P2P Lending

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P2P Lending

Post by MachineGhost » Fri Sep 21, 2012 8:05 am

After almost 2 years at LendingClub, I have the following stats:

91 Current
21 Fully Paid
1 Late
1 Charged Off

Net Annualized Return: 5.55%.

I originally joined LC to earn the deposit bonus.  Once I discovered that LC's risk analysis was inferior to Prosper's post-2009 risk analysis, I ceased reinvesting and started withdrawing all of the P&I payments received each month with the intention of lending at Prosper.  However, there were account opening hassles at Prosper that I didn't want to be forced to call them to resolve, so I let it lapse.  Since then I've had second thoughts after examining the prospect of borrowing 25K to arbitrage.  I felt that the risk of going through another recession, the dearth of qualifying loans per month, the stress of the lock-up period, the risks of inflation and the low yields relative to the credit card industry for unsecured debt that is even riskier than corporate junk bonds, just does not add up to a prudent investment.

That being said, it is certainly feasible to get 10%+ net yields per year at Prosper.  However, there are similar opportunities in the stock market with more favorable attributes.
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Re: P2P Lending

Post by Storm » Mon Sep 24, 2012 10:39 am

Wow, your stats are much better than I thought they would be.  I have heard of 20% default rates.  Keep in mind, these borrowers are most likely the worst around - they couldn't even qualify for a credit card or any bank loan...
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Re: P2P Lending

Post by MachineGhost » Mon Sep 24, 2012 11:10 am

Storm wrote: Wow, your stats are much better than I thought they would be.  I have heard of 20% default rates.  Keep in mind, these borrowers are most likely the worst around - they couldn't even qualify for a credit card or any bank loan...
I focused on only the top A and went down to a few B's and C's as the A loans dried up to get positioned.  If I did it all over again, I would use filters to optimize the risk/reward which would then put the average grade at about C- and net return after losses around 13%.  The problem is not the risk per se, it is making sure that the reward you get is commensurate with the risk taken.  LC simply does not provide adequate reward due to its anarchronistic risk modeling.
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Re: P2P Lending

Post by Pointedstick » Mon Sep 24, 2012 11:32 am

http://www.mrmoneymustache.com/2012/09/ ... experiment

The author states that statistically, it seems like your best bet is actually to focus on the lowest-rated debt, and then within those categories of people, exclude those most likely to default. Pretty interesting.
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Re: P2P Lending

Post by Xan » Mon Sep 24, 2012 11:42 am

I looked into some of these things, but what I've so far been unable to answer for myself is where I'd be crossing the line into usury.

Extracting huge interest rates from people already in bad financial shape so that I can pep up my cash returns isn't something I'm 100% sure I'm ready to do.  But they enter into the loan freely, so they must think they're better off with it than without it, so I'm doing them a favor, right?  Yet they've already demonstrated they're not financially savvy, so I'm just taking advantage.  Or am I?
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Re: P2P Lending

Post by Pointedstick » Mon Sep 24, 2012 11:51 am

I think the point is that the interest rates offered by P2P lending services are supposed to be better than what you'd get from a credit card or a payday lender, and the collection practices are probably less shady as well. So you could think of it as giving people a less-bad option. But I agree, it's kind of sad, especially when you see the kinds of things that some people are trying to borrow for. Eventually you'll find yourself asking things like, "Do I really feel comfortable helping to lend this unemployed bum 20 grand for a pool?"
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Re: P2P Lending

Post by MachineGhost » Wed Nov 21, 2012 10:33 am

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Re: P2P Lending

Post by hrux » Thu Nov 22, 2012 3:05 pm

Fellow Crawling Road Posters,
IMO, if one sets the right filters, after defaults one should be able to achieve 10-12% annual returns without all the stock market gyrations.  I highly encourage you to read this blog if you are interested in P2P lending...

http://www.lendacademy.com/
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Re: P2P Lending

Post by flyingpylon » Thu Nov 22, 2012 8:25 pm

I was interested in this sort of thing (for some VP money) but was disappointed to see that it's not available to residents of certain states (Indiana in my case).  Does anyone know what state regulations cause an issue?
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Re: P2P Lending

Post by MachineGhost » Fri Nov 23, 2012 5:34 pm

flyingpylon wrote: I was interested in this sort of thing (for some VP money) but was disappointed to see that it's not available to residents of certain states (Indiana in my case).  Does anyone know what state regulations cause an issue?
Usury or state security registration laws probably.
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Re: P2P Lending

Post by Mark Leavy » Fri Nov 23, 2012 8:44 pm

hrux wrote: IMO, if one sets the right filters, after defaults one should be able to achieve 10-12% annual returns without all the stock market gyrations.
If anyone is seriously considering P2P loans, then I would encourage you to run some scenarios that assume a 50% increased default rate over past history.

Much of P2P loan discussions suggest that the investor achieves diversification and risk reduction via large numbers of small loans.

I suggest that a relatively small change in global economic conditions could dramatically change the default rate of these loans.  What happens to your portfolio with a 50% (or greater) change in the default rate?  The math on the projected returns is fragile and dependent on existing conditions.

A P2P play is pure speculation and a bet on a stable economic outlook.
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Re: P2P Lending

Post by MachineGhost » Fri Dec 19, 2014 9:38 pm

I must be a glutton for punishment, 'cuz I'm now going in for round two.  When all was said and done, my net annualized return last time was 4.62%.  A-rated deadbeats dragged it down.  The #1 problem with LC is no income verification.

This time, however, I'm using financial intelliegence and investment automation.  At the conservative level, I can tolerate at least a 5x increase in the default rate and still be above breakeven.  No need to get greedy here at around 11% net a year.  In my view, this is superior to taking on losses in stocks.

Surprisingly, default rates on unsecured credit card debt didn't really go up much on an absolute basis during the Great Recession.  I think they didn't go past 10%.

You need some brass balls, friends, especially when you see your $25 going into an E-rated loan for 60 months.  But this is like quantitative trading; you're banking on the overall portfolio odds not indiivdual loans.
Last edited by MachineGhost on Fri Dec 19, 2014 9:44 pm, edited 1 time in total.
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Re: P2P Lending

Post by sophie » Fri Dec 19, 2014 11:34 pm

I tried it out starting almost two years ago.  I figured it would help me keep my hands off the PP, which it certainly did!

Here are my stats.  I didn't invest everything right away, I threw a bit of money at it each month for a year or so, then recently stopped and I'm just letting it ride.

Total notes 219
3 in funding
171 current/issued
6 in grace period (unusual, I am betting it's because of Christmas)
33 fully paid
1 late
5 charged off
NAR 16.33% (this is LC's slightly unrealistic report)
actual total gain for the past two years:  20.7%

I think all the efforts at filtering are actually self-defeating.  They may have worked initially, but Lending Club's underwriting is now so sophisticated that any advantage is arbitraged away.  The underwriting also changes over time, so backtesting is not really valid.

I decided early on that the best way to play this game is to go for the high risk notes, diversify, and realize that a large percentage of notes are going to default.  The returns are better than with the "safe" notes, and the risk of losing money is practically zero if you've got 200 notes.  My notes average 19% interest.  I figure with 200 notes I should see about 5-6 chargeoffs a year.

Investing in Lending Club definitely means you are financing some idiotic money management habits.  The way I look at it, people who are stupid enough to borrow money for a wedding at 18+% are actually the majority, and their attitudes often end up hurting me (e.g. my debt-happy coop board, the whole subprime crisis).  Lending Club allows the few of us who pay off our credit cards every month and have funds left over to invest to turn the tables and reap some financial benefits from those idiots. 
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Re: P2P Lending

Post by MachineGhost » Sat Dec 20, 2014 7:14 am

sophie wrote: I tried it out starting almost two years ago.  I figured it would help me keep my hands off the PP, which it certainly did!

Here are my stats.  I didn't invest everything right away, I threw a bit of money at it each month for a year or so, then recently stopped and I'm just letting it ride.

Total notes 219
3 in funding
171 current/issued
6 in grace period (unusual, I am betting it's because of Christmas)
33 fully paid
1 late
5 charged off
NAR 16.33% (this is LC's slightly unrealistic report)
actual total gain for the past two years:  20.7%

I think all the efforts at filtering are actually self-defeating.  They may have worked initially, but Lending Club's underwriting is now so sophisticated that any advantage is arbitraged away.  The underwriting also changes over time, so backtesting is not really valid.

I decided early on that the best way to play this game is to go for the high risk notes, diversify, and realize that a large percentage of notes are going to default.  The returns are better than with the "safe" notes, and the risk of losing money is practically zero if you've got 200 notes.  My notes average 19% interest.  I figure with 200 notes I should see about 5-6 chargeoffs a year.

Investing in Lending Club definitely means you are financing some idiotic money management habits.  The way I look at it, people who are stupid enough to borrow money for a wedding at 18+% are actually the majority, and their attitudes often end up hurting me (e.g. my debt-happy coop board, the whole subprime crisis).  Lending Club allows the few of us who pay off our credit cards every month and have funds left over to invest to turn the tables and reap some financial benefits from those idiots.
I'm glad you think LC has been revising their underwriting model because they really screwed up in the beginning and had to change it.  That's part of the allure of why they are #1...  they underpriced the risk to lenders, so borrowers flocked to it.  I was actually of the mind they still underpriced the risk with that revised model, but I haven't exactly stayed up to date since 2012.  Their rates seem closer to Prosper now which has/had a better underwriting model.

If the default rate for the A (and soon to come AA-rated) loans are just as bad as for the other grades, then I agree it is really is pointless focusing on "quality" except for cash management purposes (which seems crazy but could be pulled off with superior filtering?).  My net return hovered around 6.46% until the second year, then it took a dive near the end.  So overall over 36 months, out of 109 fully paid loans, 5 were charged off.  That cost me 1.65% in net annualized return.  Three A's and two B's.  I laugh at one of the charged-off A-loans that claimed to be working for the "United Nations".  Yeah sure, you and what army???

I don't have much faith in LC's collection ability.  I know the ins and outs of collection all too well and collectors don't have much, if any, of a legal leg to stand on; relying on fear, ignorance and intimidation to get debtors to pay up.  So they better come up with some innovative collection practices to be worthy of the FinTech moniker.

Financing idioticy is just ... scary.  No other way to put it.

Did you participate in the IPO?
Last edited by MachineGhost on Sat Dec 20, 2014 7:19 am, edited 1 time in total.
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Re: P2P Lending

Post by sophie » Sat Dec 20, 2014 10:23 am

I wanted to jump into the IPO, but it was annoyingly complicated and I was away/out of the country at the exact wrong time, so I missed the boat.  Shame, that would have been an awesome bit of profit.

The problem with buying the "conservative" notes is that the return, for me, doesn't justify either the risk or the fact that your money is inconveniently tied up.  This is pure VP territory, so the goal is to swing for the hills.  The bulk of my notes are Ds and Es, with a smattering of Fs and Cs.

It is scary to think about the insane decisions nearly all borrowers are making, or have made, but my main focus here is  that I want to able to slurp up some of the free money that previously has all been going to banks.  Lending Club's model is that they are skimming the best credit card borrowers off the top, as they have stricter lending criteria than the banks do.  So their default rates should be lower than the average for unsecured loans.  It's too early to tell whether this is the case because most of the 60 month loans are still active,  but their default rates have definitely gone down compared to their early years.  They also have sharpened up their collection methods.  But an unsecured loan is just that - you have no leverage against the borrower except the threat of a big drop in their credit score.
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Re: P2P Lending

Post by MachineGhost » Mon Dec 22, 2014 6:58 pm

I was looking for a way to both track the loans in Quicken and have them included as part of the asset allocation pie.  Before, I would just use a cash Asset account and record interest, repayments, etc. for all combined loans as monthly transanctions which doesn't let you set an asset allocation category (it would come up under Cash).  I think this approach may work:

https://web.archive.org/web/20131227112 ... tegration/

This will also track the investment gain properly as well.
Last edited by MachineGhost on Tue Dec 23, 2014 3:27 pm, edited 1 time in total.
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Re: P2P Lending

Post by MachineGhost » Tue Dec 23, 2014 3:26 pm

How interesting...

Lending Club has policies regarding how frequently a new bank account can be linked to your Lending Club account. These policies are designed to comply with all state and federal Anti-Money Laundering rules and regulations. We are unable to release the exact amount of time until you will be able to link a new bank account. We appreciate your understanding of these policies.
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Re: P2P Lending

Post by Xan » Tue Dec 23, 2014 3:40 pm

How would one launder money through Lending Club, and in what way would restricting the frequency of new bank accounts prevent it?
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Re: P2P Lending

Post by MachineGhost » Thu Jun 25, 2015 8:19 pm

[quote=http://www.bloomberg.com/news/articles/ ... oan-market]RiverNorth Capital Management LLC is the latest investment firm to seek yield from peer-to-peer lending, according to a registration filing submitted this month to the U.S. Securities and Exchange Commission.

The $3.5 billion Chicago fund manager is setting up what would be the first closed-end fund in the U.S. to invest primarily in loans, securities and equity tied to lenders such as LendingClub Corp. or Prosper Marketplace Inc. that participate in the so-called P2P market, according to Bill Ullman, a senior adviser for Orchard Platform, on the firm’s website.

The fund will be run by RiverNorth chief investment officer Patrick Galley and Philip Bartow, who was hired recently from Spring Hill Capital Partners, according to the filing. It is designed to provide a “high level of total return” and will offer monthly distributions to shareholders, according to the filing. The firm seeks to register 1,000 shares at a proposed maximum price of $25 per share, another filing shows.[/quote]
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Re: P2P Lending

Post by MachineGhost » Tue Nov 03, 2015 8:35 pm

Out of 80 loans so far under the new lending criteria, 2 are now 31-120 days left.  Both are D grade.  My adjusted net annualized return is down to 11.71%.  I put a pause on any more lending a few months ago until I see if we're going into another recession or not.
Last edited by MachineGhost on Tue Nov 03, 2015 8:37 pm, edited 1 time in total.
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Re: P2P Lending

Post by sophie » Wed Nov 04, 2015 2:40 pm

What's the investment grade distribution on your notes?  11.71% is nothing to complain about - compare that to current stock and bond funds!

You do need more notes to provide enough diversification though - at least 200.  And you have to take late/charged-off loans in stride.  The annual return on my 3 year old account is 17.12%.  Over half my notes are E and F grade, and so far I am seeing an annual charge-off rate of ~3.5%.  I do use filters and I'm starting to think they might be accomplishing something after all.  I set mine based on some diddling around with that Nickel Steamroller website.

I still regard this as play money and would absolutely not use this as a core investment, but it is just blowing the socks off everything else out there.  I'm curious to see how this does over the next several years, and through a market downturn.  If it holds up it might be a really neat option for a Roth IRA.
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Re: P2P Lending

Post by MachineGhost » Wed Nov 04, 2015 5:15 pm

sophie wrote: What's the investment grade distribution on your notes?  11.71% is nothing to complain about - compare that to current stock and bond funds!

You do need more notes to provide enough diversification though - at least 200.  And you have to take late/charged-off loans in stride.  The annual return on my 3 year old account is 17.12%.  Over half my notes are E and F grade, and so far I am seeing an annual charge-off rate of ~3.5%.  I do use filters and I'm starting to think they might be accomplishing something after all.  I set mine based on some diddling around with that Nickel Steamroller website.

I still regard this as play money and would absolutely not use this as a core investment, but it is just blowing the socks off everything else out there.  I'm curious to see how this does over the next several years, and through a market downturn.  If it holds up it might be a really neat option for a Roth IRA.
I can't find a weighted pie graph, but the distribution ranges from B3 to E4.  The weighted average rate is 14.77%.  Some roboinvest site thinks A's and B's are bond equivalents and the rest are equity equivalents in terms of risk.

It sure gives me the willies with this being unsecured.  Everything relies on pricing the credit risk accurately.  I know I need more notes, 100 at an absolute rock bottom minimum, 400 minimum ideally which is my goal.  It would be stupid to get killed over what I fear because I wasn't diversified enough.  Historically, I should be at least a 0% net return with my moderate risk strategy in another subprime scenario.  Wouldn't be fun, but I could live with that over net principal losses.

I do wonder how hard the rejections try, try and try again...  crazy business.
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Re: P2P Lending

Post by sophie » Thu Nov 05, 2015 2:46 pm

Sounds to me like you're on the right track.  You could try the set autoinvest instructions, ignore, and check back once a month approach.

These aren't bond or equity "equivalents" - what an odd thought.  They're the junkiest of junk bonds, which is the whole point.  Yes you are right it's completely dependent on how many people will actually pay these loans back in a situation where they lose almost nothing by defaulting.  Amazingly, it seems that most people are honest.

I saw a Shark Tank episode once where an applicant admitted to having declared bankruptcy more than 7 years prior.  All the sharks immediately bowed out, which stunned the applicant.  Excellent message for him and the viewers.  There should be consequences that matter for walking away from a debt - but if that were the case, I doubt Lending Club would exist as personal loans would be a lot cheaper to begin with.
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Re: P2P Lending

Post by flagator » Thu Nov 05, 2015 8:16 pm

sophie wrote: Sounds to me like you're on the right track.  You could try the set autoinvest instructions, ignore, and check back once a month approach.

These aren't bond or equity "equivalents" - what an odd thought.  They're the junkiest of junk bonds, which is the whole point.  Yes you are right it's completely dependent on how many people will actually pay these loans back in a situation where they lose almost nothing by defaulting.  Amazingly, it seems that most people are honest.

I saw a Shark Tank episode once where an applicant admitted to having declared bankruptcy more than 7 years prior.  All the sharks immediately bowed out, which stunned the applicant.  Excellent message for him and the viewers.  There should be consequences that matter for walking away from a debt - but if that were the case, I doubt Lending Club would exist as personal loans would be a lot cheaper to begin with.
There are plenty of consequences available to the lender such as wage garnishment, as well as civil suits with confiscation of personal property. Someone can file for bankruptcy but most people are aware of the consequences of doing so. Ultimately though most lenders make up the difference of those losses by charging higher interest rates. It seems that it is all priced into the model of financing these people.
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Re: P2P Lending

Post by mathjak107 » Fri Nov 06, 2015 4:53 am

i have found that because the lending risks can be high folks devote very little money to this , certainly far less then many of those folks would invest in an actual high yield fund  . so it ends up  they get a  pretty decent return on such little money invested  that it amounts to very little ccompared to  just buying a high yield fund and getting 6% on a much greater percentage of  their money .

kind of like some of those that buy individual stocks and are so proud of their returns but they have 90% of the rest of their money in a low return getting 1%  because they are afraid to commit it ,

they would be far better off forgetting the individual issues and just invest more of their money in a  diversified mix of funds .

i think i would sooner commit more money to a high yield fund  then such little money to pp lending  if i really wanted to add some more risk  but didn't have the stomach to commit more to pp lending .

i think pp lending can be a very decent return , but usually folks devote so little to it the return does not really influence much total asset wise ..

i usually speculate once a month with a little fun money in something . but it is really just for fun and influences little .

last month was exxon which i sold two weeks ago for a 15%  gain  in 4 weeks but i only use 10k for this so in the scheme of things it is only for fun .

if gold dips below 1100 that may be the next months speculation .  even  tlt may be if it gets beat up enough , i just hold it until a quick flash and gone .

been doing this for years with far more winners then losers since the most i will allow it to fall is 5% if i am wrong . i can't do that with pp lending .

the month before exxon was a brokerage stock  LTS  which i got at 2.00 bucks an sold  a few weeks later at a 20% profit .

i always found this fun and most of the time the positions do run up a lot higher like LTS  did  but it is just for fun .
Last edited by mathjak107 on Fri Nov 06, 2015 5:09 am, edited 1 time in total.
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