to share your stories in the comments! And, as always, if you liked the post, please take a moment to share it using the bar on the left hand side, or at the bottom of the post.

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