patrick.net

I posted several weeks back asking if anyone had any experience with The Lending Club. There were a few comments, but not from anyone who had actually used it. Someone suggested I open an account as I planned to do and report back with my impressions.

Disclaimer: I'm an intelligent logical person who pays attention to details, but I don't have any real investing experience aside from allocating my 401K/IRA savings and keeping tabs on it. My lending experience is even less (as in essentially zero) with no banking education, training, experience or other background. So these are my impressions and opinions, but that doesn't mean a whole lot.

Background: The lending club is a "user community" that consists of borrowers and lenders (not necessarily mutually exclusive) wherein investors can make fractional loans to borrowers, and get fractional returns. "Crowd sourced lending" is probably a good succinct way to put it.

My main interest at this point is in the IRA side of the equation, but before committing to taking the plunge and transferring funds from my Vanguard IRA to The Lending Club, I wanted to give it a test-drive, so to speak.

Signing up: The sign up process was pretty easy, and probably what you would expect. Normal email sign-up, agreeing to terms of use.

Funding the account: I think you can write a check, do a wire transfer, or do a direct debit from a bank account. I chose the third option, which involved the standard two step dance. You give them your account number, they debit a small amount, you report to them the amount that they debited, and then you are off to the races. Additional withdrawals take the customary 1-3 business days. Painless, other than having to wait several days.

How it works, in a nutshell:

You pick loans (manually or semi-automated) from the current list. The loans come in 36 month durations and 60 month durations, with the 60 month loans paying a premium that seems to be around 3%, typically. Each loan is rated based in several criteria (I gather) including credit score, amount of debt, income, etc. The ratings range from A1 (highest) to F5 or G5 (I forget how low they go). I don't know if this is a lending club convention or if it has some connection to standard lending practices. In any event, it's pretty straightforward: A1 has the lowest apparent risk and pays the lowest nominal return. You choose to either fund or not fund a loan, and if you fund it you choose the amount to fund. The minimum is $25 per note. The lowest risk loans pay around 7%, and the highest pay in the high 20s as far as I can tell. The Lending Club takes a cut -- around 1% -- for their part in the deal.

The loans:
As far as I can tell they have a few different ways for you to select your investments. The automated investment method is the one they seem to push (no surprise), but I haven't used it. The manual method lets you filter the loans based on grade, duration, and other criteria. I tend to stick to the A-E loans of 36 month duration. You get information on the employer, employment length, monthly salary, number of delinquencies in the most recent 24 months (I think), and most recent delinquency. Sometimes this information is verified while the loan is being funded, but usually none of the information is verified when I am making my decision to invest or not.

The borrowers:
The borrowers are pretty heavily screened up front, with only 10% getting through the front door. Borrowers typically have 0 delinquencies in the past 24 months, and often not at all, though that varies depending on the grade of the loan. I rarely if ever see 2 or 3 delinquencies in the past 24 months. The borrowers can provide some description, feedback or other comments about the loan (or whatever they choose, I suppose). The lenders can ask questions from a pre-determined list of questions, and the borrowers can answer these questions. Typically people ask what their current balances are, and minimum payments.

The process:
Select the loans, fund them to the amount you want, submit the "order", and wait. The loan funding window is relatively brief (7 days?), after which the loan gets issued based on participation. If a borrower asks for $10k and gets lending commitments for $7.5k of it, as far as I can tell the loan gets funded for $7.5k. Often / typically (?) the loan gets fully funded before the time window expires. There is some "pending" period after this. I'm not sure if this is some sort of income / job verification process going on, or what. Once the loan gets issued, the clock starts ticking, and it's only a matter of time before you get rich :) Of course borrowers can and do default, and the Lending Club handles the collection process. I'm not sure how good they are with their collections.

My strategy (if you will call it that):
Since I was working with a small amount of money ($1k) mostly as a trial of the interface and general impressions, I didn't put a whole lot of effort into deciding how I would invest. I did look at their graphs for the returns for different loan types (major purchase, business, credit card consolidation, etc), as well as returns based on loan grade, loan amount, etc. My take away from this basic research was this:
1. Don't loan to people buying "green energy" with their loan. The returns stink. Maybe they default after realizing that the ROI just isn't there? Who knows, but the graphs I saw scared me, so I avoid like the plague.
2. Loans above $5k in value provide a better return than those under $5k. I don't have all the data, so I'm not sure if this is because people borrowing more money tend to be higher risk (and therefore higher interest rates) or if other factors had been normalized out. It made an impression on me and I tend to shy from sub $5k loans.
3. Credit card refinancing / consolidation seemed to be among the safest bets. Also, it is probably the most common type of loan. I tend to fund these types of loans much more readily than others.
4. Not surprisingly the riskier loans have the best return. Also not surprisingly there is a wider range of expected return for the riskier loans. It's all about diversification, mostly in the number of notes (to my mind).

After it is all said and done (the lending club's take, defaults, etc) the A loans probably pay in the 6% range (off the top of my head) and the returns increase from there, with the appealing part (to me) being in the CDEF range. Because I am investing such a small amount, and the volatility /variability of the lower grades is so much higher, I am primarily invested in ABCD notes.

I do not use the automated system and haven't tried it. I think the idea is that you pick your return target, and they give you a pre-selected spread to fund your investment. For example, to get 13% returns, you might have 20% in B notes, 30% in C notes, 30% in D notes 15% in E notes and 5% in F notes.

I manually filter on the grades and duration (always 36 months so far). I gravitate toward credit card consolidation loans. I like to see longer employment histories, like to see stable employers (school districts, for example) and like to see good repayment histories. I have become accustomed to a borrower having one delinquency in the 15-40 month range without getting concerned. I also like to see someone whose payment for the loan in question will be