Phooey - took a look at the download file and there doesn’t seem to be a “last payment date”. I could guess that something was prepaid if the “total paid” was less than the product of the term and the monthly payment; maybe set a 1-2% error cutoff to allow for small prepayments / rounding errors.
Just noticed on the American Banking News site that they’ve recently added North Carolina and Kansas to their list of states.
I just set up an automatic monthly funds transfer of $250 for the next 12 months, scheduled for the first of each month. This will allow me to build my investment over time in small, painless increments.
Transferring $3000 in one shot would make me a bit uneasy. Being able to spread the $3000 out over the course of a year, while maintaining the option to cancel or modify the schedule and amount as desired, gives me better control and flexibility.
Question. Are you pulling anything out of your LC account, or reinvesting everything? With 500 loans, I imagine your weekly payments to be pretty substantial.
It’s still in the grace period, so I am not too worried yet. If it does fail it would be ironic in that the borrower’s credit rating has improved since taking out the loan!
I wouldnt be, s/he probably is only pulling in may $100/mo in interest.
At a minimum. $100 interest would be if all of his loans are $25, which I don’t believe they are.
He mentioned having like $12K invested…assuming 10% about $100/mo.
Which is a phenomenal return. I just checked one of my savings accounts that had $80.23 interest credited on June 1. I’m almost embarrassed to note how much I have on deposit there. So if Chessic is getting $100/mo. return on $12K, and considering the return I’m getting on my currently paltry LC investment, which I’m quite pleased with, I don’t see much advantage of keeping any where near as much as I do in a savings account.
The reason I asked if Chessic was taking any money out is because I wondered if he’d gotten to the point where he could siphon some cash off to augment his monthly income. It’d be an interesting exercise to calculate how much of an investment in LC someone would need to generate enough of income to live on.
http://www.wiseclerk.com/lending-club-ordered-to-cease-operations-in-massachusetts-t262.html
Interesting…
Or even a rough WAG based on the sort of interest I’m seeing: on a fairly new A-class loan I see 11 cents (on a 25 dollar investment), on a newer C-class loan I got 24 cents, so assume an average new-loan interest of 18 cents… and assume half that as an average over the life of the loan, or 9 cents per month per loan (my assumption is that that C-class is paying 24 cents now but 1 cent in its last month).
So 500 loans times 9 cents is only 45 dollars a month.
Anyway - safe bet it’s less than 100 a month and more than 5.00 a month :).
It does seem scary at first glance, but you’re forgetting a few things. One, if you’re at 10% interest and you’re 24 months in, then any dollars still remaining in principle has already generated and paid 20 cents. So you shouldn’t say “I’m loaning at 10% and losing at 16%, so I’m down 6%!” You’ve got to figure in multiple years.
Two, if a loan defaults in the 30th month, they’ve already paid back a substantial part of your original investment. I ran the math on my late loans and found that most loans defaulted after paying back 20% in interest and principle. That is, I recovered 20 cents on the dollar, whether you want to count that as interest or principle doesn’t matter. I had one outlier that paid back 45% of the loan, which changes the average to roughly 75%. Three,
I’m making about $95 a month. I only took out $800 when I lost my job in December, but I’ll be putting that back in soon. It’s been 11 months since I dumped a whole lot into LC, so I’m about to do a “one year later” review for you guys.
OK, ladies and gentlemen: I just completed a thorough review of all the stats and properties of completed notes. I found out what really affects the default rate and what doesn’t matter much at all. These are my findings.
I decided to just use debt consols and credit refinances, since those are the bulk of LC’s notes and controlling for loan purpose seemed important. I still have the data for the other loans if you have a specific request for information. For return rates, I simply divided payments received by loan amount to see what the three-year return would be on the dollar. So if someone borrowed $7,000 and paid back $7,700, their rate would be 1.10, or +10%
Overall return: +6%. If you invested in every debt and credit loan between inception and May 2008, you’d have 6 cents for every dollar you put in. Keep in mind that that’s without reinvestment.
Loan amount: The higher the loan amount, the more defaults you’ll see, but it’s not linear. The magic number is $19,000. Return rates are pretty stable up until that point, where they drop off.
Interest rate: Don’t try to get more than 12%. Those loans, for various reasons, end up having terrible return rates. The best rates are 9-11%. Keep in mind, though, that rates are highly affected by other factors, so it’s probably a confounded variable.
Loan payment amount: This is a product of interest rate and loan amount, but it appears to have little affect. Default rates are similar for all payment brackets.
State: Obviously, the small states have tiny n’s. But of the high-population states where I can comfortably say we have a sufficient sample size, FL and NJ are terrible. Illinois, however, likes paying their loans back. KY, SD, and Al are also quite generous while WA defaults all the time.
Earliest Credit Line: Surprise!! It’s not a factor. So long as the first credit line was pre-2005, you’re fine. It doesn’t matter if their first credit line was from Pontius Pilate or during Bush’s first term.
open lines: Another surprise! It’s the most irrelevant factor of them all. Seriously, the trend line is flat as a board.
Total credit lines: Inconclusive. It’s all over the place and the trend line is positive or negative depending on where you chop off the small-sample groups.
Credit Balance: Also inconclusive.
Credit Score: Absolutely the most important factor. The 780+ group has a return of 1.11 while the 660s have only 1.063. Most factors I looked at resulted in jagged graphs, but this one is an obvious curve and there’s a stark difference between the two ends.
Debt:Request ratio: This is a derived category. I call it the “Truth ratio”. I’ve had the hunch all along that if a person owes $12,000 and they’re asking for $12,500 that they’re legit, but if they only want $2,000 or are asking for the whole $35,000 enchilada, then I smell a rat. Verdict: Meh. The theory doesn’t really hold water. So long as the borrower isn’t asking for >3 times what his stated debt is, it’s probably fine. Even if they are, it’s still not a good correlation.
Debt to income: This one, however, does have a good correlation. You should look for loans with less than 12% DtI. There’s a sharp dropoff in return rate after that.
Length of employment: Irrelevant. For some reason, the worst borrowers have 3-4 years in their current position, yet 2s and 5s are golden. 7 and 10 is bad while 8 and 9 is good. I think we can toss this variable in the garbage.
Public records on file: Borrowers with 0 records are by far the most common, and they have a 6% return overall. People with 1, 2, or more records all have returns around 3%.
Months since delinquency: Not a clear trend. There’s slightly more risk if there’s a recent delinquency, but not much. For some reason, there’s a SHARP decline in returns at 45-50 months (aka 4 years) but that could just be sample bias. Who knows? Obviously, though, people with no delinquencies have the best returns.
Inqueries in last 6 months: People that have no inquiries have a 1.08 return. Everyone else has 4%. Sounds like a good indicator to me.
Income: Ahhhh, finally! A factor that’s not immediately obvious but also correlates well! The higher, the better. Borrowers making over 8k a month have returns well over 10% while those under are only 5%. It’s not surprising, but at least now it’s demonstrated.
Payment/income: Another derived category; my other hunch. I hypothesized that it wasn’t really the income or payment that mattered, but the two together. How much of the family budget goes into the loan is the real key here. I strongly suggest that you not loan to anyone that’ll have to pay back more than 13% of their monthly income. Any more than that and the default rates start to climb. Stay under 10% if you can still get a high interest rate.
Home ownership: Irrelevant. Mortgage-holders do sliiiiightly worse than renters, and owners are right in the middle.
**Summary: Payment/income and credit score are the things that matter most. Loan grade, loan amount, and interest rate matter slightly. Housing status, revolving credit balance, credit lines are irrelevant.
So if you like buying debt/credit notes, then go with A5-C1 grades with credit scores 714+ and high incomes and/or low payments. Never fund loans over $20k. You’ll make 7.8 cents on the dollar.**
Questions?
Thanks for all the work and sharing your results. One question on the quoted part - are you therefore saying that the annual return is about 2%? (Ignoring the effect of loans paying off early which can be reinvested sooner).
Does anyone know what happens if you get caught lying about your income?
It’s off to the hoosegow with ya!
Seriously, I don’t know, and don’t intend to find out, which is why I use the trading platform.
No, but they do say that if you have invested then realize that you do not meet the eligibility requirements, then you should call them to close your account. So if you are caught lying, I would think that at minimum they will close your account (I wonder what happens to the loans?)
As the eligibility rules are for your own protection, I suspect they will not take further action, but that is conjecture on my part.
Yes. But that “ignoring the effect…” part is huge. Keep in mind that as they pay the loan back, the invested principle drops. So in the second and third year, you’re still earning, like, 10% but only on a fraction of the original principle. A 10% $100 loan for 36 months will have a payment of $3.23 every month. So by the end of the loan, you’ll have collected $116.28, for a profit of 16.28%. 12% interest gets you 19.5% profit.
That’s got nothing to do with Lending Club and everything to do with math. There’s no getting around that, no matter if you’re talking investing or corn harvesting.
Onomatopoeia, does the lending platform not have the income requirement?
I’m in PA, so I can’t use Lending Club proper anyway, but it sounds like you had to have an account with Lending Club to get started with the trading platform?
Got it - thanks. I am evaluating LC as an alternative to some of my fixed income investments and keep forgetting that I get principal back from LC, unlike any of the others.