A Lending Club Filter For Solid Returns
After using LendingRobot for automated purchases for a while instead of this Lending Club Filter, I’m back to selecting notes manually and this filter again. Read about my latest Lending Club investing returns here.
On May 2nd, 2013, Google bought a stake in Lending Club at a $1.55 billion valuation. This headline was the first time I ever heard of Lending Club. OK, so maybe I am not much of an early adopter. I had heard of a peer-to-peer (P2P) lending web site that was operating, but the idea was never clarified to me until I read that news story and went to the Lending Club website.
The website itself was very impressive; easy to navigate, attractive, and clear instructions on what to do if you need a loan or want to invest. The company allows you to lend money to qualified borrowers in fractions of a loan as small as $25, and receive monthly interest and principal payments that can be invested back into new notes.
The concept fit into my strategy of finding income producing investments outside of just stocks and real estate, so I decided to give it a try. For anyone that has been using Lending Club, I think we can all agree that the founder, Renaud Laplanche, is a brilliant entrepreneur. Lending like this is a game changer. Here is an excellent interview with the founder by Simon Cunningham of Lending Memo.
The First $1000
The Google investment upped the exposure to peer-to-peer lending and the loan selection for Lending Club quickly diminished. But that did not stop me from depositing $1000 to start an account. When I first started investing, I chose low risk, low interest rate loans because I was still learning my way around and was a little skeptical.
All of the initial loans I chose were 36 months rather than 60 months in duration. I figured this gave the borrower less time to default. Lending Club also gives you the option to automatically choose the loans for you based on their ranking system, but this was not for me.
I liked the idea of looking at each borrower and trying to determine if I thought they were a good person to lend to. In time however, I learned what peer-to-peer lending is really about… statistics.
After I completed my initial portfolio of $1000, 40 notes at $25 each, I started reading more about strategies for choosing loans. I also implemented automated deposits into my account in the amount of $200 per month. I deposit the money in $100 increments at different times of the month to spread out my purchases.
This amounts to eight $25 new notes every month, in addition to whatever notes I can buy from the interest and principal I receive from my outstanding principal.
My Original Lending Club Filter
When learning new strategies for choosing notes, Lend Academy is a great place to start. That web site gave me the basics and also pointed me in the direction of Nickel Steamroller, now NSR Invest. NSR Invest downloads the historical data from the Lending Club web site which is freely available to anyone in Excel spreadsheet form, and they format it so that you can view it on their web site.
You can also upload your portfolio and it will give you guidance on it. After discovering Nickel Steamroller, I developed a filter that I have been using to select nearly all of my notes. Below is the filter I have been using since the initial 40 notes. I developed this filter based on my risk tolerance and desired minimum return. My goal is to return about 12% annually. According to the filter below, the return on investment (ROI) is 14.33% with a default rate of 1.377%.
| Loan Grade | B, C, D, E, F |
| Loan Length | 60 |
| Loan Purpose | Credit Card, Debt Consol, Buy House, Wedding |
| Home Ownership | Own, Mortgage |
| Employment Length | 2, 3, 4, 5, 6, 7, 8, 9, 10+ |
| State | All but CA and FL |
| Amount Funded | >15000 |
| Inquires in the Last 6 Months | 0 |
| Delinquent in Last 2 Years | 0 |
| Annual Income | >$48,000 ($4000/month) |
| Public Files on Record | 0 |
| Months Since Last Delinquency | >60 |
Here is a snapshot of the filter from the NSR Invest:
This is a fairly tight filter, meaning that on a daily basis, not a lot of loans are available to invest in that fits this criteria. So when investing your money, you need to look for new loans when they are released. If you run a filter at these times, or a few minutes after, you are more likely to have available loans to invest in. More desirable loans may quickly appear and disappear before you even see them. So you need to be nimble if you have a tight filter.
There are plenty of ways to tweak this filter, or you can create your own. For example, the filter above does not include notes of 36 month duration. If I include them, the ROI changes to 12.77% and more loans are shown.
Fees
If you are not familiar with the fee structure, Lending Club takes about $.01, a penny, every time you receive a monthly payment on a $25 note. So over the course of a 60 month loan, you will pay $.60 total in fees. Fees are clearly marked on your account statement.
This fee does not sound like much, but so far I have received $70.10 in interest and charged $3.13 in fees. To put in perspective, the weighted average of all of my loans is 13.17%, but my Net Annualized Return (NAR) is 12.39%. Here is a detailed explanation of the NAR on the Lending Club web site. Lending Club needs to make money on this gig, so I am not complaining. They also charge the borrowers an origination fee.
Tracking your Investments
NAR is the standard for tracking your investment returns. Some people are not satisfied with this calculation, especially when loans begin to go late and default. I have my own complicated spreadsheet that I update by importing data from the web site.
This spreadsheet of mine is getting a little out of control with many macros and nearly 100 worksheets, and I am not sure it gives me any better analysis than what Lending Club tells me. It’s becoming a time suck, but I like that I can manipulate the data as I wish. That said, I still use the NAR to estimate forward 12-month income on my Lending Club investment. I simply take the NAR multiplied by my outstanding principal.
At this point none of my notes have gone into default. I fully expect that some of them will in the future. A few of my notes have gone into the grace period and I did not sell them. So far they have all caught up on their payments. I am in the process of learning about what to do when the notes do go late, and preparing myself to sell when the time comes. Lending Club links to a marketplace called FolioFN where you can buy or sell notes, but I am have not yet explored it.
Resources
Here are some resources I use for reading up on Lending Club basics and strategies:
While Lending Club has been around since 2007, peer-to-peer lending is still in its infancy. As discussed in the interview with Lending Club’s founder, the market for lending is unlimited. The growth of this form of lending is now a matter of regulation, scaling the business and loan options, and public perception and awareness.
Craig is a former IT professional who left his 20-year career to be a full-time finance writer. A DIY investor since 1995, he started Retire Before Dad in 2013 as a creative outlet to share his investment portfolios. Craig studied Finance at Michigan State University and lives in Northern Virginia with his wife and three children. Read more HERE.
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I am interested in following your progress with Lending Club. I thought seriously about investing there about the same time it showed up on your radar, back in May. I created an account, did research (I like Nickel Steamroller – lots of data), but I just never pulled the trigger. I don’t know, the history is just not long enough yet for me to feel comfortable and I didn’t feel like putting in the effort for just a few thousand dollars invested. Thanks for posting this, I enjoy watching from the sidelines right now 🙂
GMS,
Thanks, and welcome for the ride! It should be fairly uneventful just putting in the $200 per month. Hopefully my NAR% will slowly increase and I will avoid defaults. I’ll be reinvesting everything. My plan is to do quarterly updates. Thanks for reading.
-RBD
Hello RetireBeforeDad – Thank you for your very informative post. I am very new to investing outside of a 401k and just opened a LC account recently. I have 1 note in funding and waiting for the bank withdrawal on the second $25 increment. I know those are small beans right now but I’m confident that my account will grow over time and it sure beats regular savings accounts even though it’s not quite liquid. I’m curious to know why you omit CA and FL from your filters?
Karen,
Thanks for following my blog and commenting. Its always best to get started investing, no matter how small you start. I omit CA and FL in this case because the filters on Nickel Steamroller tells me to. This is probably due to CA and FL leading the nation in foreclosures and bankruptcies, and the data analyzed is from prior years. If I add those 2 states back into the filter, the number of loans available goes up, but the ROI goes down and the default rate rises. Its all about trying different scenarios and seeing which ones raise or lower the ROI, and avoiding loans that are more likely to default.
-RBD
Good article. Every new investor should do as much research as you have done. Just one comment. I think it is best to have a mix of 36 and 60 month loans and in my accounts I keep this to 2/3 36-month and 1/3 60-month. Five years is a long time and lots can change in that time so I feel skewing to the shorter duration is worth it. And the fact that we have not had any 5-year loans fully mature means that we don’t have any complete historical data on this yet.
And thanks for mentioning my site as a resource.
Peter,
I just found this comment in my spam folder. Thanks for chiming in and I appreciate your advice. I started investing in mostly 3 year but then changed to mostly 5 years to get the higher rates. At this point I am probably 50/50. My next filter I do think I’ll be more 3 year centered. But I need to spend a good amount of time on my next filter and do more research. Thanks for sharing my article as well.
-RBD
Wow, thank you for the link RBD, and fantastic and informative post. The transparency is definitely appreciated.
Pretty tight filter for you there. Of the 430 notes, only 136 were issued prior to December of 2012. Are you concerned with the overall lack of history with this filter, especially considering these are five-year loans? In full disclosure those 136 notes are sitting at 13.88% ROI, but are obviously very young loans in relation to their full term. Additionally, are you concerned at all with the risk of holding the five-year loans? Of course this is still taking into consideration you have some diversification with the initial $1,000.
How do you plan on projecting your forward returns once you have loans going late? Do you anticipate using the “adjusted NAR” figure, or coming up with your own discounted amounts? When developing my own goals I take my current investment, any projected contributions, and use an expected rate of return.
All in all, I’m glad you’ve made the addition of peer-to-peer lending to your portfolio. Should be nice alternative investment to monitor and keep track of over the next few years.
W2R,
Thanks for your insight on my filter. Projecting forward returns has been improved with the new adjusted NAR feature that they implemented. I’m sure I’ll use that, and also tweak my spreadsheet when the time comes. I am always changing the features on it and trying to make it better. I am investing in the 5 year loans for the higher returns associated for the higher risk of default. As all the loans get older, the outstanding principal at risk declines steadily. At 36 months on a 60 month loan, I see the principal balance on most of the loans (10-20% range) hover around 50%, leaving around half of the original investment at risk for the last 2 years. What I alluded to in this post is that I am considering starting to sell the loans as soon as they go late or into grace period. I need to read up more on that strategy, but that seems to be a common risk reduction technique, taking a smaller loss to get out of of the loan. Also, I reran my filter late last night and you point out some things for me to consider. It looks like I could improve on this by loosening up some of the criteria and and focusing more on older loans. My plan for this filter was to work it for a while, then develop a different one to work for the next $1000, which I will probably implement for the new year..
-RBD
The adjust NAR is nice, and a step in the right direction, but fails to really take into consideration the fact that an account will take some serious aging before that becomes effective. As for the tweaking of filters, I’ve never stopped doing that myself. So much room for tweaking and trying new things.
I personally don’t churn my notes as I am comfortable with my filters and understand that long term, notes will default and charge off. Just a part of the process. Plus it allows for me to maintain a reasonable level of passivity while scaling it up significantly in terms of dollars and notes.
Thanks for the post RBD. When I asked for you to write it, I had no idea you’d get to it so quickly. I have started to research these peer lending operations several times, but never made the jump. I have trouble getting comfortable with this type of thing, I guess. I know I’m old school, but it just seems too good to be true. Plus I would want to deploy a large amount of capital to balance stocks and real estate.
Thank you so much for the post. You’ve given me much to think about.
-Bryan
Bryan, I would strongly encourage you to continue doing research into peer to peer lending. What makes you say you need to dump a ton of money into it to balance anything? Wouldn’t that imply you are currently out of balance? If you determine it is worth the risk, create your own filter and investment criteria, open an account and put a small amount to work. I’d personally advise no less than $1,000, but more along the lines of $2,500 to ensure you can get some ample diversification to stave off the inevitable defaults and earn a positive return.
If you have any questions, ask around, there are plenty of folks who have been investing quite successfully for years.
Haha, oh yes my friend….my portfolio is out of balance. I just don’t know if I want to commit to following a whole bunch of very small loans. On the flip side, I like the diversification angle of lots of small loans instead of a couple very large ones. This warrants further thought and research. I’ll likely be writing you and RBD with further questions.
-Bryan
@Fast Weekly – Committing to a bunch of small loans is the way to go for diversification purposes. It is relatively easy to keep things organized through the online interface with either Lending Club or Prosper. To be honest, I don’t follow each loan individually at this point. It is a matter of scaling and passivity. If I can get a 12% return without monitoring each loan versus spending hours monitoring for just an extra 1%, then that is worth it for me. I don’t really churn my notes at all, thus saving a tremendous amount of time. I might spend 10 minutes a week managing my three P2P lending accounts of approximately $14,000 and 800 notes at this point. Any more time than that and I’m just analyzing my accounts because of my own investment curiosities and passion for investing.
As for learning more, it is easy enough to open an account, poke around the interface and notes, and if you don’t decide to invest, just close the account. Feel free to ask if you have any questions.
Bryan,
I already had this post in my mind, and I try to do two a week. I do think this is going to be a big part of the future on lending. Good returns for investors, and better rates than bank loans for borrowers. For investors there is a variety of risk levels and tools to lower risk. Thanks for reading and suggesting the post.
-RBD
I really enjoyed the article. I came across the P2P concept just a few weeks ago, I guess news travels slow overseas. Anyways, I live in NC, and state law prohibits me from creating an account. I wish I could, as it seems to be a very interesting endeavor. Best of Luck.
Michael,
Thanks for reading and commenting. Yeah I’m not sure how the state regulations are determined. Over time I read they expect other states to loosen up the restriction. It is a cool concept and has been a good investment for many so far.
-RBD
Nice post…no defaults in your first 5 months is pretty good. I guess that is proof that your filter is working. Keep it up…wishing you continued success!
Thank you for all the useful information on the website. I was wondering what are your thoughts on Lending Robot? Do you have better returns now that your are using them? Are you using a the fully automated solution they provide? Looking into it and it seems interesting but I am not sure if its worth the 0.45% fee annually. A review on this service would be great.
Paul,
So far I like it a lot. But the notes I own through it are not mature enough yet to make a long term return opinion. I use the automated version where I pick a return and it makes the appropriate choices. Right around 9% expected return. Buy expected return is a long term expectation. The notes are mostly in the high teens and low twenties yields. So it’s kind of misleading. LR predicts my current portfolio that I picked myself will return below 9%.
Most notes it chooses for me are under 10,000 and 36 months. Many are in the $2000-$5000 range. Makes sense these are less likely to default. They are harder to find if you’re not automating. I was investing in $35k notes and they are starting to default more.
Keep in mind, you only pay the 0.45 fee above $5000 that Lending Robot is managing. I started off slowly, investing only $200 through them, plus reinvestment. It takes a while to build up your managed account. My original picks from the last 2 years are not included in that $5000. After 3-4 months of using the tool, I’m still under the $5000 threshold and don’t pay a thing. I’d say it’s definitely worth a try. You can always stop.
I find it really hands free and like it. No loans have gone sour yet.
I can answer more questions here if you like. Hoping to eventually get out a review on the product.
-RBD
Thank you for the insight. I think i’m going to try it. As money grows in the account it become harder to manage and find loans to invest in. Lending robot pretty much eliminates administrative overhead.