Lending Club Sadness

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steelerfan
Posts: 127
Joined: Wed Feb 27, 2013 3:33 pm

Lending Club Sadness

Post by steelerfan »

My first delinquencies are hitting and it is bumming me out. I am still on board but I am starting to worry that there may be a disproportionate amount of people seeking loans who are in trouble when they apply or even looking to run away. I once worked sub-prime auto finance and it was the same story. We bought the paper from used car dealers and even the bottom feeders in buy here pay heres. Our loss curves started out small but they eventually skyrocketed. It was like the word got out. We even caught some dealers colluding with the customers making their first payment or two and giving them a 60 day running head start. Our company went belly up and my boss had to fly to NY to explain to some angry people that they lost $30MM. He was worried for his safety.

It is discouraging when people are defaulting without even making a first payment. This is something to monitor as I have read that the big banks are applying big data analytic models skimming a lot of the good prospects off the top before the little guy even sees them (not sure I believe that yet). The guy who defaulted supposedly owns a house and lists a $10250 monthly income. He carries a B rating. I am going to stay the course for a few more thou and see if a larger pool will pull my return up but to say I am disheartened would be the understatement of the year LOL...This type of business is dependent on a ~4% default or the model will collapse on itself.

I am currently sitting with a negative 11% annualized return. I would be happy with 7=8% but below that it is difficult not plowing more money into blue chip dividend stocks that have raised their dividentd for 50+ years. On one of my loans they are skip tracing the guy so my guess is he is going to be a total loss.

billc
Posts: 94
Joined: Fri Dec 09, 2011 4:13 am

Re: Lending Club Sadness

Post by billc »

If you're on lending club seeking high returns then risk of loss is part of the territory. Make sure you're not risking an amount you can't afford to lose.

If you're looking for a stand in AA+ rated bonds then you're looking in the wrong place.

arrrrgon
Posts: 154
Joined: Thu Aug 09, 2012 10:42 pm

Re: Lending Club Sadness

Post by arrrrgon »

I took all my money out last week. The delinquencies are ridiculous. Even on A and B rated loans.

m741
Posts: 1187
Joined: Tue Jan 18, 2011 3:31 am
Location: Seattle, WA

Re: Lending Club Sadness

Post by m741 »

I'm not sure what kind of loans you guys are making. I've been using Lending Club for a few years, and have made 101 loans (just checking right now). I've had only a single default (and one loan is currently in grace period). I filter to always loan at rates over 8% and under 20%, so these aren't exactly the best loans - but they aren't the worst, either. There are some other statistical criteria - inquiries, past defaults, the explanation of the loan, etc. I think there was a summary of good criteria on Brave New Life a while back.

arrrrgon
Posts: 154
Joined: Thu Aug 09, 2012 10:42 pm

Re: Lending Club Sadness

Post by arrrrgon »

I didn't take a single loan from anyone with a public record or previous delinquency. I picked mostly loans for people claiming they were trying to consolidate their debt. I think there's just a lot of luck involved.

arrrrgon
Posts: 154
Joined: Thu Aug 09, 2012 10:42 pm

Re: Lending Club Sadness

Post by arrrrgon »

My sample size is much smaller than m741. One of my first loans went into bankruptcy a week after taking the loan.

steelerfan
Posts: 127
Joined: Wed Feb 27, 2013 3:33 pm

Re: Lending Club Sadness

Post by steelerfan »

billc wrote:If you're on lending club seeking high returns then risk of loss is part of the territory. Make sure you're not risking an amount you can't afford to lose.

If you're looking for a stand in AA+ rated bonds then you're looking in the wrong place.
I am well aware of risk/reward and investing in unsecured microjunk bonds is risky; hence the high individual rates. But it will ultimately come down to what makes the most sense to for my investing dollars. I am attracted to this class of investment because of the income stream potential. If it works it would be pretty cool to have constant reinvestment of p&i throught the month. . A 4-5% default like LC stats indicated is expected. Ten percent default or more is entirely another thing. At that point I would rather buy individual shares of stock for my "risky" portfolio segment. As I said I will ride this out for a bit. But in my experience a model that works initially can eventually go sour once a few variables change. When the company I spoke of went bad I could trace it to specific underwriting decision changes because I was in a position to see that. A person that has a couple years in by now could very well have a different experience in addition to a bigger and perhaps higher quality base to fade the losses. Coming in today could be a different scenario. Probably people that have been in for a while are better at picking the most credit worthy borrowers. Maybe increased demand is loosening loan approval criteria. Who knows?

Definitely not looking for investment grade bonds but not happy when 2 notes go bad right away. It could be bad luck or it could be a start of a trend in this business. LC seems to be aggressively trying to collect to their credit. But if you look at the profile it pretty much says that underwriting information is not verified unless noted. It is troubling when a guy has a stated income of 123K and he defaults on the first $98 payment. I am trying to experiment with the filters to find the sweet spot of the perfect borrowers as you all are.

My loans are from A-E. My effective rate is 13.4% on 21 notes. I am buying about 4-6 notes a month so not really a big piece. I generally want people that have a high income and no derogatories. Not excluding locations yet but that may change.

Not looking to make a killing here but was not planning on going negative right away. In reality this is insignificant to my investments (less than a half percent) but what I am talking about is losing enthusiasm in what at this point is entertainment. And that is a shame.

henrik
Posts: 757
Joined: Fri Apr 13, 2012 5:58 pm
Location: EE

Re: Lending Club Sadness

Post by henrik »

I don't think 21 notes is anywhere near enough to make any conclusions about trends one way or the other:)

bad_LNIP
Posts: 130
Joined: Mon Sep 08, 2014 1:09 pm

Re: Lending Club Sadness

Post by bad_LNIP »

From what I have read, you have to really diversify and spread your money across hundreds of loans for LC to "work" for you. 21 notes isn't nearly enough. Most folks from what I have read do $25 or $50 per loan and spread it around and focus more on the A/B spectrum.

billc
Posts: 94
Joined: Fri Dec 09, 2011 4:13 am

Re: Lending Club Sadness

Post by billc »

Lending Club (and Prosper) have competing incentives. On the one side they need to keep the defaults low to attract investment. On the other side they need to get as many people wanting to borrow as possible because of all the investment money flowing toward them (institutional investors are betting big on both companies).

But unsecured credit has been offered at scale for a long time. I would expect people will default on loans with Lending Club at a similar rate at which they default on their credit cards. Once LC is at a large scale, the pool of borrowers will have to be pretty similar to other places offering unsecured credit. If the interest rates are comparable to credit cards you can probably rest assured that the model will work as long as you're diversified over a big enough pool of loans.

I think there may be equal return (and risk) investing in companies that do lending at scale (banks, etc) than lending directly - and you get better diversification than lending club (generally).

You can either attempt to pick the good banks (WFC, US Bancorp) and avoid the bad ones (Wachovia and WaMu circa 2008) or you can try a financials ETF like Vanguard's VFH.

cmonkey
Posts: 1814
Joined: Mon Apr 21, 2014 11:56 am

Re: Lending Club Sadness

Post by cmonkey »

steelerfan wrote: My loans are from A-E. My effective rate is 13.4% on 21 notes. I am buying about 4-6 notes a month so not really a big piece.

Assuming you are minimizing risk and only putting in 25 to each note that means you have invested 525 dollars. At that level, a single default would be a HUGE hit to your investment.

You need a minimum of 100 notes with $25 in each note to consider yourself out of "risky" territory. I would recommend 200 notes minimum.

Also don't just pick any random note. Here's my method.

NEVER pick A-B and G notes. For A and B the interest rate is not worth the default risk.

C-E loans only
0 delinquencies
0 inquires
verified income only
debt consolidation only
$25 MAX per loan

Using that criteria you could easily find enough loans for $10,000+ and be in better shape for riskier loans.

This has been my strategy and I have not had a single charge off in the 3 years I have been with Lending Club.

SimpleLife
Posts: 771
Joined: Wed Aug 21, 2013 8:23 pm

Re: Lending Club Sadness

Post by SimpleLife »

Reading this thread makes me glad I did not take part in this. It just seems really risky.

arrrrgon
Posts: 154
Joined: Thu Aug 09, 2012 10:42 pm

Re: Lending Club Sadness

Post by arrrrgon »

I understand the odds and the need for diversification, but for me it's just not worth the risk. I used a very small amount of money just to try it out, so it was no big deal. I came to the conclusion that I would rather own a part of someone's business instead of maybe possibly getting paid back on a loan I make to a stranger that thinks of me as some rich guy (which I am not).

Lending Club is that friend that everyone borrows money from, because they know he won't care if they never pay it back.

reepicheep
Posts: 383
Joined: Mon Dec 29, 2014 7:45 am

Re: Lending Club Sadness

Post by reepicheep »

Taxable Account

Year end Statement 2012 (account opened in Sept, 2012)

Outstanding Principal $16,702.58
Earned Interest $225.55
Chargeoffs $0

Year end Statement 2013
Outstanding Principal $27,637.45
Earned Interest $4,612.48
Chargeoffs $0 (I was still ambitiously selling my late notes on the secondary market).

Year end Statement 2014
Outstanding Principal 11,537.89
Earned interest $8,535.91
Chargeoffs $1,696.04 (I've withdrawn a lot of cash from this account. Much of it I moved into a Roth IRA at LC over time...some of it I used to buy a motorcycle, and some of it went to paying off the original 2.99% loan I got that I arbitraged into LC in the first place. I also stopped bothering to sell late notes. I haven't made any additional deposits in at least a year, and plan to have it down to zero by the time I have to do my 2015 taxes).

Roth IRA LC (I rolled over a Roth between 2013 and 2014. I contribute $458/month to this account now)

2013
Total Principal $6,084.51
Interest $731.92
Chargeoffs $0

2014
Total Principal 16,628.03
Interest $2,899.86
Chargeoffs $438.00

2015 current
Total Principal $18,251.61
Interest $3374
Chargeoffs $672

My loan criteria has somewhat fluctuated over the years so I can't give you an exact for what criteria every note was bought under, but in general I've focused on debt consolidation and refinancing, 0 anything for any credit hits/inquiries/problems in the last several amount of years. Steady job of 4+ years, and most recently I look for people who own or mortgage. I invest in all the notes, though in a higher percentage towards the higher return notes.

jamiesmoneyadvice
Posts: 5
Joined: Thu Jul 09, 2015 8:40 pm
Contact:

Re: Lending Club Sadness

Post by jamiesmoneyadvice »

I highly suspect that Lending Club has taken on many more risky borrowers since it went public on the stock exchange. This is to boost profits for the Wall St. machine while shafting the little guys like us trying to make returns. I have heard that in the past few months, defaults on new loans are happening more frequently than in the past. That being said, loans are at the most risk of default in the first 15 months before there is much payment history. I sort of lucked out because I can only buy on the secondary market in my state and my returns are pretty good so far.

SimpleLife
Posts: 771
Joined: Wed Aug 21, 2013 8:23 pm

Re: Lending Club Sadness

Post by SimpleLife »

The whole concept seemed really crazy to me. What did anyone really expect these people to do? It's a really easy way for the to scam some money and disappear for a few years until it blows over. Glad I didn't invest or take every thing MMM says as the gospel.

steelerfan
Posts: 127
Joined: Wed Feb 27, 2013 3:33 pm

Re: Lending Club Sadness

Post by steelerfan »

I was the OP for this thread from a few months back. I still am investing in LC because I enjoy it as it is fun and simple to move moeny in. My return is climbing back out of the mud. Almost up to 5 percent from negative 15% at one point.. I really do think the longer you are in this the diversification makes the investment as a whole less risky. It still seems risky for the return you get even though I enjoy it. If you feel like you are rolling the dice at times, you most likely are. It seems like these days it takes longer for notes to get out of the review queue and issue. The other thing is there seem to be big investors that step in once a loan is funded to say 60 percent. I feel there is a lack of transparency regarding what happens though I have no proof of that. My company is in the process of being sold so I am/was considering moving some of my roth 401k to a LC roth. My gut tells me this is a mistake as with big banks moving in to this market. I try to listen to my gut.

I have incorporated filtering advice from Dragline and CMonkey and it seems to be working.

NPV
Posts: 188
Joined: Fri Dec 06, 2013 9:41 am

Re: Lending Club Sadness

Post by NPV »

I do not really see the attractiveness in LC for the lenders. Seems like individual lenders are at a great disadvantage vs. banks in this lending game:
1. Banks can create money out of thin air to lend
2. Banks have huge datasets and sophisticated statistical models to assess borrower risks
3. Banks have incomparably more diversification

Admittedly I have not looked at this in depth (precisely because of the points above I have a strong hypothesis it does not make too much sense), but if the above is true, why play a game stacked against you?

SimpleLife
Posts: 771
Joined: Wed Aug 21, 2013 8:23 pm

Re: Lending Club Sadness

Post by SimpleLife »

Is there any form of collateral in the LC loans? Or are people just lending people money to buy whatever they feel like with no collateral at all?

Why would people go to LC anyway rather than a bank? Seems like if they can't get a loan from a bank, then there's a reason for that.

My bank will gladly lend me money to buy a house, an asset they can take from me. They won't just lend me money to go on vacation, especially if I have nothing for them to take from me if the deal goes sour.

jamiesmoneyadvice
Posts: 5
Joined: Thu Jul 09, 2015 8:40 pm
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Re: Lending Club Sadness

Post by jamiesmoneyadvice »

SimpleLife wrote:Is there any form of collateral in the LC loans? Or are people just lending people money to buy whatever they feel like with no collateral at all?
No, LC loans are unsecured like credit card debt. If they default, you're out of luck. Also, most of the loans aren't for cars and houses anyway but to pay off existing credit card or other higher interest rate debts.

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