Earlier this week I decided to try my hand at selling a small number of Lending Club loans. These are loans that have either entered the grace period, or that have gone late (but not too far late). I figure that taking a small loss now beats taking a big loss later.
In deciding to sell these loans, I looked at both their repayment history and their recent credit score history. All four of these loans been paid on time for 4-6 months, but when I looked at the credit score trends I didn’t like what I saw.
Here’s one example:
And here’s another:
Neither of these graphs gives me much confidence, so I’ve decided to bail out. Of course, I’m not sure I’ll be able to find any willing buyers, and I’m also not sure how to price them. For now, I’ve discounted these notes 14-22% below face value, with the two loans pictured above falling at the high end of that discount range.
The only other expense associated with selling notes through the Lending Club trading platform (which is powered by FOLIOfn) is a 1% service charge applied to the total sale price. If the loans remain unsold for thirty days they’re automatically taken off the market. You can, however, re-price them at any time, and you can also re-list them in the future.
In the long run, I suspect it will take some experimenting to figure out the best pricing strategy, but there’s no time like the present to start figuring it out.
Lending Club is now profitable. Prosper is starting to provide some awesome innovation and serious competition. The market for both borrowers and lenders is starting to heat up.
It might be worth noting that lending club has lost money since they started. You also are buying notes on loans, which if they go under, they reserve the right to collect on and not pay you. Obviously they haven’t gone under yet, but they are STILL losing money.
Lending Club is growing, and the portfolio of loans is increasing. This tends to overstate the returns because the loans are skewed to the newer ones that have not had time to go bad. And good luck trying to sell the junk – nobody wants it. Better off with a good bond index fund.
Very late comment but thanks for the info nickel! This is one area of LC I’m not familiar with so thanks for showing us the process.
Once you learn more about pricing, please share with us what you think because I’m clueless also.
I invested in Propser loans at first. I started in August of 2008 and invested $500 in 10 loans. In 2010 I invested another $50 in 2 loans. So far, 3 of the 12 loans paid off early. 2 loans are now recently in default after paying off on-time for about 18-19 months. Balance owed me that I will probably not collect: $61.23 Total of interest received so far is: $69.03 So I am ahead $7.80 from an investment of $550. That makes my return on my money so far a whopping 1.4% All my loans were graded AA to B and I tried to select them carefully.
I started in investing in Lending Club (only A or B loans) in May 2009 and invested $950 in 38 loans. 2 paid off early. None deliquent yet and my return as estimated by Lending Club is 10.84%. So I will have to see if any of these go delinquent.
I did not invest much money, only did this as an on-line “gambling” experiment. Now that I have a couple of defaults, I am rethinking investing any more money.
I found it really strange when first logging into the ‘notes of sale’ that some were actually listed for more than the principal+potential interest.
Looking over the list I found many like this and found it seemingly incomprehensible why anyone would buy a loan at above face value?
And the other option, rather than selecting a new note with a good interest rate would be to buy one that someone else has already deemed to risky?
I think as good as Lending Club has done for me over the past year I don’t see any motive to actually engage in trading notes.
Basic strategy for selling these loans is a reverse auction. Continue to lower the price until it sells. You have to keep close dibbs on it just in case the borrower catches up on payments. If this happens, somebody else can swoop in an buy the loan at a deep discount to face value and with the expectation that the borrower is making best effort to honor their debt.
I may have to do this. I have 338 loans, 310 current, 8 in various late stages, and 1 charged off. 19 fully paid. That one charge off dropped my overall return about 2% NAR. I have decided not to reinvest payments and pull out the money as the available cash reaches 100 dollars. Most of the late loans are ones that LC selected for me based on my requested return (11%). I stopped that and was more selective when I selected the loans.
Matt and others: Yes, it’s probably a good idea to go ahead and set up the FOLIOfn functionality in advance just in case you end up needing it. It takes a bit of time to complete the process so there’s no sense in waiting.
I’m currently invested in 24 notes and am averaging a 11.5% NAR. I have not happened upon any late/grace loan payments as of yet, but thanks to you bringing it up have set up my trading account with FOLIOfn. Thanks for raising the awareness.
Glad that you are testing the market for the rest of us. Comment: On the surface it may seem the best strategy to sell the bad performers and keep the good. But, you might look into selling a combination of good and bad – this way, you might be able to offset some losses on the bad ones now, before some of your good ones (currently good) go bad as well.
Look forward to following your experience in the secondary market.
Nickel,
I’m glad your experience on LC is shaping up to be more positive than the one most of us had over at Prosper.
It’s been awhile since I looked at Prosper’s data, but last I checked, only 15% of the loans that went one month late ever recovered.
One thing we noticed at Prosper is that most borrowers seemed to borrow enough to cover their first few months of payments. For as much as we wanted to think that a borrower who made six months of on-time payments was a good borrower, we realized that it was just the start to a very long journey. (IOW, it means nothing.)
Do you know how Lending Club is calculating the subsequent credit scores each month? Are they doing hard or soft pulls every month?
As far as pricing goes (from a potential buyer, ha!) you have to consider that as the loan progresses, the interest component gets smaller and smaller with each payment. That is, because the interest payments are front-loaded, the longer you wait to sell your loans, the more you’re selling the liability/risk (principal) and the less you’re selling the profit component (interest). So a buyer takes more risk for less reward, and that’s even if the loan is not distressed.
With regard to the two loans that you mention in your post, those credit scores make me think the debt is junk and highly likely to default. In that case, I would pay you less than a junk debt buyer would, and he only pays you pennies on the dollar! (Remember, a JDB can settle with the debtor, so even if the settlement is for $.50 on the dollar, the JDB still makes a healthy profit on it. Further, he can sue the borrower for the entire balance. For a secondary market buyer, however, he has two or three months where he crosses his fingers, hoping the loan comes current. If it doesn’t, it gets sold off. It’s a pretty crappy proposition.)
If you’re able to find a buyer at the discounts you mentioned, quite frankly, I think you found a sucker.
I’m only invested in a few hundred dollars worth of notes currently, but so far I’ve been happy with lending club and the returns. I’ve been very selective about the loans I invest in, and so far I’ve been fortunate not to have any late payments or defaults. I’m considering investing a bit more here as it seems to be getting some decent returns – upwards of 11% for me right now.
Limes: You’re right that it’s not worth losing sleep over this. I just happened to notice that these loans looked like stinkers, so I decided to try out the market. Mostly a learning experience for me, plus it gives me a chance to share the process with you guys – a number of readers have asked what it’s like to buy/sell on the trading platform, and I couldn’t answer until now.
Biz of Life: I’m averaging better than 10% net annualized return (NAR) including defaults, so it’s hardly hypothetical (at least at this point). When you ask what I’ve learned from this experience, I’m not sure if you’re talking about these notes in particular, or investing with Lending Club in general. Assuming the former, I haven’t learned anything aside from how to use the trading platform. I already knew that peer lending is risky, and I knew (from experience) that loans sometimes default. That’s just part of the landscape. But as long as I keep earning solid returns, I’ll willingly eat the occasional default.
Sounds like a lot of trouble and risk for a hypothetical 8% return…. Did you learn any lessons from the experience? The best thing for buyers is a distressed seller.
I have invested in 500+ loans already, and I was super zealous keeping tabs on every loan at first. In reality, defaults are bound to happen and if I stress out for every loan that goes late, I would never sleep well. So I decided to just invest more, reinvest my earnings and take my default as part of the investment… So far, I only got 9 loans charged off and 8 in various late states. My returns are still upwards of 8% which is what matters at the end.