Lending Club

[FrequentFlyer9000]

I've determined that LendingClub provides asset diversification with better risk-adjusted returns than traditional forms of fixed income. I recommend people read up on it at LendAcademy and throw some play money at it ($2,500 tops to start). The risk-adjusted historical returns are quite good if you use the right filters, and credit diversification is very easy since there is a minimum investment of only $25 per loan. As you know, credit risk is a big risk so diversifying across as many borrowers - whether personal or corporate - is a must to reduce the damage a single default can do to your portfolio value.

 

[PointsEarner615]

Sorry, no -- Lending Club is not a replacement for traditional fixed income. I have Lending Club myself, and its nowhere near risk-free. Once the economy turns south again, expect the default rate to skyrocket.

In order to reduce overall risk with Lending Club, you need far more than $2,500 so as to spread out the risk. The more notes, the less risk.

And if you like burning lots of time having to read over borrowers' credit worthiness just to invest $25 -- go right ahead. Yes, you can put things on auto-pilot, but then you lose the ability to really delve into how risky this stuff is. And while the initial returns look solid, just wait for a few defaults that just kill your return.

 

[FrequentFlyer9000]

Hi PointsEarner,

I appreciate your perspective since you clearly understand finance pretty well. I get the sense that you have probably thought about LendingClub briefly with some suspicion but have never delved into the numbers. And after all - aren't we all interested in the numbers and only the numbers?

As you know, traditional retail banks have been making money on loans to individuals for hundreds of years, as have credit card issuers. The only difference is that LendingClub allows you to be the bank.

You are absolutely correct that creditworthiness, risk, and let's not forget loan purpose make all the difference. Just like stupid banks went under during the crisis, stupid lenders will not do so well in LendingClub. But the folly of the stupid should not lead to the disqualification of an excellent source of income.

Filters are extremely easy to use and can be customized to the full extent possible. So I only look at borrowers with low-risk characteristics who are looking only to get loads for debt consolidation, not for less safe ventures such as businesses or vacation money or medical bills. I would never give money to someone who needed it for a big expense.

Also, you mention defaults. Of course you need to think about defaults. That's why I mentioned the risk-adjusted returns, not the nominal returns. There is a database that shows the long-term performance, since inception, of every single loan ever made on LC. In fact, you can create a filter for a type of loan and look at the historical performance of that kind of portfolio since the beginning of LC, which by the way was at the beginning of the financial crisis in 2006-2007. I am saying that a well-vetted LC portfolio, risk-adjusted for defaults, can/will make 9-12% returns even after several years. If the sh*t hits the fan and another crisis comes along, I am sure that will drop to a lower number. But that is true for all investments, including fixed income.

The main reason I like LendingClub is that the historical RISK-ADJUSTED returns are higher than traditional fixed income, and that I can spread my credit risk among many more counterparties than I would otherwise be able to do with traditional fixed-income investing. LC isn't creating a new asset class, it is just opening the doors to one that has historically been monopolized by banks.

If you are truly interested in learning more with an open mind, I suggest the following links:

• Multi-year documentation of one investor's returns on $300,000 of LC investments
• Some filters that have excellent track records so you can outperform the average LC investor

Good luck to all of you and remember to keep an open mind.

 

[Mountain Trader]

Hi PointsEarner,

I appreciate your perspective since you clearly understand finance pretty well. I get the sense that you have probably thought about LendingClub briefly with some suspicion but have never delved into the numbers. And after all - aren't we all interested in the numbers and only the numbers?

As you know, traditional retail banks have been making money on loans to individuals for hundreds of years, as have credit card issuers. The only difference is that LendingClub allows you to be the bank.

You are absolutely correct that creditworthiness, risk, and let's not forget loan purpose make all the difference. Just like stupid banks went under during the crisis, stupid lenders will not do so well in LendingClub. But the folly of the stupid should not lead to the disqualification of an excellent source of income.

Filters are extremely easy to use and can be customized to the full extent possible. So I only look at borrowers with low-risk characteristics who are looking only to get loads for debt consolidation, not for less safe ventures such as businesses or vacation money or medical bills. I would never give money to someone who needed it for a big expense.

Also, you mention defaults. Of course you need to think about defaults. That's why I mentioned the risk-adjusted returns, not the nominal returns. There is a database that shows the long-term performance, since inception, of every single loan ever made on LC. In fact, you can create a filter for a type of loan and look at the historical performance of that kind of portfolio since the beginning of LC, which by the way was at the beginning of the financial crisis in 2006-2007. I am saying that a well-vetted LC portfolio, risk-adjusted for defaults, can/will make 9-12% returns even after several years. If the sh*t hits the fan and another crisis comes along, I am sure that will drop to a lower number. But that is true for all investments, including fixed income.

The main reason I like LendingClub is that the historical RISK-ADJUSTED returns are higher than traditional fixed income, and that I can spread my credit risk among many more counterparties than I would otherwise be able to do with traditional fixed-income investing. LC isn't creating a new asset class, it is just opening the doors to one that has historically been monopolized by banks.

If you are truly interested in learning more with an open mind, I suggest the following links:

• Multi-year documentation of one investor's returns on $300,000 of LC investments
• Some filters that have excellent track records so you can outperform the average LC investor

Good luck to all of you and remember to keep an open mind.

I doubt I will ever invest the time to use LC but kudos to the writer of this post for a great overview, written so as to inform, not argue.

 

[PointsEarner615]

Frequent,

Thanks for the detailed response, I appreciate it. I've actually done more than research Lending Club -- I hold an IRA with them.

I would just say that Lending Club can be part of a fixed-income portfolio, but I would never say that it should replace traditional fixed-income, IMHO. To be blunt, Lending Club is the same status of corporate junk bonds. There's no wrong with holding junk bonds per se, as long as you keep it under 5% of your total fixed-income holdings. When I started with Lending Club, I had time to go over the individual notes I was lending too and developed a pretty good track record of filtering out the defaults. But that takes time, and more time than I could devote.

What I worry about is that newbie investors will salivate over the outsized returns in Lending Club in the chase for yield. And yield chasing never ends well.

 

[MickiSue]

You know, it makes me kind of sad to see someone say that they "would never" loan money at LC for someone with big expenses that they are trying to pay off (such as medical bills). In my mind, the whole reason for organizations such as LC SHOULD be for people who have been dealt a bad blow by the profit crazed, such as the medical industrial complex, to be able to find a way to pay the bills with less stress and more dignity.

The reality is that there should be no need for private lending for medical bills, because healthcare should be as much an expectation of Americans as police and fire protection, just like it is in every civilized country in the world. As we're not there yet, those who can might consider a small step up for those drowning under medical debt, and they can even make a little profit while they're at it.

 

[FrequentFlyer9000]

Hi Micki,

At the risk of going off topic big time, I'll reply.

First of all, I agree that our health care system is broken and that getting sick can ruin a family financially is horrible and a failure of our society. However, I believe that this is the government's responsibility to fix, and therefore the voters' responsibility to fix. The government (both parties) has spent way too much of our tax money on ventures proven to have been ineffective (war on drugs, middle East conflicts, etc.) for me to feel responsible to make up for their folly. I'd much rather my tax dollars build a safety net for the less fortunate than be spent on idealistic doomed policies.

That said, I also do believe in helping my fellow man out. However I never mix investment with charity. I feel that if I do, I run the risk of doing neither one particularly well. I volunteer and donate to causes I feel strongly about each year, and I invest my money in a vacuum as removed from emotional decision making as possible.

As such, I propose LC as a pure investment opportunity. Your thousands of dollars could be spent much more wisely on charities where 95%+ of the proceeds go to the intended recipients without interest charged.

If you wish to invest in a way you believe helps people out, that is a noble goal and you can probably do pretty well financially at the same time. It can be a win win. I choose a different path, but I hope it can be respected as an equally valid one.

 

[MickiSue]

I can respect that. Thanks for the detailed response.