Peer to peer lending

[Nords]

We've had a number of posts on startups like Lending Club and Prosper, for example the back half of this thread: http://www.early-retirement.org/forums/f27/ten-year-early-retirement-update-63174.html#post1236240

I'm also seeing a lot of P2P discussions in the personal-finance blogs that I track, so I've spent some time reading about the various screens and filters and techniques and limits. Eventually I ran across the Lend Academy blog (Getting Started With Lend Academy ) with more advice on the mechanics.

Yeah, I know. If you're so smart about P2P lending then why are you blogging about it instead of pricing your second yacht (and your third supermodel) for the Cannes Film Festival? But he's sharing free advice, and maybe blogging about it helps him improve his own techniques.

I've already decided that picking individual stocks is a waste of my time. Stock-picking diversification means that I'd need to scale it up to a minimum of 30 (if not 50), and then the tracking time mounts to the point where you've traded employment for self-imposed slavery. It's far easier to buy index funds for only 70% of the return with about 2% of the labor.

Another concern is scale. I'm not going to waste my time achieving 15% APY if I'm only investing $20K. Sure, that's $3000/year, but I make more from that in a year by investing $100K in a dividend stock index fund and going surfing. I've also made more than $3000 by selling a couple of call options, which required just enough labor to make me wonder whether it was worth my time. Luckily I was curious enough to muster the self-discipline to finish the education required for the options experiment, and now the additional incremental returns only require 10-15 minutes of labor with zero tracking effort.

But what if I could achieve 15% APY by investing $100K-$500K? Now you have my attention, although I certainly would lack diversification in the rest of my portfolio.

While Lend Academy is probably one of the best resources on the Internet, its advice just doesn't scale:

If there was only one word of advice I could give to all new p2p investors it would be this one: diversify. Don’t make the mistake I made and spread your initial investment among two loans. What you want to do is diversify your initial investment as widely as possible. Both Lending Club and Prosper allow a $25 minimum investment in each loan. Take advantage of it. If you are starting off with $1,000 then fund 40 different loans with this money. Only if you are starting with more than $2,500 do I recommend you going over the $25 minimum. Then I would still make sure that no loan is more than 1% (and preferably less) of your total p2p investing portfolio.
I think it is useful to spend some time reading the details of each loan. If nothing else this will give you a feel for the different kinds of borrowers on the platform. I tend to avoid someone who hasn’t bothered to give a good loan description (or any description) and if they have failed to answer investor questions then that is a red flag, too. You can always ask your own questions, keeping in mind of course, that people may not always tell the complete truth.

Reading the details of 40 different loans, each for $25? How much time are we honestly going to spend on each loan, and how well are we going to remember those details? And what if there's a question to ask, or if we actually have to read the details of 150 loans before we find 40?

As that grows past $25/loan to no more than 1% of the portfolio, now we're reading the details of over 100 different loans (or maybe 375+ to find those 100). That problem's not 2.5x as challenging as 40 loans-- it's at least a squared factor, if not cubed.

If I'm going to spend that much time reading the details of individual loans then I might as well revert to picking stocks. But I've already concluded that passive index investing offers much more return per unit of effort than picking stocks, and I fear that the same is true of P2P lending.

Once again, it's hard to justify the results by the risk-- or by the level of required effort.

If you have a better resource, please post it here. And if you have a better way to scale up to the $100K-$500K level without an outsize investment in picking & tracking labor, then you probably should start your own blog!

 

[plex]

I think there is a timing issue as well with P2P lending. It is great after an economy picks up, the late/bankrupted notes are probably few and far between, but what about when the market goes down hard (the tail risk)?

From what I remember reading, many P2P lenders encountered serious dips in their returns back in 2008/2009 at Prosper, it definitely went into the negatives, though I do not know how far. These notes are not without market risk, so need to be treated as what they are, something between junk bonds and mid-grade bonds, they are not CD's, TIPS, SPIA's or treasuries.

 

[cute fuzzy bunny]

I have a simple perspective on it. Its not stocks, and I can't make any money right now on anything other than stocks without picking up a lot more headache.

I sure as hell don't spend hours every day scrutinizing loans. You can download the lot into an excel spreadsheet and click a button and get whatever scrutinizing you need done automatically in a few seconds. Or just use their autoinvest tool to buy a range of notes at a particular risk level.

Considering there are institutional funds committing a lot more than 100-500k into lending club, apparently its doable.

Would I put 500k into it? Nope. I consider this the same as a precious metal or other 3-5% asset class. $100k for someone like you and I is a good amount though.

I could shove it all into (more) index funds or dividend paying etf's, but then I have to sell something and create a taxable event to get more than the dividend in terms of income. It'd also reduce my diversification to 95% equities and ~5% cash.

I'd love to diversify using more traditional methods, but .02% for a cash product or losing 25-35% of my bond funds value due to rising interest rates just doesn't sound much more appealing than shoving it in the mattress. Plus I have a memory foam mattress and it doesn't look like there is any place to actually shove cash.

2008 was ugly at Prosper, but to be fair the stock market and everything else has had some truly sucky times over the last ten years. Prosper also sold VERY non-prime debt at high interest rates and has since improved the credit worthiness of their borrowers.

I read the blog. Most of what the guy says seems reasonable, but he's fallen into the mistake of reading some stats and charts where half the data was drawn from an insignificant sample size and as a result some of his filtering stuff isn't worthwhile. For example he's not excluding loan purposes that have shitty ROI's and higher defaults, and pretty much all of the state exclusions are based on bogus data and assumptions. I'd suspect that high cost/expensive real estate states like CA and FL had more defaults when everyones home value dropped, they bankrupted or walked away and at the same time decided to stop paying their unsecured debt. But I've found little of interest in the blogs and online 'advice' for p2p lending, as its frankly a competitive sport. If I give someone else the tools to be successful at it, then I'm competing with them to buy the same notes, and the better notes sell within hours, not days.

Where else does the money go if you want income and diversity from the stock market, where its actually worthwhile?

I'm still north of 17% and will be happy with 6% and thrilled with the ~12% I expect to get. Its an income knob I can turn up or down at will, either by reinvesting principal and/or interest payments or taking them. As long as my returns are positive, its my backup income source behind my checking account. So far in the history of lending club, nobody with 800+ notes has had a negative return. If we have a rough patch in the stock market, I'll just take all the payments as income and start draining the account down. Then if the market picks up, I can sell something and pump cash back into the LC account.

 

[67walkon]

I just started with the Lending Club. Why? Because we have several hundreds of thousandsof dollars sitting in our investment accounts and earning precious little.

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, but even if we went up to $100,000 and earned 10% overall, I'm not sure it's worth it. At $25 per loan, that's 4,000 individual loans. On the other hand, 10% is pretty good in today's market. On the third hand, is $10,000 in annual interest going to be all that much better than a decent Vanguard fund or some dividend paying stocks?

Hard to tell. But I'll watch it for a while and see what I think.

 

[Onward]

I've been investing, on a small scale, in p2p loans since the beginning (2006). Right now I have about 300 loans at Lending Club. The average age of these loans is about a year.

There are two ways you can reduce the time it takes to choose loans and thus invest larger sums.

The first way is to use Lending Club's Prime service. You specify your desired level of risk and return, and Lending Club does all the work in choosing loans for you.

The second way is to use Lending Club filters. These are screens that you construct and can then run on the current body of in-funding loans. Only the loans that meet your filter criteria are displayed, and you can then invest in them.

BTW, the first "phase" of my involvement in p2p lending was with Prosper, from 2006-2009. My total return, after all defaults, fees, etc., was roughly -2% per year.

The second "phase" has been with Lending Club from 2010 to present. Lending Club calculates my annual return this far as 17.2%. Their algorithm is optimistic, however, and a more realistic number is around 15%. Backtesting my loan-selection strategies leads me to expect a return, when all is said and done, of 10-12%.

I would love to have more people around here to discuss p2p lending with, especially from a FIRE-ee's point of view.

 

[cute fuzzy bunny]

I would love to have more people around here to discuss p2p lending with, especially from a FIRE-ee's point of view.

Here I am!

Here is my current filter, I just tweaked it some. Like you said, I had to take some less desirable stuff to deploy a lot of capital, but this is my current filter for taking 2-5 notes a day. It usually turns up 8-15, and my additional non filter supported criteria cut those further back.

Employment 2+ years
Credit card, debt consolidation, car, and home down payment
Credit score 670+
Homeownership Mortgage, Own, Rent
Interest rate D, E, F, G
Earliest credit line 5+ years
Max DTI 25% (I don't take higher %, but I see a lot of good notes that are 20.2 or 21% DTI, and are therefore excluded by moving the slider to 20%)
Revolving utilization 90% or less
Revolving balance less than 50k but I dont write for more than 30ish.
No public records
Delinquencies 0, and 1-3

Everything else either had no statistical significance or was really splitting hairs and going one way excluded a lot of decent looking notes while going the other gave me more to choose from.

Whatever goes through the filter, I throw back low income people (one emergency spend means I don't get paid), where the debt payment is significantly more than 10% of the gross (I think people paying 20-25% of their gross for 5 years isn't going to happen), employed by any companies that just announced huge layoffs (like HP), and I eyeball people with a small number of credit lines and a high credit score...they're someones spouse that hasn't held credit in their name much and the spouse probably has 50k in debt and can't get any more loans. Very small loans (<2k) also for some reason have a high default rate. At this point it takes me 2 seconds to scan a loan for these criteria.

The two things that disturb me a little about LC are the institutional money and the data they have that you can download that they don't show or let you filter on without using a program or spreadsheet.

The institutional money comes in and wipes the note inventory from 2000-2500 down to 500 or 600, and until the inventory builds back up, good notes like the ones I'm filtering on simply don't exist for a couple of days, or they sell in a matter of hours. Right now I'm checking the site every few hours, but during those time periods I might just not bother reinvesting and will just wait until the note inventory rebuilds. Primary problem with this is that it'll make it harder for individual investors to deploy a lot of capital without cutting corners. I deployed capital by writing B and C notes, and taking some 660 credit borrowers that looked good. About half their loans are usually B/C 660 borrowers, so that really opens up the field.

If you download and look at the data, sometimes it tells a very different picture of a borrower. I've seen "A" rated debt with small revolving amounts and low DTI but in the downloaded data it shows six figure non mortgage debt loads. This is because LC doesn't incorporate helocs and car loans and other non credit card debt in their revolving $ and DTI calcs. So two borrowers might look the same, but one owes a crazy amount of money and the other doesn't. When I challenged LC on the viability of the extra data and why it wasn't shown or filterable, they said they didn't think the extra data would be significant in avoiding defaults. I don't agree.

My current lates seem to have no correlation to anything. They're B-E borrowers, some with excellent fico scores and several with high incomes. Most of them appear to have moved or disconnected their phones, because the audit trail is full of "called borrower, no voicemail" or "phone disconnected". At least half are notes I got through the autoinvest tool which were less filtered, and half are notes I wouldn't write today (low income, high payment, etc). By my estimation, about 2-3% of my notes will go late due to death, divorce, major illness or long term job loss. LC estimates my overall default rate to be between 5 and 7%. At 5%, I'd see around 75-80 defaults and I'm at 25 today after a big spike this weekend, but I suspect thats because they don't process payments on weekends and apparently also not on columbus day, so nothing happened from 10/5 to 10/9. Some of those will probably come back into compliance.

I also avoid the "oh my god, I have notes in the grace period and have to sell them!!1!" routine. About half of the grace notes (late 1-15 days) come back into compliance, quite a few get on the payment plan, and a surprising number of grace notes pay the loan in full and were just ugly until the payment got applied. I tried selling a couple of grace notes, but the borrower paid and someone snatched up the note for less than face value before I saw it was paid. No bueno. You can't get anything significant on the secondary market for a serious late note with "phone disconnected" and "skip trace" in the audit log. So I'm just going to ride them out and hope there aren't too many and that some come back into compliance. That sure saves a lot of time...

Thats what I've learned so far, and what I'm doing. If I could get CD's in the 6-8% range or money markets in the 3-5% range, unless I could clear 15-17% in LC I wouldn't bother. It'll be interesting to see what kind of rates you can get for higher grade debt after interest rates start to rise.

 

[Onward]

A lot of my experiences mirror yours. I'm also seeing the most attractive loans snatched up quickly. They're taking only a day or two to fund. I don't know how much of this is due to the recent entry of institutional investors, though I'm sure some of it is. You probably know that LC decided recently to give certain entire loans to their institutional customers. Supposedly LC is choosing these loans randomly. Like you, I don't like the trend.

The filters I use are mostly the ones described here, and variations of them.

I had the same experience as you when selling loans in grace period. A loan would get snatched up as soon as a payment was made. I don't sell grace-period loans any more. I do sell late (16-day+) loans, though I have to discount them deeply.

In case you haven't seen these, here are a couple of portfolio analyzers for p2p lenders:

Nickel Steamroller - P2P Lending

Lendstats.com Prosper and LendingClub Statistics

Overall, I like the platform and I think p2p is now a viable asset class that could deliver 10% annual returns long term. Among traditional asset classes, I suppose p2p loans are most like junk bonds.

 

[cute fuzzy bunny]

I've used nickel steamroller, but a lot of their data has too small of a sample. If you look at the number of notes for each sample size, some buckets are 70,000 notes and some are 20.

I agree...a lot like junk bonds. I used to hold those but experienced a lot of longer term drag from defaults.

Of course, the fast snapping up of notes makes for an easy selection process, if you like inertia. I picked notes for a while (when I was deploying a lot of capital) by just pulling up the entire set, sorting by most recent first (the 13 days-to-go notes) and then looking for the ones with higher funding than its peers. In that regard, you're using everyones filter/scheme. Only downside being, a note may get initial inertia based on poor decision making, and the rest might be people using the same method.

In case someone is reading this and doesn't know how the process works, LC puts out loans, people chip in their $25's (or whatever) and the funding level starts increasing from 0 to 100%. When it gets to 100%, they ask the borrower if they really want the loan and do due diligence on the information provided by the borrower (the review process). A TON of the notes I've picked didn't pass the review process, but then again my selection is a bit picky and there's a good chance you're fibbing about stuff thats too good to be true.

I think 10% is pretty doable as well. What I like about it is cash flow. I had ~$70k in cd's mature and didn't want more equities, and there is nothing else. I can turn that 70k into high regular income (around 2500/mo) with capital depletion or I can continue to reinvest it if I don't need the cash flow. I wouldn't expect a sudden stock market crash to produce a lot of quickly trailing defaults in credit card consolidation loans, so it should be decoupled from financial events excepting a real estate market crash, and we already had that.

I've had 44 loans pay back the money within a month or two, about half of those went into late 16+. So considering the discount you have to put on the late notes to sell them, I'm just going to ride them to the ground and see how they pay. By the numbers between 50 and 70% of late notes will eventually pay most or all of the loan.

The one exception to that is the auto-invest I did with a lump sum of cash gave me some $150 and $250 note segments. I think if one of those went late, I'd give selling it a whirl. $25 per is definitely the way to go.

 

[brewer12345]

Just curious: did any of you investing in this try borrowing in your chosen market to see what the process is like?

 

[cute fuzzy bunny]

Just curious: did any of you investing in this try borrowing in your chosen market to see what the process is like?

No, but they have a full run down at the site. Seems pretty standard, borrower fills out a short app and gets an initial rate/payment, fills out the full app, gets reviewed, gets funded, borrower gets to decide whether to take the loan with a final rate/payment, and its an auto-deduct from their bank account after that.

The one thing that annoys me is that nobody borrowing fills in the 'description', or says anything about the loan. Which is a pretty good move for the borrower, because as a lender when they start talking I often don't like what I hear. Guy thats supposed to be making $10k a month who can't spell or form full sentences? C'mon man...

Although you can tell quite a bit just from the loan title they put in. "Credit horror show loan #3" sort of puts me off. "I'm sick of credit cards!" is a winner though...

My favorite is still the folks with $30-40k in credit card debt, making 4k a month who want to get a loan for a $30k wedding. I'm afraid that shows poor money management, and I probably won't get to fund the impending divorce.

One of these days I'm just going to write a quickie program to sift the data. Excel just wasn't working for me, too cumbersome. Only problem I'm having is finding a quick free Basic language for windows. I don't need or want a bunch of fancy graphics and windows crap, I just need it to eat a text file and spit out a list of loan numbers with the right html formatting to click on it. Used to have free Qbasic (IIRC) included with windows, but not anymore. Microsoft had some freebie Basic language tools, but they were heavily built around graphics and windows manipulation. Way more than I need for a ten line piece of code with no gui output at all.

One interesting point on borrowing though, I can get a loan from them for about 6.5% for any amount up to 35,000. I'd imagine that most people here have the credit chops to end up in the same spot. This is why lots of people like LC, they can borrow for a few percent less than the banks offer, drive down their monthly payments, and hopefully don't run up the cards again.

 

[jayc]

Odd/Even or Black/Red. Spin the wheel. Maybe get a free drink while playing. A little less than 50% chance of winning. Seems like a lot less trouble and a lot less risk.

 

[haha]

You guys who are doing this seem to be doing very well. And it has the interest of a small business, which is certainly lost when you put all your money into index funds, and then have little to do but obsess over withdrawal rates.

But what bothers me is this seems like loan sharking, but you don't have anyone named Boris with a background in knee rearrangment working for you. Banks have trouble getting repaid on these personal loans, and they can hurt you, at least financially and reputationally. I wonder how many divorces have been helped along by dunning calls from collectors at all hours, at work, at wife's work, etc? Pawn shops don't care if they get repaid, they make their money going in on the spread between what they loan you and the conservative value of your collateral. But you have no collateral, no real collection means, and no muscle.

Aren't your borrowers pretty much guaranteed to be those who have a habit of losing?

Ha

 

[cute fuzzy bunny]

You guys who are doing this seem to be doing very well. And it has the interest of a small business, which is certainly lost when you put all your money into index funds, and then have little to do but obsess over withdrawal rates.

But what bothers me is this seems like loan sharking, but you don't have anyone named Boris with a background in knee rearrangment working for you. Banks have trouble getting repaid on these personal loans, and they can hurt you, at least financially and reputationally. I wonder how many divorces have been helped along by dunning calls from collectors at all hours, at work, at wife's work, etc? Pawn shops don't care if they get repaid, they make their money going in on the spread between what they loan you and the conservative value of your collateral. But you have no collateral, no real collection means, and no muscle.

Aren't your borrowers pretty much guaranteed to be those who have a habit of losing?

The borrowers are pretty much people who were smart enough to take a loan for 17% and pay off their 29% credit cards.

Your assumptions about collection aren't correct. You don't pay your LC loan, you'll get the same credit/collections company calling you, your credit will get dinged, and for significant amounts (debated, but 10k seems commonly bandied about) you'll get sued. This entire process is exactly like what you'd get in applying for a personal loan at a bank, except for the interest rate. The non paying borrower gets exactly the same treatment they'd get from Bank of America.

Seriously, I understand the risks but like the cash flow and likely returns. And again, what the hell else is there? Just load up 100% on index funds, keep a little cash and hope the next ten years is different from the last ten? Didn't someone here like to say that in predicting things (like the weather), persistence is the best indicator?

 

[cute fuzzy bunny]

These are some sample screen shots so people can see what it looks like in practice.

First is the loan selection screen with a note I just invested in. Second is the 'checkout process' where they give you a fair assessment of your returns. I've found that in buying a note bundle, if you're under 12% you're not taking enough risk, and if you're much over 14.5%, you're taking on too much risk.

A lot of people screw this up by only taking A and B grades. They die, divorce and lose jobs at the same approximate rate as F and G loans, which pay 4-5x the interest. Do the math. A lot of people also do something hairbrained like "I'm an entrepreneur, so I'm going to invest in small business loans!!1!". Really, really bad idea.

 

[cute fuzzy bunny]

And this is what the collections log on a loan looks like, and a chart of that borrowers FICO score so you can see what happens to them. This guy is going to have a nice time getting credit of any kind for quite some time...

 

[haha]

Your assumptions about collection aren't correct. You don't pay your LC loan, you'll get the same credit/collections company calling you, your credit will get dinged, and for significant amounts (debated, but 10k seems commonly bandied about) you'll get sued. This entire process is exactly like what you'd get in applying for a personal loan at a bank, except for the interest rate. The non paying borrower gets exactly the same treatment they'd get from Bank of America.

I see, thank you. Are expenses of unsuccesful collection attempts charged against the individual loans? Are borrowers charged by adding collection expenses to their loans? I don't know what the law allows, and I would expect that it might be different in different jurisdictions. But I am guessing, whereas you likely know.

Ha

 

[cute fuzzy bunny]

I see, thank you. Are expenses of unsuccesful collection attempts charged against the individual loans? Are borrowers charged by adding collection expenses to their loans? I don't know what the law allows, and I would expect that it might be different in different jurisdictions. But I am guessing, whereas you likely know.

Yes, the collection companies charge a percentage of the money they recover. The good news is unless the borrower fizzles without making a payment or after just a few payments, between what you've been paid and what the collections agency recovers minus the recovery fees, you'll get most of your money back.

This is pretty different from most investments...you will absolutely have some non payers, and the only objective is to choose your loans wisely to minimize that and make sure you're making enough to surpass the losses.

 

[ejw93]

Nords -

I've been with LC for 2 years now (Roth IRA). I like it. Here's why:

- I only spend about 5 minutes per day, 6 days/week 'shopping loans'. I figured out that based on the time I spend daily, my 'hourly wage' is still better or comparable to my w*rk hourly rate, even considering I have under $20k in LC. Once you get used to how to apply the filters- plus your own algorithm for workflow- it's pretty quick to cherry pick the loans you want.
- The returns are 'linear'. Your account goes up by almost 1%/month like clockwork, no volatility. This provides a tremendous amount of 'bouyancy' to my Roth IRA portfolio.
- The returns are good. I'm netting 9.4% right now on mostly 'C' and 'D' loans (note that this does NOT jive with the LC advertised return calculations- see below).
- 100% transparency. You can download the entire database of loans and filter/pick/choose/analyze what strategy you think will work best.

Stuff that Sucks (sorry to paraphrase ButtHead):
- As mentioned, their IRR calc is not true- you must plug/chug excel to figure out your true IRR. LC says my IRR is >12%, which is bogus (my real IRR is 9.4%):
1) LC does NOT account for the 'churn' you must deal with (constantly re-deploying loan cash from 36-month repayment amortization schedules), which averages to about 6% of your portfolio in an 'in-funding'/ pending funding/ 'dead' status.
2) LC does NOT account for any profits/losses you incur by buying/selling loans on the secondary loan market/Trading Platform.
- You need 400+ loans for diversification- else any defaults will reduce your portfolio by >0.25% perdefault (minimum $$ invested is $10K @ $25/loan to hit 400 loans).
- If you like to cherry pick loans, it's a pain to deploy chunks of $5k or more at a time (unless you are a sucka and don't diversify).
- Liquidity. If you have an adverse medical or marital event, you are at the mercy of the Trading Platform. I know guys who check the TP multiple times per day looking for 'divorce sale' buying opportunities.

 

[rbmrtn]

One of these days I'm just going to write a quickie program to sift the data. Excel just wasn't working for me, too cumbersome. Only problem I'm having is finding a quick free Basic language for windows. I don't need or want a bunch of fancy graphics and windows crap, I just need it to eat a text file and spit out a list of loan numbers with the right html formatting to click on it. Used to have free Qbasic (IIRC) included with windows, but not anymore. Microsoft had some freebie Basic language tools, but they were heavily built around graphics and windows manipulation. Way more than I need for a ten line piece of code with no gui output at all.

I used to collect all sorts of compilers for different lanquages. For BASIC you might look at these...

Just BASIC - Free programming language

QB64 Homepage

Official Website | FreeBASIC Programming Language

Windows PowerShell is also free , you can do what you want with a shell script.

 

[Nords]

Nords -

I've been with LC for 2 years now (Roth IRA). I like it. Here's why:

- I only spend about 5 minutes per day, 6 days/week 'shopping loans'. I figured out that based on the time I spend daily, my 'hourly wage' is still better or comparable to my w*rk hourly rate, even considering I have under $20k in LC. Once you get used to how to apply the filters- plus your own algorithm for workflow- it's pretty quick to cherry pick the loans you want.
- The returns are 'linear'. Your account goes up by almost 1%/month like clockwork, no volatility. This provides a tremendous amount of 'bouyancy' to my Roth IRA portfolio.
- The returns are good. I'm netting 9.4% right now on mostly 'C' and 'D' loans (note that this does NOT jive with the LC advertised return calculations- see below).
- 100% transparency. You can download the entire database of loans and filter/pick/choose/analyze what strategy you think will work best.

Stuff that Sucks (sorry to paraphrase ButtHead):
- As mentioned, their IRR calc is not true- you must plug/chug excel to figure out your true IRR. LC says my IRR is >12%, which is bogus (my real IRR is 9.4%):
1) LC does NOT account for the 'churn' you must deal with (constantly re-deploying loan cash from 36-month repayment amortization schedules), which averages to about 6% of your portfolio in an 'in-funding'/ pending funding/ 'dead' status.
2) LC does NOT account for any profits/losses you incur by buying/selling loans on the secondary loan market/Trading Platform.
- You need 400+ loans for diversification- else any defaults will reduce your portfolio by >0.25% perdefault (minimum $$ invested is $10K @ $25/loan to hit 400 loans).
- If you like to cherry pick loans, it's a pain to deploy chunks of $5k or more at a time (unless you are a sucka and don't diversify).
- Liquidity. If you have an adverse medical or marital event, you are at the mercy of the Trading Platform. I know guys who check the TP multiple times per day looking for 'divorce sale' buying opportunities.

It looks like the P2P effort is less onerous than day-trading or the short-term options strategy we've discussed here before. It might even be better than picking stocks, since it seems to screen loans a lot faster than I can work through annual reports.

It seems difficult to walk away from it for a week or two.

You're already concentrating more than $25 per loan. Do you see yourself being able to scale it up to 800-1000 loans? $100K total invested, or even $250K?

In general, the longer I've been ER'd, the less trading I've done.

 

[ejw93]

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.

 

[calmloki]

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

 

[cute fuzzy bunny]

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...

 

[cute fuzzy bunny]

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.

 

[Keim]

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...