Thursday, February 04, 2010

Invested in another batch of loans with Lending Club

I just completed some work for a client and will be off (at their request) for the next two months before restarting work in April. But since I do in fact have a tentative commitment for work in April, I finally feel comfortable with expanding my very modest experiment with investing in consumer loans with Lending Club. Saturday I initiated a transfer of some cash from my Fidelity account to my Lending Club account. Nominally, the transfer is supposed to complete in five business days. I just got an email confirmation from Lending Club for the completion of the transfer and that the money was ready to invest. I more than doubled my previous investment balance to about 250% of the prior balance. This is still a rather modest experiment and now only barely enough to show up at the very bottom of my overall investing radar. If all goes well, in two months I'll double it again, but it would still be a very modest investment.

I also decided to double the size of my individual loan investments from $25 to $50. I almost went right for $100, but decided to continue being conservative. I could have stayed with $25 "tranches", but with the larger amount of money that would have meant a lot more loans, which means a lot more due diligence, or a lot more risk of making a bad or risky investment.

I actually only invested three-quarters of the fresh cash. That worked out to nine new loans. Honestly, I was tired after all of that intense focusing on which loans seemed attractive and which loans seemed unattractive or too risky. My target was for a 15% rate of return. I screened the available returns for that rate and after a pass through the notes I had nine hits. I could have gone with a lower rate of return and found another three loans, but I decided that there was no harm with simply waiting a couple of days and taking a crack at some fresh loans. Investment rule #1: Whenever you are reaching for higher return, try to be conservative whenever the opportunity presents itself.

One of the reasons I came up short on my target of number of loans was that I personally only consider loans that have already been fully approved with full income verification. A lot of loans are still "under review", which is not bad per se, but it runs the risk that the loan may ultimately be denied if the borrower fails to come up with the required income verification by the two-week deadline. If that happens, your investment order gets kicked out and you have to start over. By selecting only approved loans, I eliminate that uncertainty and extra work. And, it just feels better that the borrower has been so diligent with getting all of the paperwork taken care of in a prompt manner.

My new batch of loans has an average interest rate of 15.42%, which is a little higher than the current rate for my full portfolio of 14.26%. I am trying to nudge my rate up to about 15%, which seems to be about the sweet spot, balancing higher return and higher risk of default.

Some of the new loans still have another 12 days (about of 14 days) left in their funding period, so I might have to wait almost two weeks before my investment orders are fully accepted or get rejected. A bunch of them had only 7 days or less left. In any case, since they all have approval already, they will be "issued" as soon as they reach 100% funding.

I have been experimenting with Lending Club since June 2009 and have had absolutely no bad experiences. Zero defaults, zero delinquencies, zero late payments. So I am very pleased with Lending Club so far.

My next step is that sometime over the next week I need to browse through the loans again to invest the remaining 25% of my fresh cash.

-- Jack Krupansky

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