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Old 10-10-2012, 11:03 PM   #21
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Nords -

I'm still at the $25 per loan level until I reach 800 'active' loans- right now I'm at about 730 loans in portfolio. When I reach 800, then I'll step it up to $50/loan.

I think what I am doing now is scalable by up to one order of magnitude- I would just add a zero to the $25 per loan figure. I have not had trouble applying my filters and moving the necessary amount of money per month (I call it the 'churn'- which is just under 6% of your account value per month that will always be in play when you are funding 36-month loans).

From what I am reading, investing much more (probably upwards of $500k) in LC will place you in 'loan shopping' competition with institutional investors- not a food fight I want to get involved in.

BTW I have largely steered clear of 5-year loans. I figure that if the primary reasons for default are medical, divorce, and loss of job, then you are almost doubling your default risk by funding 60-month loans instead of 36-month loans.
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Old 10-11-2012, 10:31 AM   #22
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Good that LC has a collections process built in that the lender doesn't need to initiate. Looks like it takes too much day to day babysitting for my taste though, and no collateral for the loans? Not liking that. Our alternative is hard money loans.

An example:

On 7/18/12 we lent $75k on the Summer St. house. It got a known flipper's repairs and staging, and is expected to close and pay back our loan by the end of the month. Pretty quick flip, we'll have collected about $1875 in 10% interest for the three months plus $300 in thanks-for-funding-this-one bucks. We drove out and walked through the house, spent maybe an hour including drive time, maybe a couple hours w/ drive time at the title office, and maybe an hour setting up and entering monthly payments in Quicken.

2746 Summer St SE, Salem, OR 97302 - Zillow
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Old 10-11-2012, 10:37 AM   #23
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Originally Posted by ejw93 View Post
BTW I have largely steered clear of 5-year loans. I figure that if the primary reasons for default are medical, divorce, and loss of job, then you are almost doubling your default risk by funding 60-month loans instead of 36-month loans.
I think you have a canard there. People who take out 5 year loans aren't much more likely to have a default event than 3 years, and unless you're doing a 3 year and then taking your money out, the next 3 year loan you reinvest in will have the same annual chance of a default event...since nothing in the loan data will help you avoid death, divorce, medical issues or a job loss.

The 5 year loan data isn't as fully developed as the 3 since the 5's are new, but the payments on the 5's are often lower than 3's, but of course the payments last longer. One of the reasons why I pick notes where the payment is close to or below 10% of gross...makes them easier to finish paying. The 5's are also often larger loans, and curiously a large loan is more likely to be paid back than a really small one. I do eyeball the ones where they show $19k in revolving debt and want 35,000 (the max) for their loan...

I've really been amused by some of the "blogs" on this, especially the one where the guy suggested you could take out a loan, buy a car and then thumb your nose at LC. Hope he enjoys the 200 point drop in his fico score.

Doug, not sure why you couldn't leave this for a couple of days. I could leave it for 5 years. Money would be sitting in a non interest bearing account with no fees or charges, just like my checking account.

Despite the poo-poo'ing, still not hearing of any good alternatives for a huge hunk of cash other than "buy more equities", which sort of destroys the purpose of a big hunk of emergency cash intended to provide income when the market is down and I don't want to sell equities.

So my structure is like this:

- ~1.5 years cash in the checking account
- Another years cash maturing mid next year in a penfed 6.25% cd
- $70k in lending club, which can throw off 0-2500/mo cash flow, rest is as liquid as the secondary market I consider these short-medium term bonds bordering on the junky side with a 5-6% default rate
- 40 years of equities with a big slice of emerging market, oil, and non US dividend payers, with reits and dvy. About 4.5% yield paying into the checking account and covering ~75% of my annual budget

Basically the LC piece will slide into the secondary role after the last CD matures. Market goes bonkers again, I start drawing steady income from the LC piece along with the dividends and wait for share prices to rebound. Market behaves and goes up, I harvest some equities to puff up the checking account.

I'd normally use CD's and short term bonds for the second bucket. But those don't pay enough to bother. Even at a paltry 5-6% (much lower than what we're hearing about here) its as good as the penfed cd's people were gobbling up 5-6 years ago.

Seems also to be a nagging opinion that this is hard, takes a lot of time or requires persistent maintenance, none of which have to be true. You could drop 50k into an account, pull up the whole notes list when they have 2000-2500 notes, which happens often, use your filters to plink off a few of the most egregious default items, click 'invest' and then periodically decide whether to schlork money from the holding account over to a bank or to push the button again. Or you can mess with it for 5-10 minutes a day between checking facebook and reading email. Or you could write software or excel macros to do complex analysis and make a semi part time job out of it. Its not like most early retirees are holding on for dear life because they don't have enough leisure time and too many ways to spend it...
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Old 10-11-2012, 10:43 AM   #24
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Oh and this may sound funny, but this might be better than an annuity. While it doesn't have the rock solid alleged security, the running default and interest rates when you're well diversified gives you a fairly persistent income, as ejw93 notes.

Persistent income without funding an insurance company's 100 story building downtown!

Thanks rbmartin for the pointers to some development tools. About all I want is the old school quickbasic where you get a prompt, type in ten lines of old school "open the file, read until end, check 10 fields for criteria and write a line into a second file if I find a hit" code and run it. I'll look into the stuff you provided, as I need to do this sort of thing every once in a while and I'd hate to learn another language or a big time development package to do something simple.
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Old 10-11-2012, 12:33 PM   #25
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Thanks for some good filter ideas, CFB. I just tweaked my filters (that sounds dirty!) thanks to you.

I'm using Prosper and only have a few $100 there. Am watching it grow a bit before it gets any serious cash. Want to get a feel for the thing...
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Old 10-11-2012, 12:37 PM   #26
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People who take out 5 year loans aren't much more likely to have a default event than 3 years
Actually it looks like they are. If this data is to be trusted, 5-yr loans are siginificantly more likely to default over any given time period:

Random Thoughts: Lending Club Loan Length and Default Rate

Since seeing this, I've been favoring 36-mo loans.

On another note, what do you make of the many loan listings in which the employer is listed as "n/a", even when there's a hefty monthly income shown?
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Old 10-11-2012, 05:01 PM   #27
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Actually it looks like they are. If this data is to be trusted, 5-yr loans are siginificantly more likely to default over any given time period:

Random Thoughts: Lending Club Loan Length and Default Rate

Since seeing this, I've been favoring 36-mo loans.
The writer forgot to model adding two years of a new 3 year loan to the end of the 3 year data to get an equal footing for the two. I'm willing to bet that two 3 year loans suffer more defaults than one 5 year. But there also isn't enough useful data going back far enough to tell for sure.

The one thing I do know is if you exclude 5 year loans on data like this, you're significantly reducing your available notes. So far I'm seeing zero correlation between loan length and default status. In fact, so far I'm seeing very little correlations at all in my late notes.

Quote:
On another note, what do you make of the many loan listings in which the employer is listed as "n/a", even when there's a hefty monthly income shown?
That means they're self employed. I scanned a ton of data and never found anything really solid about it, except that self employed borrowers pay late more often than regular employees, but they're also less likely to default. Cash flow problems cause the lateness, but the ability to create additional income when needed helps on the defaults. But I'd take their income with a grain of salt, unless its verified. Then you have the funny stat that verified income loans default more than unverified ones. My guess on that was something smelled fishy, calling for the verification. Income might have been okay, but the fishiness remained.
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Old 10-11-2012, 05:26 PM   #28
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His second chart compares default rates quarter by quarter, starting at loan commencement. In all quarters the default rate of 5-yr loans is much higher than 3-yr loans. So I don't see how the extra length of 5-yr loans makes a difference here? We haven't even reached the fourth year of the oldest 5-yr loans.



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That means they're self employed.
Or retired?
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Old 10-11-2012, 05:39 PM   #29
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His second chart compares default rates quarter by quarter, starting at loan commencement. In all quarters the default rate of 5-yr loans is much higher than 3-yr loans. So I don't see how the extra length of 5-yr loans makes a difference here? We haven't even reached the fourth year of the oldest 5-yr loans.
It could be simply that the type of borrower changed or that lending club became more popular and a wider group of borrowers came in, or its because they're taking larger loans. I've seen this thrashed to death by people far more skilled in statistics than I am. For the most part, about 95% of what I see written about the LC process and the data is pretty unscientific and involves a lot of assumptions. From the prairie dog view, I'd have a hard time figuring out how a 10k loan at 3 years would default more than a 10k loan at 5 years, with a lower payment. Since a lot of early defaults come because the borrower took on more debt than they wanted or were able to pay, and its fairly random, I'd think that having to deal with two borrowers over the same time frame, both with larger payments, would be better.

I know that when I looked at it about six months ago, there was no clear cut data either way, and it sort of looked like a 5 year loan would be better. Either way any points offered were leaking badly from several holes. I think its a canard. There is a lot of thin data, a lot of faux correlation.

This also drives the LC people nuts. The loan grade, fico score and a bunch of other evident factors are probably 95% of what we need to know to write a loan. All this other stuff is just trying to snip off small bits of the default rate.

Quote:
Or retired?
Yep, it just means they don't have a formal employer, and they shouldn't list the name company they own. Probably part of the confidentiality of the thing...if you said what business they owned and where they lived (and we have the latter) you could figure out who they are. As it is, I've written several loans to people working for businesses in the area with a small number of employees, and with their loan app info I could find out who they are.

Otherwise (for other folks reading this), you don't know who your borrowers are aside from where they live and work, and they don't know who you are either. Keeps people from taking the loan sharking collection efforts into their own hands. Thats also a tipoff that you're dealing with a less than intelligent borrower, when they put their name in as the loan description or some other part of the visible application process.
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Old 10-11-2012, 10:39 PM   #30
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I'm still at the $25 per loan level until I reach 800 'active' loans- right now I'm at about 730 loans in portfolio. When I reach 800, then I'll step it up to $50/loan.
I think what I am doing now is scalable by up to one order of magnitude- I would just add a zero to the $25 per loan figure. I have not had trouble applying my filters and moving the necessary amount of money per month (I call it the 'churn'- which is just under 6% of your account value per month that will always be in play when you are funding 36-month loans).
Thanks-- I'm looking forward to seeing how that works out.

Do the P2P companies or the borrowers have any obstacles to getting a $250 chunk of a loan instead of $25? (My typing fingers insist that those numbers should be "$250K" and "$25K".)

I wonder who these institutional investors are and what IRR they're getting.

When I started reading up on the subject, I hadn't even considered the churn rate. Just one more complication.

P2P lending discussions are beginning to sound like the 1990s threads on commodities and New Zealand timber farms. They're not necessarily bad investments, and they certainly offer a measure of diversification, but I'm not sure that the effort is worth the risk/yield. The challenge of figuring out the unknowns and exploiting them for profits? Certainly. Entertainment? Absolutely. A decade or more? Not so sure about that.

What IS worth the risk/yield? A boring ol' portfolio of diversified asset classes where nobody's tempted to chase yield just because one of the assets is returning less than double digits.
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Old 10-11-2012, 10:40 PM   #31
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Good that LC has a collections process built in that the lender doesn't need to initiate. Looks like it takes too much day to day babysitting for my taste though, and no collateral for the loans? Not liking that. Our alternative is hard money loans.

An example:

On 7/18/12 we lent $75k on the Summer St. house. It got a known flipper's repairs and staging, and is expected to close and pay back our loan by the end of the month. Pretty quick flip, we'll have collected about $1875 in 10% interest for the three months plus $300 in thanks-for-funding-this-one bucks. We drove out and walked through the house, spent maybe an hour including drive time, maybe a couple hours w/ drive time at the title office, and maybe an hour setting up and entering monthly payments in Quicken.

2746 Summer St SE, Salem, OR 97302 - Zillow
Hi Calmloki, I wondered if this lending thread might call you.

Cute house. I don't see the sale that you funded on this listing. Can you tell us what the flippers paid for it, and when? Did you provide purchase money funds and get your lien in escrow?

That certainly is a good profit. I supose you have learned who the honest and efficient flippers are.

Do you do this as something that spins off earned income? So you could fund an IRA or Roth if you want? At the cost of paying self employment tax I guess. Not sure if that is a good deal or not, but thinkng about it IRS regs might classify you as a business no matter what you want?

Or is a schedule B interest reporting?

Ha
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Old 10-11-2012, 10:51 PM   #32
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- $70k in lending club, which can throw off 0-2500/mo cash flow, rest is as liquid as the secondary market I consider these short-medium term bonds bordering on the junky side with a 5-6% default rate
So are you there yet? How long are you planning to maintain that level of investment?

How many loans in the portfolio, and is the $70K spread out evenly across them or is more invested in certain loan types?

When I divide $2500/month into $70K I get a lot more than the IRRs that people have been discussing. What goes into that $2500/mo figure?
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Old 10-12-2012, 07:36 AM   #33
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Is there any info on if defaults do occur how long they start after loan initiation? I wonder if you could churn notes on a short timeline and reduce default risk? However this is more work of course I guess you could the auto select option. And the assumption would be a strong secondary market to off load loans.

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Old 10-12-2012, 08:44 AM   #34
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Gold flees the man who would force it to impossible earnings or who follows the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment

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Old 10-12-2012, 09:51 AM   #35
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So are you there yet? How long are you planning to maintain that level of investment?

How many loans in the portfolio, and is the $70K spread out evenly across them or is more invested in certain loan types?

When I divide $2500/month into $70K I get a lot more than the IRRs that people have been discussing. What goes into that $2500/mo figure?

I am sure he will respond, but I think he is including return of principal...

$70K/36mths = $1,944 without any interest.
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Old 10-12-2012, 11:06 AM   #36
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Howdy Ha -

The flippers negotiated with the bank directly and hammered the asking price down hard, we provided the $75k purchase price at the closing 7/18; this is a flipper we've been impressed with and I commented on in the past. We did not fund improvements or repairs. While I wanted to claim this was a business to write off a nasty bad loan in one year our tax person smacked me upside the head and we are declaring our lending proceeds as ordinary interest income.

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Hi Calmloki, I wondered if this lending thread might call you.

Cute house. I don't see the sale that you funded on this listing. Can you tell us what the flippers paid for it, and when? Did you provide purchase money funds and get your lien in escrow?

That certainly is a good profit. I supose you have learned who the honest and efficient flippers are.

Do you do this as something that spins off earned income? So you could fund an IRA or Roth if you want? At the cost of paying self employment tax I guess. Not sure if that is a good deal or not, but thinkng about it IRS regs might classify you as a business no matter what you want?

Or is a schedule B interest reporting?

Ha
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Old 10-12-2012, 11:12 AM   #37
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So are you there yet? How long are you planning to maintain that level of investment?

How many loans in the portfolio, and is the $70K spread out evenly across them or is more invested in certain loan types?

When I divide $2500/month into $70K I get a lot more than the IRRs that people have been discussing. What goes into that $2500/mo figure?
Yeah, the 2500 would involve withdrawing capital along with interest, and it'd dwindle down to nothing after ~5 years. But thats its purpose, a cash cushion in place in case my checking account gets low and I need cash flow until the market picks up. As I mentioned, I'd use CD's or short term bonds, but I like 10-12% a lot better than less than 1%.

I can see that you're working hard to make this sound harder than it is, and you're right it isn't for you. If I had two large military pensions to cover all of my expenses and then some, contraptions to create income wouldn't look that interesting to me either.
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Old 10-12-2012, 11:26 AM   #38
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So are you there yet? How long are you planning to maintain that level of investment?

How many loans in the portfolio, and is the $70K spread out evenly across them or is more invested in certain loan types?

When I divide $2500/month into $70K I get a lot more than the IRRs that people have been discussing. What goes into that $2500/mo figure?
Yes, I'm there. I have roughly 1900 notes, 95% of those are $25, the rest range from $50-500. Yes, that auto invest tool coughs up some large loan segments when your filter is picky.

I'll maintain it until I can get relatively good cash flow and better returns from anything else. Since interest rates are slated to be near zero for another 2 years, at least two years.

As I mentioned a couple of times in the 'ten year' thread you pointed to and in this thread, I only invest in credit card consolidation, debt consolidation, car loans and home loans. Everything else has a higher default rate and some loan types like small business, education and renewable energy are money losers.

Its strictly an interest bearing lump of bonds paying back interest and capital daily, usually in the $100-300 range per day. I can let that accumulate, I can reinvest, or push a button and move it to and from my checking account.

Another random point of interest...lending club was quite handy in that when you link accounts it doesn't seem to matter if the account ownership matches. I had no problems linking it to a joint account with my name on it, sloozing all the money out of that to LC, then pushing it back into a non joint account somewhere else.
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Old 10-12-2012, 11:35 AM   #39
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Is there any info on if defaults do occur how long they start after loan initiation? I wonder if you could churn notes on a short timeline and reduce default risk? However this is more work of course I guess you could the auto select option. And the assumption would be a strong secondary market to off load loans.
You can do all sorts of stuff. In some states, they can buy secondary notes already issued, but can't buy new notes, and people frequently dump their LC notes due to death/divorce/whatever. Some people never buy new notes but do a nice little business on salvage.

You'll see little default waves for the first 11 months or so until the loans are considered 'seasoned'. You can actually sell a good interest rate seasoned note on the secondary market for more than face value.

You'll see a little blip, in my case about 6-7 notes that went late the first month. Only one never paid, a $5k wedding loan that didn't have any questions asked before I invested, but did after and had I seen those...well...looks like someone was living in moms basement, thought they were getting married, and then their spouse to be saw their comments on LC and ran like hell. A lot of those lates just paid the money back.

Two went into chapter 7 bankruptcy within a couple of months. I'm annoyed that they can do that and not get "eh, thats fraud, so cough up the money or go to jail for a while".

Then things settled with only an occasional late, and I've run at about a 2:1 ratio of people paying all the money back to people who are late. I'm in the 7-11th month window where I'm supposed to get the bulk of my lates, and I've had a bubble of about 10 the last 2 weeks.

By my estimates, if I have 75 defaults this year, I'm just slightly better than average, and I have around 25 right now. Looks like I'll be a lot shorter than 75.

After that, its death, major illness or injury, divorce or significant long term job loss. Over the next 5 years I expect 100-125 notes to go belly up.

Looking strictly at comparing the income to default rate, I've got ~4k in interest right now, ~1K in lates, and they gave me $1000 to try it out. If I keep a ~3:1 ratio of interest to lates, I'll hit around 12%. After recalculating the LC NAR to a real return, it'll probably be around 10%.
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Old 10-12-2012, 11:41 AM   #40
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The Gold Lender of Babylon – The Richest Man in Babylon, Pt. 5 – Getting Your Financial Ducks In A Row

This was a good lesson for me, and I took it to heart. While a lot of lenders don't mind helping someone pile on more debt than they can bear, hoping to god they can pay it back...I won't do that. The lesson of "Don't help someone get into trouble, because their trouble will become your trouble" is well met.

If I see more than 30k in debt, or that they're paying a big debt load with a meager paycheck, unless they're consolidating that debt, I don't want them. I see a lot of people making peanuts that want a movie star wedding, and a lot of people that according to their spending have been just having a blast with toys and trips, but then all of a sudden they need a new roof and kitchen! Hey guys, if you need 40k for home improvements, perhaps you should plan that out and spend the 40k in credit card debt you're holding on that future need. Even though some have huge incomes and could wade through all of that debt...I don't really want to be a party to that.
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Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
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