Peer to peer lending

[Aiming_4_55]

Sounds kinda like work Does that make one switch from ER to semi-ER since they are researching and taking risk?

I'm half joking, but I guess it can be a hobby. I'm kinda doing my own peer-to-peer lending, but in a different way, but I won;t hi-jack this thread. I'll just update one of my existing threads or start a new one as I'm experiencing "something new".

 

[cute fuzzy bunny]

Sounds kinda like work Does that make one switch from ER to semi-ER since they are researching and taking risk?

How is this different from any kind of investing, unless someone tells you "Go buy an s&p 500 index" or "go buy target retirement 2045", and you do it without learning why? Then you're also taking risks. By that metric everyone with self directed investments isn't retired. But then again, whether you're 'retired' or not is a moving target. There have been many, many days where I'd have preferred to be behind a desk posting to an internet forum and getting paid for it instead of what I ended up doing.

Oh and by the way Ha, my ex-wifes boss does lending club, now that I think about it. Nice lady in her 50's, independently wealthy. Wants this for the same thing I do, nice steady income on standing cash with a decent amount of liquidity.

 

[Aiming_4_55]

How is this different from any kind of investing, unless someone tells you "Go buy an s&p 500 index" or "go buy target retirement 2045", and you do it without learning why? Then you're also taking risks. By that metric everyone with self directed investments isn't retired. But then again, whether you're 'retired' or not is a moving target. There have been many, many days where I'd have preferred to be behind a desk posting to an internet forum and getting paid for it instead of what I ended up doing.

I'm probably in the minority here as investing started in my early working days without much knowledge. HR related brownbag seminar told new employees to save for retirement and here are some options. I carved out a % of my pay and I said sure that sounds like a good thing. I looked at my options in the 401k program, historic data, and picked 3 (Fido Magellan, Contra, and something else) during the meeting. It was set from 1990 to about 2004, contributing 5 - 15%. Fortunately for me, it worked out. In 2005/6, I became a little more aware and determined somewhat of an asset allocation with Vanguard index funds.

 

[fanmail]

I'm very intrigued by this. Going to do some more research, thanks everyone for the great information.

 

[Texas Proud]

Even if the more serious default rate doubles, I'd still eke out 3-4%. Where else can you get something that in the likely worst case scenario still makes money?

That is what banks say.... but we also know that many banks go under because defaults go above what they expect...

The difference here is that you have 100% equity to cover losses and no real expenses you have to cover....

 

[pb4uski]

Interesting thread and a topic that I have been interested in but sitting on the sidelines. I would think of it as a portion of my junk bond allocation. It does sound like a bit of work but I would think that once you have a loan selection and monitoring process established that it would be reasonably easy to maintain and you could put it aside when on vacation.

What are the merits/detriments of LC compared to Prosper? Are the tools very different between the two?

I'm a bit anal when it comes to tracking investments - everything is in Quicken and automatically updates by linking to my investment providers (principally Vanguard). Is there similar functionality for tracking loans and loan cash flow?

Also thought of getting a loan (my credit is excellent) and then turning around and lending (just kidding).

 

[cute fuzzy bunny]

Interesting thread and a topic that I have been interested in but sitting on the sidelines. I would think of it as a portion of my junk bond allocation. It does sound like a bit of work but I would think that once you have a loan selection and monitoring process established that it would be reasonably easy to maintain and you could put it aside when on vacation.

I'm not sure it even requires monitoring. I've been completely unable to tell which grace/late notes are worth selling and so far many of them have eventually paid back all of the money. I think I had about 20 grace/lates pay off, and one that paid after I listed the note for sale. A lot of people eyeball this and fiddle with selling and buying "used' notes. I don't use it, but I understand that mint and quicken can shlork these in and give you returns.

What are the merits/detriments of LC compared to Prosper? Are the tools very different between the two?

Never used prosper. Prosper has been around longer but ran into some trouble in 2007 and 'rebooted'. LC has higher grade borrowers and lower interest rates. I spent a few hours comparing the two and came to the conclusion that I might be able to make more with prosper, and had a chance to lose more. LC had the stats that with >800 notes, nobody has lost $, and prosper doesn't.

Also thought of getting a loan (my credit is excellent) and then turning around and lending (just kidding).

When I found I could borrow @6.5% and lend at 17% with a likely default bringing my ROI to 3-5%, I thought about it. For five seconds. I suppose if your credit rating isnt that important to you, you could pull $35k as an A borrower and lend to the D-G crowd, and if the economy goes back in the hole and they don't pay, you don't pay either?

Meh, not a margin strategy I'd recommend, but I'd probably do it before I'd margin the stock market...and its way more appealing than borrowing money on a heloc and investing it...

 

[Onward]

There really shouldn't be any correlation between LC loan default rates and the stock market.

Unfortunately (for us p2p investors) I expect a pretty strong correlation between the stock market and p2p loan performance. A weak economy will hurt both corporate earnings and, with layoffs, the average person's ability to pay his debts.

There is definitely a strong correlation between the stock market and junk-bond performance.

What are the merits/detriments of LC compared to Prosper? Are the tools very different between the two?

I haven't used Prosper in a while, but I've kept up with its features. The site is on par with LC. Some things Prosper does a little better, and some things LC does a little better. Prosper has been around longer and might have a slightly slicker UI.

 

[cute fuzzy bunny]

There is definitely a strong correlation between the stock market and junk-bond performance.

Ehhh...perhaps but do people working a job and paying on a loan correlate with a corporation meeting their debt obligations?

What affects lending club payback performance is loss of a job, serious injury or medical condition, death, divorce, serious financial mishap or taking on more debt than the borrower can pay. I fix the last one by filtering. I can't do anything about the rest. The only two of those that are economy related are the loss of a job or serious financial mishap, like a housing market crash.

Since the housing market collapse (which I think had a LOT more to do with higher default rates than the economy and definitely more to do with it than the stock market decline) happened at the same time as the recession, job loss, etc...its hard to pick out the causative factors to rise in defaults a few years ago.

However, it'd take some splaining to come up with the correlation between a drop in the S&P 500 and Frank the car repairman not paying his monthly car payment or debt consolidation loan. Maybe a guy who sells financial products for a living and makes his money on commission has a bad time paying loans during a stock market crash.

In any case I'm pretty sure I said results would likely to be trailing on LC default rates, which is fine with me. Its not like the DOW will drop 4000 points one day and 15% of my loans will default the next. It'll more likely have an effect 3-6+ months later. I can still draw a bunch of cash from my LC account until, through, and after a higher default rate scenario and avoid selling equities while they're beaten down.

Unless I get into a certain loss situation, and during the recent worst recession since the depression coupled with a housing market crash and a stock market crash...lenders with 800+ notes still made money, I don't think stock market correlation from anything other than a total return measure matters here. I just want to avoid losing money, make some money on my cash stash if I can, and have a source of steady reliable income with a knob I can turn up and down to avoid selling equities in a market downturn.

 

[Onward]

I just want to avoid losing money, make some money on my cash stash if I can, and have a source of steady reliable income

I think you're on the right track. The big institutional $$ coming into LC isn't stupid.

I'm on the same track, so let's hope it's right.

 

[fanmail]

After having read this thread now about 3 times, I have a few questions. I'm sure I will go to the LC website and try to get some answers there as well.

1. What is the cost to join/do business?

2. How easy is this to fund through an IRA? This seems very inefficient if done in a taxable account.

3. Is there a noticable difference between having say, 400-800 loans, or 1900 like CFB has?

4. Is the filtering process something you just figure out over time?

5. Why wouldn't people just borrow $ from a bank at a presumably lower rate?

 

[cute fuzzy bunny]

After having read this thread now about 3 times, I have a few questions. I'm sure I will go to the LC website and try to get some answers there as well.

1. What is the cost to join/do business?

They'll pay you $300-$1000 to join, depending on how much money you invest. They paid me a grand for putting in 50k, 2%. They're allegedly picky about who joins, some states don't allow it (because banks drove legislation in those states to prevent it), you need a high net worth and its not supposed to be more than 10% of your net worth. I meet the criteria, but I did or saw nothing about how they could have come to the determination, other than they asked me and I said "Yes".

2. How easy is this to fund through an IRA? This seems very inefficient if done in a taxable account.

Haven't done it, since I want to have access to the income, and thats a lot harder inside of an IRA.

3. Is there a noticable difference between having say, 400-800 loans, or 1900 like CFB has?

There is a difference between 400 and 800 (nobody with 800 loans has lost money so far, but some with 400 have had minor losses), but probably no difference between 800 and 1900. More diversity, but it seems pretty well maximized by 800-1000 loans.

4. Is the filtering process something you just figure out over time?

I read data on Lendstats and Nickel Steamroller, and improved my filters over time. I found very little quality stuff online, since teaching other people how to best compete with you for the best notes is a little counterproductive. I'm apparently overly helpful, and stupid.

5. Why wouldn't people just borrow $ from a bank at a presumably lower rate?

Because the bank rates are higher. Most of the debt I hold is 17-21% interest from people paying off 25-30% rate credit cards. A lot of these folks would end up with the same 25%+ rate on an unsecured loan from a bank. Making one smaller payment with less interest rather than struggling with the minimum payments and high interest rates on multiple loans/cards is quite appealing.

 

[fanmail]

Thank you CFB, very helpful. Is having your LC account in a taxable account difficult in any way? What does that do to your total return?

 

[cute fuzzy bunny]

Thank you CFB, very helpful. Is having your LC account in a taxable account difficult in any way? What does that do to your total return?

Well, you have to pay income taxes on it as ordinary income (like regular interest), minus any taken losses. I don't have a mortgage or car payment (even though the interest rates are appealing now) so my financial profile is so low I rarely have to pay any taxes. So my piddling little bit of LC income isn't a problem for me.

Now if I were working, or collecting six figures in pensions, or some other income bearing process where I don't really have any investment risk at all because my income can pay my bills, I probably wouldn't do this at all. If you are retired and want to earn a good steady income from your 3-5 year emergency cash, with the ability to reinvest the income or turn the knob and take it when your other investments are on the soft side, then I think its a good thing. Plus its an interesting learning process and you can spend either very little time with it or on a rainy day tinker with it. While I don't think that investing is a hobby, this can be a little of both.

Two sides to my decision to participate: about 9 months ago, married to a woman with an income that met our spending needs, wanted something extra from my loose medium term emergency cash...liked this for that purpose. Currently, divorced with no income at all other than dividends (which are okay, but don't pay the champagne and lobster bill), I want growth on my cash that exceeds inflation (preferably 'and then some!') and if we hit a slough in the stock market (where the rest of my money is) I'd like to take as much income that this throws off and defer selling at a loss.

You're quite certainly putting your money at risk vs a CD or short term treasuries, but both of those are ALREADY losing 2-3% a year to inflation and carry some risk/encumberance. I'd rather take my chances on doing well with it and making good money vs just standing around and taking it in the shorts.

 

[cute fuzzy bunny]

One other thing about the 'rewards' for joining. I can give anyone a $300 joining bonus and I think its for just putting 10k in the account, even if you don't use it. Sadly, I'd get nothing for this, but its better than the $100 or $200 that most smaller investors can offer.

Whats better is if you look for the 1.5-2% deals for larger investments. Once again, LC doesn't pay existing lenders for referrals, but if you want to sock $50k into this like I did, your first thousand bucks worth of 'oops' is on them.

I did go to somebodies web page that had the 2% link on it, but didn't see anything from LC. I emailed them and said I thought I had a referral and what was the status, and the guy just said "Eh, don't see it, but our best offer that month was 2%, so here it is".

Nice. Same guy (John Steward, and he's not impressed with "I love your comedy show" jokes) has been quite responsive to me in specific emails, usually getting back to me in hours. Very helpful.

 

[Nords]

2. How easy is this to fund through an IRA? This seems very inefficient if done in a taxable account.

You'd have to find an IRA custodian that would agree to let you run this in a self-directed IRA. That's possible, yet likely to be extraordinarily painful to obtain the approval. They'd be very concerned about the legal liability of agreeing that you might be capable of managing your own money.

Ironically the IRA custodian would quickly rubber-stamp a request to put your IRA funds into an institution that invests in P2P lending.

I don't know enough about self-directed IRAs to be sure they can even invest in P2P lending. But investing in startups and real estate with a self-directed IRA is quite a hassle.

 

[cute fuzzy bunny]

You'd have to find an IRA custodian that would agree to let you run this in a self-directed IRA. That's possible, yet likely to be extraordinarily painful to obtain the approval. They'd be very concerned about the legal liability of agreeing that you might be capable of managing your own money.

Ironically the IRA custodian would quickly rubber-stamp a request to put your IRA funds into an institution that invests in P2P lending.

I don't know enough about self-directed IRAs to be sure they can even invest in P2P lending. But investing in startups and real estate with a self-directed IRA is quite a hassle.

Lending club offers their own IRA's. I haven't used one, but its stupidly simple to do. They also do rollovers and the like.

https://www.lendingclub.com/public/individual-retirement-accounts.action

 

[haha]

I don't have a mortgage or car payment (even though the interest rates are appealing now) so my financial profile is so low I rarely have to pay any taxes. So my piddling little bit of LC income isn't a problem for me.

People say this around here all the time. But it makes no sense to me.

How can a single man have enough income to buy utilities, pay RE tax, eat and have a little R&R without paying tax? I've never been a particulary high earner, but I have paid taxes every year since I was 22. The only way to not pay tax is to not make any money. And somehow, that just is not hugely appealing.

Ha

 

[Khufu]

I'm tiptoeing in. The initial investment was $2,500 and I plan to track it for a year or two to see how it does. If it is going okay, I might put some more in,

This is a defective strategy for identifying risks where the biggest risk is a systemic crisis or a recession, i.e. both highly destructive and rare. You might go through years of tiptoeing without encounter such an outcome. It would be like driving without seatbelts for a year. Probably nothing bad would happen, so you would conclude the risk is small. But then when a car crash does occur the effect is all out of proportion to its low frequency.

The p2p loans are not truly diversified any more than the home mortgages turned out to be in 2008. As a group they will have higher default rates during a recession.

 

[cute fuzzy bunny]

People say this around here all the time. But it makes no sense to me.

How can a single man have enough income to buy utilities, pay RE tax, eat and have a little R&R without paying tax? I've never been a particulary high earner, but I have paid taxes every year since I was 22. The only way to not pay tax is to not make any money. And somehow, that just is not hugely appealing.

Glad to show you my tax returns, but its legit. After deductions, I usually pay little or no tax against no withholding. I do make an effort though, since about 90% of the money I pay in taxes is wasted on worthless crap and I'd like to spend my own money on my own worthless crap.

New tax plans next year could make it harder to do, but when half my income is qualified dividends and the other half is adjustable, its not that hard.

I live in a nice house in one of fortune magazines "50 best small towns to live in america", drive a nice car, eat good food and generally have anything any other middle to upper middle class person would, but since I carry no debt I can easily keep my taxable regular income to under $15k, plus the dividend load of roughly an equal amount. If I added in a house payment and a couple of car payments, then I'd need 50-60k and then I'd pay taxes.

 

[pb4uski]

People say this around here all the time. But it makes no sense to me.

How can a single man have enough income to buy utilities, pay RE tax, eat and have a little R&R without paying tax? I've never been a particulary high earner, but I have paid taxes every year since I was 22. The only way to not pay tax is to not make any money. And somehow, that just is not hugely appealing.

Ha

It would be quite easy if you are living off savings (including principal). The standard deduction for MFJ for 2012 is $11,900 and the personal exemption is $3,800 so the first $19,500 for a married couple isn't subject to income taxes.

Plus dividend and capital gains are not taxed at such low levels of income.

Add in a HSA deduction for transfer of taxable account money to a HSA and it is even higher.

 

[cute fuzzy bunny]

Ding ding ding! We have a winner. My fixed bills like property taxes and utilities and basic food are around 12k. I can spend another couple of grand a month and still fly below the significant taxation level. Besides I leverage the crap out of cash back, rewards and other stuff. I'm getting $585 this month from "spend xxx on your card in the next xx months" deals, just got my $300 executive bonus check from Costco (I love being paid to shop somewhere), and I use 2:1 restaurant deals out the wazoo!

My favorite fancy restaurant has a $10 off $50 from my recycling rewards, and costco sells their gift cards, $40 for a $50 card. So I can get a very nice meal for $30.

I just take money as a finite resource at this point, and a penny can be pretty well pinched without too much work. The stupidest thing you can do right now is hand over your hard earned money to the government.

Believe me Ha, life is going to be pretty good around here, but I look like a poor person from an earned income perspective...Lending Club and my last penfed cd's are my only "ordinary" source, most of the rest is dividends and capital gains.

Now, they go fooling with the tax law next year like they may, and it'd get a little uglier if they cut off the free qualified dividends and capital gains for low income investors

 

[haha]

Well, I said a single person. One person living alone spends quite a bit more than twice what a couple spend.

I guess the other question I have about this is how does it happen that one can perpetually live off a portfolio that is making no money? Say the allocation is 50:50. So 50% of the porfolio pays current income. It doesn't matter whether this is in a taxable account, or an IRA etc. If you are going to spend the income to live, you are going to be fully exposed to tax on what you spend from the fixed income part-either as Sched B interest, or withdrawals from retirement accounts.

If all your fixed income is taxable interest, but you supplement it by principal drawdown, you had better hope for continuously falling interest rates. Or eventually rates will turn, but you will have depleted your principle so badly that you have little money left to benefit from the rising rates.

The same principle holds for stocks. If you are always spending principle, the vagaries of the market will see to it that sooner or later you have mortally depleted the principle.

This obvious truth has been obscured by the Alice in Wonderland post 1982 markets. Most of us here have been conditioned by the rapid, Fed stimulated rises after our two 21st century setbacks, such that on an emotional level, we no longer really believe in the possibility of markets going down, and staying down.

Since Alan has appointed me official board pessimist, I will say that this does not have to be true. I am not nutty enough to make predictions, but I think the possibility that we have constructed a faulty or incomplete mental map should be considered.

I just saw CFB's post. One thing different in our situations is that I am forced to have a certain amount of income by RMDs and SS payments.

Ha

 

[AnilG]

Lending Club Data Analysis and traffic to my Blog

Hello,

I noticed some traffic coming to my Random Thoughts blog from this forum and then saw a chart posted from one of my blog post.

I thought that I may be able to answer any questions you may have about Lending Club, my experiences and any clarification on the analysis I have done and shared through by blog posts.

Just to address question of 36 mo versus 60 mo loans, I personally do not invest in 60 month loans as none of 60 month loans have matured yet so any default rate analysis is incomplete at best. Also, the default rate for 60 month loans is higher than 36 month loans when compared on the basis of same point in maturity cycle.

Overall, I am very excited with the potential of peer to peer lending. It offers investors another asset class and opportunity to invest in consumer lending. Consumer lending has been a big money maker for banks and I don't see a reason p2p lenders can not be beneficiary from it too.

Thanks.

Anil

 

[cute fuzzy bunny]

Well, I said a single person. One person living alone spends quite a bit more than twice what a couple spend.

After jettisoning my wife, her $65k car, $300 haircuts and so forth, I have to disagree. I can live quite comfortably on less than half of what we spent during our marriage. Much less.

I guess the other question I have about this is how does it happen that one can perpetually live off a portfolio that is making no money? Say the allocation is 50:50. So 50% of the porfolio pays current income. It doesn't matter whether this is in a taxable account, or an IRA etc. If you are going to spend the income to live, you are going to be fully exposed to tax on what you spend from the fixed income part-either as Sched B interest, or withdrawals from retirement accounts.

No bonds, and very little ordinary income in my portfolio. Its all qualified dividends, capital gains, and just enough ordinary income to sit below the taxation ceiling.

The same principle holds for stocks. If you are always spending principle, the vagaries of the market will see to it that sooner or later you have mortally depleted the principle.

The idea is to keep a ~5 year cash buffer in front of your equities, but even without that, if the market fell by half and stayed there, I could live quite well eating my portfolio until I'm in my 80's. Then I have an expensive house I could sell, and my 77 year old dad has a paid for house and a six figure bond portfolio that I'll inherit some day. Hopefully a long time from now. And I'm eligible for social security in ten years. I'm also seriously considering some sort of part time job in a year or two, preferably one that'll give me access to cheaper health care.

we no longer really believe in the possibility of markets going down, and staying down.

Considering we've basically gone sideways for 15 years, have near zero savings/interest rates and have spent plenty of money bailing out everyone who screwed up while doing nothing for those who have made prudent decisions, I believe in anything!