Is Lending Club Getting Sketchy?

Two of the key search items that I have looked at when investing in Lending Club have been the "Verified Income" field and the "Review Status" field. Verified Income is particularly important to me because when gauging the likelihood of repayment, knowing how much a person makes is obviously very valuable information. While not as important, knowing whether a loan is approved already is very helpful--when you decide that you want to buy a note on a particular loan, you want that money to be invested as quickly as possible and not have to wait  for Lending Club to finish its approval process.

Unfortunately, over the last few months, when I have been browsing notes on Lending Club, and I have limited my search by either of those fields, absolutely no notes return.

I might be able to explain away the fact that no notes have been approved by considering that perhaps Lending Club has been inundated with new notes and has therefore pushed back the approval process until after loans secure full funding, but I can't think of a single good reason why loans would not have verified income. While not all applicants had verified income previously, there were still a good number that did, and (to me, at least) it seemed very prudent to give those notes priority attention.

I did some tentative searching but was unable to come up with a reason for these searches coming up blank. One article from April of this year even suggested that we should start seeing more notes with verified incomes.

Fellow Lending Club users: did I miss an announcement of some kind? Why have already approved notes from loans with applicants with verified income disappeared from the Lending Club platform?

Photo by photosteve101

Lending Club Update - September 2012

As you can see in the graphic to the right, I'm finally out of the negative return area with Lending Club. In fact, since the last time I posted an update, my returns have increased by roughly 5%. To make sure my returns increase, I've changed how I look at investing with Lending Club.

How, specifically, have I adjusted my investing strategy with Lending Club? Well, in the first place, I've increased the number of loans that I hold. As I mentioned before, having so few loans in the first place is really what caused the one default to affect my returns so grievously. As of today, I have 36 loans, all of which are current in their repayment. I do plan to keep investing more with Lending Club, but I'm holding off until I get a better sense of how much I'm going to be able to work when I go back to grad school in a few weeks.

The other way that I've changed my strategy is that I am much more vigilant now concerning late payment. As you may know (and as you probably know if you're reading this in the first place), Lending Club has a trading platform with which you can sell off any of your notes at whatever price you choose (assuming you can find somebody to buy them). The drawback is that Lending Club charges a 1% fee per note sold.

How exactly have I been more vigilant? Well, as soon as I notice that one of the people that I've lent to misses a payment, I put their note up for sale. I start the price at what is owed plus the current amount of interest, and I adjust that price downwards every few days until somebody purchases it. My thought is that it's better to get most of my money back on that note, even if I end up selling it for a loss. That is, a small loss is more appealing to me than the prospect of getting larger returns due to extra charges to the borrower that accompany late payment with the risk of a large loss (the entire value of the loan).

Perhaps I'm oversensitive on this topic, but after the one note defaulted (by someone who later filed for bankruptcy), I want to limit my risk with the notes as much as possible. As I mentioned, Lending Club does charge late fees for people who are late with a payment (which would mean extra money if the borrower brings themselves up to date with their payment), but I'm a happier person by selling the notes off and not having to worry about them.

What do you think? Am I too conservative in my Lending Club approach? Let me know in the comments.

Lending Club Update - July 2012

¿Que Bueno?

Since my last Lending Club update, I am significantly closer to getting back in the black. My new total to the right, while still negative, is a lot closer to zero than it was in April. Yes, I realize the irony in looking forward to a 0% rate of return.

Why has it improved so much, you ask? Well, a limited portfolio like I have is a double-edged sword. On the one, pointy end (they'll cut you, fool), having only a small number of notes at Lending Club means that if one of your borrowers stops paying, your rate of return, like mine, will probably fall over 20%. On the other end (the end where I do the cutting), if everybody else you lend to pays on time, your rate of return will, relatively quickly, work its way back up.

So where does that land me as far as sticking with Lending Club as an investment? I actually plan to keep buying.

You see, I'm something of a contrarian when it comes to receiving bad news (though not nearly as much of a contrarian as Nelson -- how's that RIM stock working out for you, buddy?).* I think that most people in my position, after seeing a double-digit negative return figure in an investment, would probably stop putting money in that investment vehicle.

Not me. In the same way that when there's a plane crash, I actually feel safer getting on a plane the next day, now that I've had my first Lending Club default, I'm actually eager to keep putting money into what I consider to be high-quality loans. While it'll still be a limited investment (the biggest chunk of my investing money goes into my 401(k) right now due to my employer's awesome matching program), my plan is to get up to 50 notes in the next few months. I'll then reassess where I'm at.

What do you think? In my position, would you have stopped investing? Let me know if the comments.

*I thought about including a smiley face here to indicate that I was joking, but I figure we're all big boys here, and big boys don't need to use emoticons.**
**One might also argue that big boys don't need to use footnotes to explain when they're joking. To this harrowing assessment, I have no retort. In the words of the immortal Phoebe Buffay, "I have tasted my own medicine, and it is bitter!"

Lending Club Update - April 2012

Behold the figure!

That figure that you see to the right of this text represents what my current returns are from my Lending Club account.

A negative return? Why is it so low, you might ask? The answer is simple: one of the people to whom I lent money decided to stop paying, and that person's loan was just charged off. The change is so dramatic from this point because I only have 16 total loans, so any one default is going to affect me enormously. As Lending Club itself has suggested, the more loan notes you own, the less any individual default hurts you.

See the print screen from the site describing Lending Club's efforts to get the person to pay.

"Recovery unlikely," eh? So you're saying there's a chance...

This person's default was a bit surprising to me as he (I assume it was a he) had one of the higher credit scores available on the site (the best credit score that someone can have on the site is an A1 -- this guy had an A5). His loan was also relatively meager (approximately $6,000); loans under $10,000 have tended to be my lifeblood at Lending Club due to the fact that I believe that they are safer loans to take as smaller payments are theoretically easier to make.

In retrospect, it seems like this guy was probably applying to Lending Club as a last-ditch effort to stay afloat financially. I'm basing this assumption on the fact that his credit score (which you can monitor on the site) has basically gone into the crapper the last few months. It seems like the last thing he needed was more debt.

In short, investing in Lending Club in the minimal fashion with which I have invested is an especially high-risk/high-reward enterprise. I'm positive there are plenty of other folks out who have a comparable number of notes as I do who have no defaults; conversely, I'm also fairly certain that there are those who have more defaults.

The only real way to lower the volatility in your Lending Club portfolio with some certainty is to own more notes. Even so, even easily explained double-digit losses give me pause. Still, the truth of the matter is, I'm only out about $23 and change; this wasn't the sort of loss that means I'll be stuck eating cat food in my retirement.

What do you think? Have you invested with Lending Club? What have your experiences been? Let me know in the comments.

Does Lending Club Advocate the Martingale System?

Gambling's not all neon and brick walls, you know.

There was a time in my life when I was spent a lot of time reading about gambling strategies (and I'm not talking about penny stock tips).  As you might have suspected, that time in my life ended pretty poorly (no pun intended).

However, as I was looking at my account with Lending Club, I realized that they appear to be advocating a similar strategy that some gamblers do.

This strategy is known as the Martingale System, and here's how it works.

The Martingale 

Let's say you're playing blackjack.  You wager $5, and the dealer has 19 to your 18, so you lose the hand.  Now, you double your bet to $10.  Sadly, the dealer hits a blackjack, and you lose again.  The Martingale System says that since it is improbable that the dealer will win infinite hands, every time you lose, you should continue doubling your last bet until you eventually win a hand.  When you do win, you will win back both your original bet as well as a small profit equal to your original bet.

It's a slam dunk, right?  There's no way to lose!  Let's all go to Vegas and get rich!

Unfortunately, for the Martingale to work, you need both a ridiculously high risk tolerance and an infinite amount of money (though, if you had infinite money, why are you gambling in the first place?).  Let's look at why.

Lending Club Update

As I mentioned and advocated for last month, I've cautiously dipped my toes into the Lending Club pool, and I wanted to give an update on how I'm doing.

Returns

The graphic above shows the percentage of return that I have received.  As you can see, I presently have a net annualized return of 8.29%.

Analysis


While I'm pleased with the return, I expect the percentage to go down significantly in the next few months as one of the loans that I purchased a note on is currently in talks with a collections agency.  I only hold seven notes, so any defaults significantly lower my returns.  While I suppose that it is possible that I will recoup some of my money, I'm not holding my breath.

Investing: P2P Lending vs. Bank CDs

I'm going to start this post by stating something that is stupidly obvious: there are a huge number of different ways to invest your money.  From stocks and bonds, to investing in new companies, to burying your cash in the backyard, if you can imagine it, you can probably invest in it (dream a little dream, you dreamers!).  For the purposes of this article though, I'm only going to focus on two that I think have a good deal in common: peer to peer (P2P) lending and certificates of deposit (CDs).

How P2P Lending and CDs Are Similar

The key similarity both investments share is that both require you to tie up your money for a certain, specified amount of time.  As such, both are essentially illiquid investments.*  However, this length of time is fairly short-term, particularly when compared to 30 year bonds, for instance. 

For CDs, your money can be tied up anywhere between three months and five years, depending on how long you choose to invest.  For P2P, (which I'm basing on my experience with Lending Club, as I am unfamiliar with Prosper and others), your money is invested for either three years or five years.**

With the above similarity stated, let's look at the pros and cons of each investment.