One of the most difficult things that happens to us in life is taking on debt. Almost everybody does it at some point or another, and it can be a total lifesaver. With just a little extra borrowed money, many of us are able to make it through temporary trouble.

However, taking on debt can have consequences – sometimes big ones. While many people are able to do it correctly (only borrowing short-term before quickly paying the loan back), many people hold onto debt far longer than they planned. On top of this, they may run into even more money problems, leading them to take out another loan or open another credit card. A few years down the road finds many people struggling under the weight of multiple loans and credit cards, all with complicated interest rates, and all with bills due at different times of the month.

A good solution to this problem can be a debt consolidation loan. Taking a number of different loans and/or credit cards and combining them into one easy payment can make life easier in a number of great ways. This is even more true if the loan is a peer to peer loan, and there are only two companies that offer peer to peer loans: Lending Club and Prosper.

5 Reasons to Consolidate Your Debts through a Lending Club or Prosper Loan

Reason #1: Lower Interest Rates. Period.

A Lending Club or Prosper loan usually offers lower interest rates than credit cards. This is because the companies that issue these cards are massive banks that have to pay for thousands of employees, vaults, tellers, etc.

But peer to peer lending companies like Lending Club or Prosper are run through websites, sites that are cheaper to run than a bank. Because they cost so little to run, they can pass the savings to their customers in the form of lower interest rates. For example: if you go to Lending Club or Prosper and check your personalized interest rate, it can be lower than the rate you have been paying on your credit cards (or other loans).

Also, I am sad to inform those of you with good credit that you are definitely paying more than necessary. Almost all forms of credit in the United States, both credit cards as well as most loans, do not give you an interest rate that is based on your credit history (a risk-based interest rate). So if your credit history is perfect, you are given the same high interest rate as those with bad credit.

A Prosper or Lending Club loan, on the other hand, gives you the interest rate you deserve, a rate that is specific to how well you have paid back your loans over time. People with great credit are often given a much lower interest rate than any credit card could offer – as low as 6%.

Check your rate @ Lending Club & Prosper (will not hurt your credit score)

Reason #2: Interest Rates are Fixed

One of the biggest problems with credit cards is how often their interest rates keep changing. How frustrating!

For example: when you first get a credit card, you can be offered an “introductory” rate that is really low. But the rate soon shoots up to its regular amount, typically six month later. And it can shoot up again if you make a late payment. For most of us, this rate of change can result in a great deal of stress from our outside debts. It is like being at work and having a boss who is fun and relaxed — until you make a small mistake that makes him lose his temper and scream at you.

A peer to peer loan, on the other hand, is a really stable means of borrowing money. This is because the interest rate on it never changes. So when you check your rate at Lending Club or Prosper for the amount you want to borrow (note: smaller loans get lower rates), they will offer you an interest rate and repayment schedule. If you accept this rate, it will never ever change. Even if you mess up and make a late payment, the interest rate stays the exact same as it was on the day you got the loan.

So, not only do Lending Club or Prosper loans usually have lower rates than credit cards, but these low rates stays low. Period.

Reason #3: The Loan Has a Fixed Term

Taking on credit card debt (or other loans) is often a slippery slope. People who are in debt unfortunately can find it is just as easy to continue going deeper into debt with their credit cards, slipping further and further down with each passing year. Remember, with credit cards you can simply charge more anytime you want. For most people, this can feel like a downward spiral. Even though someone spends a few months repaying their debts, they only get tempted to use the card again, erasing all these gains. This can make someone feel like they will never be debt free – a feeling that can be very stressful.

However, if you consolidate your debt with a peer to peer loan, the money can only flow one way. Once the loan is deposited in your bank account, you simply make monthly payments on it until the loan is fully paid back. There is no easy option to go deeper into debt. In the industry this is called a fixed-term loan, and it is a much more stress-free way to become debt free.

So, say you are in debt $4000 (the national average for credit card debt). With a loan at Lending Club or Prosper, you can apply for a $4000 loan to consolidate your credit card bills. And if your credit score is around 700, perhaps your interest rate would be 12%. A three year (36-month term) peer to peer loan of $4,000 with a 12% interest rate would mean 36 monthly payments of $132. The best part of this loan is how it gives you something to look forward to – an end date when your loan is paid back. You can look forward to 36 months from now, because the different debts you took on through credit cards will all be paid back.

Reason #4: Late Fees are Smaller

Despite good financial habits, there are times in all of our lives where we might miss a payment. The fact is, almost everybody has fallen behind on their payments at some point, and most credit cards have steep fees for people who make late payments. This happens in two ways:

• They can charge a large fee for a late payment, often around $30
• Late payments can cause an increase in your interest rate

Just a single late payment can mean hundreds of dollars in new charges.

A peer to peer loan, in contrast, has a much fairer system. For starters, the late fee is usually smaller. Lending Club, for instance, often charges a fee of around $15, basically 1/2 that of a credit card. Also, making a late payment on a peer to peer loan cannot increase your interest rate. Of course, it is better to never be late at all. But if you do have to make a payment past the due date, then you can feel a little more at peace about it. After all, a late payment will not result in your your interest rate changing, and the fees will be lower than those from other loans.

Reason #5: Debt Consolidation = Less Stress

Most importantly, those who carry debt under a number of different loans or credit cards find that they can all have different amounts and interest rates. Since it can be hard to keep track of which payments are due, this can often result in missed payments and a great deal of stress.

Personally speaking, last month I almost had a negative mark added to my credit score since I accidentally threw out one of my credit card bills. I called them and got things straightened out, but only because they contacted me to remind me.

A loan with Lending Club or Prosper, on the other hand, transfers all your different debts onto one loan (and often with a lower interest rate). Instead of trying to keep track of which credit card bills are due at throughout the month, a consolidation loan automatically makes a deduction from your bank account, usually on the same day of each month. In summary, consolidating your debt with a peer to peer loan can mean a much more relaxed life.

Bottom Line: Stop the Madness and Take Out a Consolidation Loan with Prosper or Lending Club

It would be great if we never needed to take on debt at all. Everything would be so much easier. However, almost all of us need to take on credit at some point in our lives. Unfortunately, most people choose to go into debt by adding charges to a bunch of different credit cards, holding onto this high-interest debt for a long time.

It is important to state how credit cards can often serve a great purpose. They can be a great tool for short-term debt that is quickly paid off, since it allows us to add all our charges on a small plastic card. Personally speaking, I pay for all my purchases with a credit card, including charges associated with maintaining this website. But as a place to keep long-term debts, credit cards are terrible. Their interest rates and steep fees make them a bad way to carry debt over time. As a result, I make sure to pay off my credit card every month. I never carry a balance.

Unlike a credit card or other high-interest lines of credit, a consolidation loan through a peer to peer lending company like Lending Club or Prosper is a much better option for people who need need to hold onto debt for a few months or years.

As stated above these loans offer five main advantages:

1. Lower interest rates (particularly if you have great credit)
2. Fixed rates do not change
3. A fixed term (repayment schedule) makes it easier to stay disciplined
4. Smaller late fees than most credit cards
5. The ability to consolidate debt into one easy payment

Check Your Rate At Lending Club & Prosper

There are two companies that offer these low-interest debt consolidation loans. To get the lowest rate possible, it might be a good idea to check your rate at both and go with whichever company’s rate that is lowest. Both Prosper and Lending Club will make a soft pull on your credit, which means checking this rate cannot hurt your credit score.

I have done this myself (see: Lending Club Review and Prosper Review). For me, Prosper’s interest rate was lower. But these rates are always changing, so your experience may be different than my own. It is a good idea to check your rate at both and go with whatever rate is lowest.

Check your rate at Lending Club (won’t hurt your score)
Check your rate at Prosper (again, it won’t hurt your credit score)

Questions/comments? If you enjoyed this post please like or tweet it below.

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Andy Moore "Stress"
Squeaky Marmot "Whoops... collateral damage" CC-BY 2.0]

The post Debt Consolidation Loan? 5 Reasons to Use Lending Club or Prosper appeared first on LendingMemo.

Once we have a general grasp of peer to peer lending, we can finally get down to the task of looking at the platforms themselves. In today’s video Whiteboard, we begin our three part introduction to Lending Club’s website, focusing specifically on the home account screen, a page Lending Club believes shows the most important information.

Video Transcription

So now that you have a general understanding of what this whole peer to peer lending thing is, it’s time to get down to the task of actually looking at one of the websites on its own. So let’s do that in a screencast today. We are going to be looking at part one of Lending Club – the account screen. So let’s do this!

Can we get some background music going? Alright. Let’s hit it.

To get to Lending Club I’m going to open up Google Chrome. Here in the browser I am going to type in Lending Club dot com. Here is the homepage of Lending Club. Now, if I didn’t have an account I could click on this Investing link on the left and then click on the sign up now button under open an account. This would take me to a page where I can begin to fill out my information for creating an investor account.

But I am not going to do that today. Instead I am going to go back to the homepage and click the little button that says “Sign in” in the top right. Here it says “Member Sign In”, so I am going to put in my member information – so my email address and my password.

Now here we are at the Lending Club account screen. So this is the page that has kind of the most information for Lending Club. This is the home screen for every investor so they are going to try and pack as much of the important stuff here as possible. So we are going to spend our time today looking at this page, and this page alone.

The first thing you are going to notice are the three numbers on the top of the screen. The first is this accounts  Net Annualized Return, basically the return this account is earning per year as calculated by Lending Club. It is important to note that my real world return is actually closer to twelve percent. This percentage, 19%, is not accurate at all because I have been involved in something called Foliofn that makes my number way more inflated than it actually is, so don’t think I am amazing earning 19% on my Lending Club account.

The second number is the account’s total value. Below this number of available cash of this account, meaning funds that are not currently invested in notes. The third number is the amount of interest this account has received since it opened. And below this number is the total payments that borrowers have returned to me, both interest and principal combined. So this account has received $8,400 in payments from borrowers, and of that $8,400 about $3,400 was interest that I banked, which is pretty awesome.

These three numbers are perhaps the most important because they show how well this account is performing, how much value the account possesses, and how much raw earnings this account has yielded since it has been open.

Below these three numbers are some additional information that is really interesting, such as how much of this account’s funds are in funding, obviously in funding notes are not earning any interest. Also here is the outstanding principal, meaning how much of this account is tied up in loans that are still being paid back – loans that have not been paid off or gone into default.

Under “Notes at a glance”, we will probably focus on the most interesting thing of our video today. You can see that I have 452 notes, and if I click on this a dropdown menu displays my entire account’s notes by status. See, this is actually a really great way to show how every loan’s status changes by the time it is paid back.

Loans begin with a status of “In Funding” as they get funded by investors and wait for final approval from Lending Club.

Once everything is finalized a loan becomes “Issued”. After its first payment it gains the status “Current”. Most loans will keep their current status until they are paid off, whereupon they get the status “Fully Paid”. Pretty simple.

Unfortunately, sometimes a borrower will miss a payment, and the loan will get the status of “In Grace Period”, and this is basically kind of a two-week period where Lending Club politely reminds the borrower that they missed a payment and to try and correct that. Most loans that go into this Grace Period eventually resume payment and become current again. For instance, a borrower may have switched banks and forgot to update Lending Club with the new routing information.

Unfortunately, some borrowers continue to miss payments, and then things get a bit more serious. The loan gets the status of “Late”, starting with the less serious status of “16-30 Days Late” and moving to the more serious status of “31-120 days late”. If the loan has not had a payment for over [four] months, it goes into “Default”, eventually becoming “Charged off”, meaning that the loan is written off and its value is officially deducted from my account balance.

For my account, you can see that 2 notes are in funding, 360 are current, 6 notes are in grace-period, and 57 notes have been fully repaid, and considering this account is less than three years old, this means these fifty-seven people have all paid back their loans early, which Lending Club allows without a penalty.

Finally, there is 1 note that has gone between 16 and 30 days late and 12 notes that gone between 31 and 120 days late. 1 has defaulted and 13 have been charged off.

I can click the Amount option at the bottom to view my account value as arranged by each loan’s status. As you can see, I have $364 in notes that are, for instance, 31-120 days late.

Now, obviously a loan that has not had a payment in over a month is no longer worth its original value. So Lending Club has an option to reduce my account’s value by the status every note, discounting notes that are a little late maybe 20% and discounting notes that are very late a much more 80% figure.

So let’s click this ON-OFF button in the top left. If I click this button, I can watch my account’s value drop about $300 – from $13,577 to $13,228. This can be a really helpful way to both see the effect of late loans as well as to get a more accurate picture of what my account’s generally worth.

There is a lot of more information we can look at in the “More Details” section, but we will just touch on a few things. Clicking here shows three more windows in the center. On the far left we see my account’s value depending, again, on the status of each note. In the middle we see the makeup of my account by risk grade. Remember, Lending Club gives a note a grade from A to G, with A being the safest and G being the riskiest, and you can see that, in my account, all my notes are between D and G grade notes (D-E-F-G). You can see how I prefer taking on more risk with my investment, but you do not necessarily need to do what I do.

Finally, the third box has some additional information, such as the average interest rate on the loans I am investing in. So, for my account, I’m partaking in notes that offer borrowers a 21% interest rate on a loan.

The last section I want to talk about in this section of Lending Club’s website is down here,  a more detailed breakdown of my account, specifically this box: $87 in service charges. This is what I have paid in investor fees to Lending Club, 1% of all my borrower repayments.

The post Introduction to Lending Club – LendingMemo Whiteboard #5 appeared first on LendingMemo.

As we continue to produce more content to aid people who are looking to get started in peer to peer lending, I continue to be startled by the number of investors who have negative experiences with Lending Club or Prosper as a result of not diversifying their account.

Here is an actual comment left on LendingMemo’s site last month:

Lenders beware. I speak from experience that this is a good way to lose your money with almost no recourse. I invested in 12 loans rated A or B at Prosper.com and 8 defaulted. That is why states like Texas do not allow Prosper. It is not a scam but smells like a skunk!

Le sigh. Frankly, I am at a loss to understand how anyone is able to have this experience considering the barrage of invitation by the platforms for their investors to create diversified accounts.

The Most Important Thing in P2P Lending: Invest in 200+ Notes

Forever: the one rule we must continue to emphasize is the need for every investor to remain diversified, preferably in at least 200 notes. Let’s look at each of the platforms and see how they interact with this requirement.

Diversification on Lending Club (with Lending Robot)

The benefits of diversification, as usual, are front-and-center on the Statistics tab on the Lending Club website. Here is their favorite chart:

The butter-colored box pops up if you hover a mouse over the “less than 0%” sliver. In essence, it shows that investors on Lending Club who are own 100 notes or more (and are not overly invested in a single note) have a one in a thousand chance of losing money. That’s a pretty powerful stat. Personally, I wish Lending Club would trumpet the even more stunning 200-note threshold like the rest of us, but “100 loans” is certainly an easier number for a casual investor to remember, and holds considerable weight on its own.

Further evidence of the benefits of diversification on Lending Club is seen within the brilliant new charts at Lending Robot. In the graphic they provided to LendingMemo below, they have aggregated all of Lending Club’s completed loans, cleverly drawing min/max boundaries vis-a-vis portfolio size. Check it out:

As Emmanuel elaborates in his recent Seeking Alpha post, the crossover point seems to be 146 for these completed Lending Club loans. This does not, of course, ensure that lenders who mimic this with similar sized portfolios are themselves guaranteed positive returns, but it does add another party’s vote to the mounting evidence that peer to peer lending (as an asset class) reaches full diversification with a portfolio of 200.

Diversification on Prosper (with Orchard Platform)

How does Lending Club’s position compare to Prosper’s? At LendIt last year, Prosper distributed a whitepaper (download it) with the following pie charts:

Tasty. Furthermore, their Prosper.com/Invest page has a graphic (reproduced on the right) that says all investors since 2009 with 100+ notes have earned positive returns. None have lost money. While I do not feel much need anymore to compare Prosper 1.0 to Prosper 2.0, this 100% stat is remarkable. By comparison, Prosper 1.0 had just 19% of diversified investors with positive returns (858 out of 4,450).

Alongside Lending Club, Prosper seems to advocate the easier-to-remember 100-note threshold as being adequate for a positive return.

To augment this conclusion, the svelte Orchard Platform did their own analysis last month of diversification on Prosper. Their work is always worth a full read (with graphs to boot), so you should definitely go there for the complete article, but here is their conclusion:

“Based on our analysis, if an investor cannot invest in at least 200 notes, the resulting portfolio may be too volatile to be predictable, and the likelihood of a very low (or negative) return becomes higher.”
[emphasis mine]

Four More Strategies to Diversify Our P2P Lending Portfolios

Although the most important requirement for lenders is having 200 similarly valued notes, additional diversification can be had by investing across:

• Risk-grades
• Vintages (issued quarter)
• Geographies
• Platforms

Strategy #1: Invest in Multiple Risk-Grades

One way we can avoid over-saturation within a particular borrow population is by investing across a gradient of the credit spectrum. This can be accomplished easily enough by purchasing notes in different risk grades.

Personally speaking, I had become overexposed within my Prosper accounts by only investing in the riskiest D, E, & HR grades. To aid this situation, I have injected an additional sum of cash (seen in the graphic from my Prosper account on the right) that will eventually be 50% invested in C-grade notes, albeit those with an expected return of 16% or more.

Tax Strategy for Multiple Grades: If one wanted to really pull the most benefit out of this approach, it might be a good idea to have both a regular (taxable) account coupled with a tax-incentivized account, like a Prosper Roth IRA. By placing the lower-earning loans in the regular account and the riskier higher-earning loans in the tax-free IRA, investors can achieve a better harmony of both liquidity and taxation.

Strategy #2: Invest in Multiple Vintages

Purchasing notes across differing vintages happens naturally for those who continue to add more funds to their account over time. In contrast, investing one lump sum in a single quarter isolates an investor to the national economics of that season, as well as only a single iteration of underwriting standards.

Since the national climate is always changing, and platform underwriting continues to both improve and flux in response to this climate, it is a good idea to try and inject lump sums intermittently, while avoiding a single large deposit (although I am interested in hearing approaches that might try to “time the market” of national employment).

Strategy #3: Invest in Multiple Geographies

As lightly touched on in my recent The Joys of Redlining article, peer to peer lending allows us to focus our investment within particular geographies. It is important to remember that both Lending Club’s and Prosper’s prospectuses highlight unemployment as one of the primary national conditions that affects peer to peer lending default rates. In this regard, investors might consider reviewing the geographic distribution of their portfolio using tools like the NSR Portfolio Analyzer.

This strategy is certainly the weakest, but I am curious if it is possible to balance notes across different geographies so as to reduce susceptibility to unemployment, considering certain areas of the country feel the swings of the national economy in different ways. Might it be possible to be less affected by a rise of unemployment in agricultural areas by balancing a portfolio with notes from tech-rich areas?

Strategy #4: Invest in Multiple Platforms

Finally, I continue to encounter investors who are solely involved with Lending Club. I sympathize with this approach considering the market leader is officially profitable and awash in revenue. Heck, my own affiliate ads for Lending Club are placed higher in the sidebar for that reason.

That said, Prosper has become a formidable player within peer to peer lending as a whole. Having exceptionally redefined themselves away from the company’s bumpy beginnings, the new management has turned the company completely around (Lend Academy), and done it in a single calendar year. By my projections, Prosper should go on to issue at least a billion dollars in new loans during 2014.

As investors in peer to peer loans, we can further diversify our account by spreading it across both Lending Club and Prosper. Have concerns that Prosper’s loans are of lesser quality than the rock-solid Lending Club underwriting? Again, here is the astute Orchard Platform to crunch the 2013 data and go on to vouch for Prosper’s current underwriting:

“From our analysis, we believe Prosper has not compromised its standards in order to grow.  Whether we’re looking at external factors (ScoreX, Income), Orchard’s model, or Prosper’s model – we see that the quality has remained consistently high.”
Loan Quality for 2013: Prosper | Orchard Platform

Certainly, neither platform can perfectly capture prime-borrowers who are worth of our investment. Both Lending Club and Prosper, despite their best risk-pricing wizardry, are going to mistakenly deny a small subset of people who would actually be great recipients of our cash. But by spreading our investment across both platforms, we can further assuage the volatility that might come through overexposure to one particular standard of underwriting.

For most investors, this is essentially an invitation for you to add some Prosper earnings alongside your solid Lending Club returns.

Maximum Diversification: A Good Idea?

It is possible to reach a point of near-maximum diversity, a point where a portfolio begins to simply reflect peer to peer lending as a whole. For those who can afford it and are looking for all the stability they can get, this could be done through constructing a portfolio of thousands and thousands of notes.

However, it bears repeating that there might be such a thing as over-diversification for those of us who are seeking to beat platform averages. Considering a platform like Lending Club offers us an 8% return, the more notes we take on, the more we graft ourselves into this average. For those of us (myself included) who are interested in 9-12% returns, too much diversification may actually do more harm than good.

As an aside, I am curious if note selection may ever begin to bring adverse results. For instance, mutual fund managers the world over consistently attempt to beat national averages like the S&P500 through a more “refined” selection of stocks. However, these selections seem to lose to the market as a whole (Forbes). While investors like myself seem to have attained higher than average results for the time being, I am interested if this approach will ever begin to work against the overall diversity that Lending Club and Prosper are attempting to generalize into their yearly issuance.

Questions/comments? If you enjoyed this post please like or tweet it below.

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Rob "Alexandrovsky Gardens" CC-BY 2.0]

The post The Complete Guide to Diversification in Peer to Peer Lending appeared first on LendingMemo.

Lending Club has made it easy to log into their site and invest in peer to peer loans. In today’s video, we examine the complete investment process at Lending Club from top to bottom, highlighting the two different ways to pick loans – both letting Lending Club find loans for us and while also filtering the available loans ourselves.

Video Transcription

Now that you have had a chance to kind of get a feel for Lending Club’s website, it’s time that we move on to part two of our introduction: investing in some real loans. So we will do that today in our second screencast. Enjoy.

[Begin screencast]

On the main account screen, we can invest in some loans by clicking either the Invest or Browse Notes link. The Invest link has Lending Club find notes for us, whereas the Browse Notes link is where we are going to find loans for ourselves. So today we will invest $150 in each option. So let’s start by clicking the Invest link at the top of the screen.

Lending Club’s ‘Invest’ Option

This will bring up a screen that shows three different colored buttons. Each of these buttons will result in Lending Club choosing, automatically, a number of loans for our investment. Now, the percentage you see on each button is the average interest rate of each button’s loans. So the blue button finds the safer loans with the least amount of risk, the green button finds loans with medium risk, and the orange button finds loans with higher risk.

Today we will invest using $25 notes. Now, if you are investing a larger amount of money, perhaps $10,000, then you could double your note size to $50, since your account would still be diversified in 200 notes (200X$50=$10,000). Or if had $20,000, you could invest with $100 notes. And so on. But for many, it is wise to stick with $25 notes, the minimum, so let’s do that today.

Clicking the low-risk blue button will result in the platform choosing twelve notes for me:

• Five of these are the safer A-grade loans
• Four B-grade loans
• Two C-grade loans
• And one of the riskier D-grade loan

The green button adds a little more risk by:

• Lowering the number of A-grade loans to one
• It also has four B-grade loans
• Four C-grade loans
•  Two D-grade loans
• And even one of the riskier F-grade loans

The orange button adds yet more risk, giving me:

• Three mid-risk C-grade loans
• Five D-grade loans
• Two E-grade loans
• One F-grade loan
• And even one of the riskiest G-grade loans

You can see how the projected return and default rate go up and down as we take on more risk. There is also this “More Options” button that replaces the buttons with a slider. I can click on the slider and move it left and right for a more fine-tuned degree of risk. But I am not going to do that today. Instead, I am going to go back and click the orange button, the one for higher risk, and show what it looks like to actually invest in these notes (it’s important to note that your own risk tolerance may be different than mine).

Having clicked the Continue button, Lending Club has brought me to the View Order screen. The box on the left shows a breakdown of what risk-grades in this portfolio, like we saw earlier. The box on the right shows the average interest rate these borrowers will pay on these loans, as well as the expected charge off rate, or the amount of my investment that is estimated to be lost to borrowers not paying their loans back. Minus the service charge, this summary estimates this my total return will be around 10.45%.

Now, it is important to note that this expected return is only accurate for diversified accounts. If I invested in just six notes and one charges off, then my default rate would be a lot higher, like 16%. In contrast, if I had a portfolio of 200 notes with this level of risk, Lending Club says it is a reasonable expectation that this would return 10.5%, which is pretty great.

I can also look lower on the page to find the interest rate of each loan, its grade, its amount (meaning, how much the loan is for), its term (36 or 60 months), its title that the borrower has written, its purpose (with most of these loans going towards consolidating debt), and how much funding it has received.

I am actually going to remove six notes to cut this order in half, investing the other half in the second part of this video.

Now that everything is ready, I can click the Continue button to view my Order Summary. Clicking Place Order invests $25 in each of these six loans. On this confirmation screen, I will place these new notes in my 2014Q1 portfolio (which we will talk about more in the next video). And then we are going now to click on Browse Notes to invest in notes manually, so let’s do that.

Lending Club’s ‘Browse Notes’ Option

Now this is the other way to invest, the Browse Notes link. This is the more active method of investing, so instead of Lending Club choosing notes for us, we can sort through the hundreds of available loans and select some ourselves. Looking closely at the upper right, we can see that there are 627 loans available for investment. We can kind of sort this list by clicking on its rates or clicking on the amount of the loan.

If we want to look at the details of a loan, we can simply click on a loan. For instance, this loan here is by somebody in Bristow, Virginia who makes $16,667 a month and has been employed for ten years. Looking further down, we can see a breakdown of this credit history, for instance, we can see that they have applied for credit one time in the past 6 months, meaning how many times they have applied for credit, which is really good that it is low.

Knowing what all these credit factors means takes a bit of learning, something we will return back to another time. For now let’s close the loan and go back to the list. Now, it would take way too much time to review all these loans one by one, so Lending Club actually allows us to filter the available loans for specific factors using this section on the left.

So let’s say I want to focus on higher risk loans. I would go down to the Interest Rate setting and check only the boxes for D-G grade notes. Suddenly, the number of available loans drops from (what was it?)  627 to 143, a much more manageable number.

Now there are a large number of settings we can choose from the left there, particularly the credit factors can get really confusing. Knowing how to filter peer to peer loans is a skill you can get better at with time, and is probably the most complicated part of investing on Lending Club. We will cover this more in another video.

For now, let’s add a some simple filters today, starting with one that makes sense. People who earn more income per year are going to be better at paying their loans back, so we are going to make a minimum income a month of $5000, somebody who makes $60,000 per year. Now we have lowered the amount of loans to 103.

I’m going to add a few more filters here that I personally like:

• Excluding bankruptcies
• Excluding small business loans
• Lowering inquiries to zero (meaning the number of times a person has looked around for credit in the past six months — generally I try to avoid people who shop around for credit because they are more likely to default)

Alright! Now we are down to fourteen loans. I am actually going to save this filter for future use. After I save it, I can use it anytime I log back into the website. So for this I am actually going to call it Video Example. Oh, Lending Club says I have already used that one, so I am just going to call this one Video Example 2.

It says it has been saved successfully, and I am just going to go back to the Account Screen.

So if I were a typical investor at Lending Club, I could invest in just a few simple clicks. First I would click on the Browse Notes link, then I would open up my saved filter. Here is my number of notes to invest in, the ones that have passed my filters, and I am simply going to select six of them that I enjoy. Now, considering there is a whole number of notes here, let me just increase the monthly income until it comes down to something like six.

Let’s try $6500: now we have got seven loans. Let’s click it up one more. Oops, four, that’s too small, so we are going to put it at $6500 and just select six of these.

Adding it to my order, I’ll see the Order Summary page now. Hit Continue because I have kind of reviewed these using filters. And simply hitting Place Order invests another $150 in loans, and I am again going to assign this to my quarterly portfolio.

[End screencast]

So there you have it, investing on Lending Club. Stay tuned for our next video, where we will be looking at account maintenance.

The post Investing on Lending Club – Whiteboard #6 appeared first on LendingMemo.

For people who are looking for a loan, Discover can seem like a good option. By simply going to their website and submitting an application, you can get thousands of dollars in loans. Unfortunately, many people do not realize that there are better options out there. Today we will look at Discover personal loans, showing how a peer to peer loan through Prosper is a much better option.

Getting a Loan at Discover in Four Steps

Getting a loan through Discover is not much different than getting any other loan over the internet.

First Step: An Online Application

The first thing people always do is apply for the loan online. Perhaps they heard about Discover through a friend or saw one of their ads. Either way, they (1) go to the website and (2) submit their information. The application will need some personal information so that Discover can look at the person’s credit history.

Second Step: Loan is Approved (or Denied)

This credit history that Discover asks for with each application is what they use to approve or deny the loan. They typically make this decision quite quickly, perhaps within 30 seconds of the application being submitted.

Discover will then offer the person an interest rate. On their website, Discover says rate this can be as low as 8% or as high as 19%. The person applying for the loan then has the option to either accept or turn down this rate. If they accept it, the loan is approved.

However, even if Discover approves a request for a loan, most applications need extra review. This may mean that the person who wants the loan is required to fax in last year’s tax returns or send in copies of pay stubs from their work so that Discover can verify their identity.

Third Step: Cash is Received

Once everything is reviewed and gets final approval, Discover will officially issue the loan and send over the cash. This usually happens 7 to 10 business days later.

Fourth Step: The Loan is Paid Back

Finally, the person who applied for the loan would make fixed monthly repayments each year until the loan is completely paid back. This number of years is called a loan’s term, and Discover’s loans have terms of between 3 and 7 years.

For example, imagine you took out a five year loan with Discover for $10,000. If your loan had a 12% interest rate, the monthly payments would be $222 each month for sixty months.

5 Reasons Why Getting a Loan with Prosper is Better

Unfortunately, most people who apply for a loan at Discover have no idea that there are better options out there, particularly with a peer to peer loan through a company like Prosper. Here are five big reasons to dump the orange circle:

Reason #1: Prosper Has Lower Rates. Period.

At Discover, the interest rates are too high. For people with great credit history, their interest rate will be 7.9% (basically 8%). At Prosper, the rate for people with great credit is 6.73%. That is over a full percentage point higher.

Does an interest rate 1.2% higher even make a difference? It totally does, especially for larger loans. Imagine you got a $18,000 5-year loan at these rates with both Prosper and Discover. With Discover, you would pay $3,893 in interest. With Prosper you would pay $3,247.

A difference of 1.2% would mean you would pay an extra $645 for the exact same loan!

Why does Prosper have lower rates than Discover? Simple. Because they are not a bank. Discover, as a very large company, has thousands of employees they have to pay salaries to.

But Prosper is not a bank at all. It runs completely through a website. And since it has such a small footprint, it offers lower rates than Discover ever could. Don’t believe me? Click below to check your score at Prosper. Most people will find the rate is cheaper than their rate at Discover.

Check your rate at Prosper (won’t hurt your credit score)

Reason #2: Prosper Loans are Quicker

If you are applying for a loan, chances are you need the money quickly. Perhaps your credit cards are calling you every day. In that case, the sooner you get this money and pay them off, the better.

Discover, as their website states, typically moves this loan over to you between 7 and 10 business days later. This means it might take a long time for you to get the money. For example, say you got accepted for a Discover loan on a Friday and they took 10 business days to issue the loan. You would get the cash on a Thursday almost two weeks later.

Prosper, on the other hand, gets people cash much quicker, as fast as four business days. Personally speaking, I applied for a loan from Prosper on a Monday. On Thursday that same week the money was in my checking account. You can read about the whole experience at my review of Prosper.

Reason #3: Discover Has Expensive Fees

If you miss a payment on your Discover loan, their website says their late fee is $39:

There are no fees or penalties charged on a personal loan if you make your payments on time. We may charge a $39 fee if your payment is late or if you do not have sufficient funds in your bank account to cover a payment made.
(Source: Discover.com)

But Prosper’s late fees are less than half that amount: just $15. As I said before, this is because Discover as a company is more expensive to run, so they need to charge larger fees to cover the difference. But because Prosper is simply a website, it can keep late fees low.

Reason #4: Prosper Allows Larger Loans

At Discover, the largest loan they offer is $25,000. But many people are looking to consolidate credit card debt that is larger than this. Thankfully, Prosper allows loans up to $35,000. And considering their interest rates are lower, many borrowers will find they would pay the same amount of interest on a $35K loan at Prosper as on a $25K loan at Discover.

Reason #5: Prosper’s Loans Are Funded By People

Discover, being a bank, issues these loans using its large supplies of cash. Prosper, on the other hand, is a peer to peer lender. This means it funds its loans using the money of people from all around the country. So we have the option to apply for loans at Prosper and we can also help fund these loans (I have done both).

If you borrow money from Prosper, the loan has a much better overall feel to it. After all, it is not coming from some faceless corporation but from flesh-and-blood people around the United States. And you can be confident that you will take your loan payments more seriously, because if you fail to pay the loan back then it is actual people who lose out, not some massive bank.

Conclusion: Prosper’s Personal Loans are Better

The fact of the matter is this: both Discover and Prosper offer the same product — unsecured personal loans to people with decent credit. However, that is where things stop being the same. If we look at Discover, we see how it is an expensive and bulky corporation that offers high-interest rates on its personal loans. In contrast, Prosper has:

1. Lower interest rates
2. Quicker loans (cash in 4 days)
3. Lower fees
4. Larger loans (up to $35,000)
5. Funding from people like you and me

Prosper in the News

If you have never heard of Prosper, here are some great articles about them:

• New York Times (Dealbook)
• The Wall Street Journal
• Bloomberg
• Fox Business
• NPR

Bottom line: Check your rate with Prosper

Seeing what your rate would be on a loan from Prosper is really simple. After clicking the link below and submitting some basic information, you will be offered an interest rate less than a minute later.

Check your rate with Prosper (won’t hurt your score)

Questions/comments? If you enjoyed this post please like or tweet it below.

[image credit: MLoperative "Discover"
Hobvias Sudoneighm "/Approve" CC-BY 2.0]

The post Discover Personal Loans? 5 Reasons Why a Prosper Loan is Better appeared first on LendingMemo.

While finding and investing in loans is the glory of peer to peer lending, there is still a lot more to the overall picture. In today’s Whiteboard, we explore the various upkeep associated with having an investor account at Lending Club.

Video Transcription

Once you have started investing on Lending Club, there is still some things you need to do to allow everything to keep running smoothly, and that is going to be the subject of our final part of Intro to Lending Club – maintaining your account. Enjoy.

[Begin screencast ]

Once you begin investing at Lending Club, there are some things you will need to do to maintain your account. The two big ones are (1) keeping available cash low and (2) tracking your investment’s overall return. There are additional things we will do today, but those are the big two. Thankfully, both of these are well addressed by Lending Club’s website.

For example, let’s highlight the problem of uninvested cash, seen in the Available Cash amount on the account screen. These latent funds are just sitting there, earning no interest and lowering our overall return.

Keeping ‘Available Cash’ low through the Alert link

Now to address the problem of uninvested cash, Lending Club has created an Alert page. Here I can set up Lending Club to send me an email anytime my cash balance grows too high. For instance, I have set an alert for Lending Club to email me once a week if my cash balance goes above $50. What, what is really great is that I can set up an interest rate for this alert, so that in the alert that Lending Club sends, it will suggest some loans that I can invest in that match my available cash – which is pretty cool.

Keeping ‘Available Cash’ low through Lending Club PRIME

Another way you can aid the problem of uninvested cash is by creating an account on Lending Club Prime through clicking the PRIME link. As long as you have an account value of at least $10,000, you can set up PRIME to automatically invest in loans for you, keeping it balanced with whatever grades you choose. So let’s say I wanted to evenly invest $25 notes in A through E-GRADE loans, I could type 20% in the top five five boxes, and then 0% in the next two, and then Lending Club would then automatically invest in a balance of notes along those lines.

I can even set up PRIME to invest using a filter, for instance we could use the “Video Example 2″ filter from our last video.

All this to say, while PRIME is an excellent way of keeping available cash low, many people do not yet use it because it is so passive and hands off, which is great if that is what you want to do, but many investors have seemed to earn a higher return by choosing their own loans one by one, and doing so using multiple filters, which is something that PRIME does not yet allow.

Back at the main account screen, let’s talk about the other big way we maintain our account at Lending Club: keeping track of our overall return. Now obviously the easiest way we can do that is with this Net Annualized Return figure on our home screen, but we can also look at our individual notes one by one, and Lending Club has helpfully created two areas to do that: (1) the Notes screen and (2) the Portfolios screen, so let’s first go to the Notes screen.

Tracking Loans in the Notes tab

This is a list of all the notes you are invested in, displaying information on each one – such as its note size and interest rate. Most importantly, you can sort this list by status. If I click once on my Status, I can see the 13 loans I have that have defaulted, or charged-off. Now if I click on Status a second time, I can see the 11 notes that have gone late.

What is really great is that I can click the status of each of these notes to see its repayment history. For example, by clicking this note that is over a month late, we see that the borrower’s credit score is currently around 590. If I click the Credit Score Change link, I can see his credit score month by month, and I can notice that there has been a large drop in his credit score in the last month, in January.

I can see why there has been this large drop if I scroll farther down and look at his Payment History. Here I see that his last payment was in October, and since November he’s actually not been able to make any payments. Thankfully, I can see that there is a little bit of hope here, because if I go farther down to his Collection Log, I see that he has been contacted and discussing this with Lending Club over the last couple months, so there is a chance that he could definitely start make his payments again and this loan could again become Current.

Tracking Loans in the Portfolios tab

Next we will click on the Portfolio link. This is the other area where you can see how your account is faring, and here you can designate a portfolio for each of your notes, allowing you to compare different groups of notes against each other.

You can see Lending Club allows you to set a name for each portfolio, and it goes on to display how many notes are in each, as well as the portfolio’s value, its weighted rate (meaning, the average interest rate borrowers are paying on this group of notes), its outstanding principal (or, how much has yet to be paid back), it’s total payments to date, and its expected monthly payments (or how much money Lending Club expects this portfolio to pay you if all the borrowers make their payments on time).

Personally, I use portfolios to compare my investment across each quarter. So if I open the portfolio from the first quarter of 2013 in one browser tab, and I open the portfolio from the first quarter of 2014 in the other, I can kind of compare and contrast the two of them. If I look closely I can actually see that the average weighted rate, or the interest rate that I am investing in, is half a percent higher higher in my 2013 quarter one portfolio than in my 2014 quarter one (21.9% versus 21.5%). And this discovery could encourage me to invest in more E-G grade loans if my overall strategy was to keep my average loan rate around 22%.

Various Additional Sections

There are a few other things we need to do to maintain our Lending Club account, a few other links that we have not yet covered. So first you can set up our bank account information on the Bank Account tab.

You can also transfer cash between your Lending Club account and your bank account using the Transfers link.

The Order History shows exactly what it says; it has all your investment orders on Lending Club arranged by date. I can click on each order number to see that particular order’s details.

Moving on to the Account Activity tab and typing in the little code, I can see my borrower payments, issued loans, and service fees that have affected my account.

The Statements tab is where I can see the statement for every single month, as well as my end-of-year statements, as well as the particular documents I have as a peer to peer investor. I can also look at tax statements if I have a taxable account here.

The Trading Account link is where I can buy or sell notes that have already been issued. This is a whole different more complicated side to Lending Club, and is kind of beyond the scope of this video, so we will skip over it for now.

But we will finish with one thing, and that is the Statistics tab in the upper right. This is where Lending Club shows data about their platform as a whole. The top charts show a nice growth curve for how many loans they are issuing each year and each month. These charts are really encouraging to help us trust Lending Club as a company, but as a company that is doing something new that has not been done before.

The chart on the bottom left shows what all these loans are going towards, with the bulk (61.29%) going towards refinancing, which basically is people moving their debt over to Lending Club for a lower interest rate.

Under the Performance tab, you can see how each loan grade has given a different return, with E-grade loans giving the highest return of 11.04%.

But the most important chart here actually farther down — the Benefits of Diversification chart. You can see that people who are diversified in an account with 100 notes (and do not have a one note that is overweighing their whole portfolio) have a 0.1% chance of having a negative return. You can compare that with people who are not diversified in 100 notes, and they have an 11.4 chance of losing money. So, again, this is just more proof that diversification on Lending Club is key to having a positive experience.

It can be fun to click kind of around more charts here, going to the Loan Details area and looking at this information, but we are actually going to finish today by looking at the Download Data area. This is a place where you can go to download spreadsheets of all the loans that Lending Club has ever issued. You can open this up with a program like Microsoft Excel, and you can do your own analysis at home, which is pretty great.

[End screencast]

So there you have it: an introduction to Lending Club. Stay tuned for our next video, where we will be doing the exact same thing, but with Prosper.

The post Maintaining Your Lending Club Investor Account – Whiteboard #7 appeared first on LendingMemo.

When peer to peer lending began in the US in 2006-07, an amazing thing happened. The platforms, both Lending Club & Prosper, launched their sites with a commitment to keep their loan history open to the public. This was totally unprecedented, particularly within an avenue as fickle and as large-scale finance. And, to this day, this standard has set the pace for all who have followed. In short, this is an asset class that believes in itself.

I sometimes wonder if a platform or two decided against launching because they felt too uncomfortable to match this open standard. Imagine if a third platform would try to launch next week, but quietly keeps its dataset closed. Make no mistake – people would notice and the new platform would look incredibly insecure.

Indeed, this spirit of data generosity has become a pillar of peer to peer lending as a whole. I would go so far as to say that p2p data sites that launch with a overt focus on moneymaking have been subtlety frowned upon by everyone else. In contrast, secondary sites like Bryce Mason’s P2P-Picks.com and the Orchard blog have been lauded through their crunching and subsequent giving-away of quality data to the public. And no site has been more generous with its data than Nickel Steamroller, the peer to peer lending analytics site produced by Michael Philips and Rocco Galgano.

The Story of NSR

If we are going to begin anywhere with the story of NSR, we have to begin with what inspired it: the astute work of Ken over at LendStats (registered in early 2010). Ken was the pioneer in figuring out how to aggregate the platform history for the public in a way that was simple, data-rich, and free. Thousands of investors began to use his site to develop filters for Lending Club and Prosper.

Michael Philips, a data analyst and software engineer by trade, saw the work that Ken was doing and was inspired. His domain, NickelSteamroller.com, was registered in July 2011. Soon both Ken and Michael were both providing much needed help to retail investors trying to pull apart peer to peer lending’s historical performance. Eventually, Ken over at LendStats seemed to take a leave of absence, and Michael stepped up to fill the gap. This is how NickelSteamroller became the go-to analytics site for peer to peer investors, the national portal to run statistical queries on the open loan data that Lending Club and Prosper had freely provided for years.

However, Michael had mostly focused his work on Lending Club, and with Ken out of the picture, there was nobody helping investors analyze Prosper’s history. For almost a year, many of us investors struggled to get by. Rocco Galgano saw the need for another tool site, and launched Prosper-Stats.com in late 2012. And, for a season, Michael and Rocco each covered all the bases, Michael for Lending Club and Rocco for Prosper.

I remember talking to Michael in early 2013 about Rocco’s work over at Prosper-Stats. Michael was really amazed at Rocco’s ability to compile and backtest Prosper data, since Michael had himself been somewhat struggling to add Prosper functionality to NSR.

So it was really exciting when Michael told me in the mid-2013 that he and Rocco had teamed up. These two talented and hard-working programmers decided to set aside competition and become a duo – to launch a combined back-testing tool that would feature both their work, and in doing it across both platforms, to launch a tool unlike anything offered before.

After months of work, Michael and Rocco launched NickelSteamroller 2.0 on January 29, just six days ago. NSR 2.0 is the first analytics site to service both Lending Club and Prosper since LendStats, and is completely free to the public. Here is the full announcement by Michael.

Again, this degree of collaboration and transparency is just par for the course within peer to peer lending. While the industry certainly has an element of competition, Michael and Rocco’s motion to both unify their labor and then give their work away is simply another instance of integrity within this asset class. Whenever my friends and family ask why I am so involved within p2p lending, I simply highlight stories like NSR.

The 5 Major Functions of NickelSteamroller

For people new to NSR, the site can be a bit overwhelming. To help, I have highlighted its main functions, ordered by what is generally seen as most useful to peer to peer investors. There are many additional things the site can do, but these are the big ones:

#1: Analyzing Lending Club & Prosper Historical Loan Data

Easily, the most popular function NSR does for investors is analyze how Lending Club & Prosper’s past loans have performed. For example, here is the backtesting tool for Lending Club showing the return on its $3.5B in loans, subsequently broken down by grade:

And here is the tool for Prosper, this time for $693M, and again broken by grade:

We can then explore this data by running statistical queries on it, creating filters that we can use for future investing. For instance, in the example above we see that Lending Club E-grade loans give the highest returns, with an 11.33% ROI. If we isolate all the E-grades loans and then break them down by their number of credit inquiries, a good filter begins to emerge, namely E-grade loans with zero inquiries (historical returns of 12.15%):

It deserves repeating that past performance is no guarantee of future returns, but personally I would feel quite comfortable with a Lending Club account that is diversified through this NSR filter (at least 200 E-grade loans with 0 inquiries).

You can endlessly play with this backtesting tool; I have spent countless hours on it. And the more time you spend, the better grasp you get on the historical loan data, and the more savvy of a strategy you can apply towards your investment going forward.

#2: Portfolio Analysis on Lending Club and Prosper

The other big thing NSR allows is a better measure of your returns than is typically provided by Lending Club or Prosper themselves (though Lending Club’s new tool helps). For instance, I can upload my notes.csv file using the Lending Club Portfolio Analyzer and have my portfolio valued with loss factors, which basically means it discounts loans based on status. Late loans are worth less on the open market, so NSR lowers your ROI (return on investment) in accordance with how much latency is in your portfolio.

For example, below I have had NSR discount my ROI by late notes (arrow 1), further breaking it down by loan grade or purpose. This graphic encourages me to find additional E-G grade loans (arrow 2):

The amazing thing is that the new NSR 2.0 also includes a portfolio analyzer for Prosper (link), something that has never before been available to retail investors.

#3: Charts of Lending Club & Prosper Trends

The new NSR also has a ton of data on how the platforms are growing and changing day by day:

For instance, if I click on the Prosper chart for Monthly Interest Rates, I discover that Prosper has slowly been lowering its average loan rates over the past years. Every grade is between 1-5% lower than late 2011 (I feel this coincides with Prosper’s need switching from lenders to borrowers):

#4: Charts of National Economic Trends

One thing many investors do not pay too much attention to is the reality that peer to peer lending does not exist in a vacuum. While these borrowers (and their solid 700 credit scores) are an extremely stable investment, both Lending Club and Prosper have stated that swings in the national economy could have negative consequences for how well these borrowers pay back their loans.

Michael and Rocco understand that, and have set aside a section of their site solely for the purpose of keeping track of how the American economy is changing as a whole:

If I click on the unemployment rate link, arguably the most important one on the list, I can get a decent grasp of the national climate for borrowers making consistent repayments. For instance, I can notice that the US unemployment rate has improved a lot since its high of 9.9% in November 2009:

Charts like this are extremely helpful to keep an eye on regarding the weight of p2p lending within our overall investments. So if NSR’s unemployment chart eventually tops 10%, you can bet I will be investing a bit less in Lending Club & Prosper, and a bit more in something stable like CDs.

#5: Active Listings of Loans on Lending Club & Prosper

The final thing of interest that the new NSR allows us to do, is to better filter the platform’s available notes. For example, the basic filtering on Lending Club’s site is just too bland. It does not really have the fine-tuning that serious investors need to quickly find the loans they are looking for. But NSR allows extremely fine tuned searches within Lending Club & Prosper’s list of available notes.

For example, say I wanted to quickly find notes with a:

• B-grade
• 36-month term
• Purpose of debt consolidation
• Interest rate of exactly 9.67%

By creating an NSR filter and running this filter across the list of available loans, three of them pop on my screen in milliseconds:

I could then click the Loan ID link to go directly to Lending Club’s site and make an investment.

Welcome to Self-Directed P2P Lending in 2014

A lot of changes have occurred in peer to peer lending over the past few years. A lot. However, two things have remained the same. First, the analysis continues to get better and better. Who can tell what things will look like five years from now, what tools will be available to those who want to pull apart the data and earn a higher than average return through lending money to people with great credit.

A second thing has remained consistent year by year, which is the inherent kindness of peer to peer lending’s companies and voices. The data, amazingly, will continue to remain open and available. NSR 2.0 is just more of this candor.

I want to send a huge thank you to Michael and Rocco for continuing to work in the spirit of this asset class, offering huge benefits to investors who might not necessarily have a hedge fund at their disposal. As all of us continue to invest, earn solid returns, and save for retirement, we owe a great deal of gratitude to the generous data scientists and programmers out there who have made our higher returns possible.

The new NSR: www.NickelSteamroller.com

The post NickelSteamroller 2.0 and the Courageous Data of P2P Lending appeared first on LendingMemo.

Investors on Lending Club and Prosper who diversify their accounts in two hundred notes can reasonably expect a return between 5-10%. In today’s Whiteboard we look at how we can do our best to be on the higher side of that spectrum.

Related article: What is an Expected Return? A Survey of P2P Lending Experts

Video Transcription

I want to open up today’s video by asking a question. Lending Club has released data that shows that the majority of its seasoned diversified investors are earning between a 5 and 10 percent return. So I want to ask: how do we get on the higher side of that population of investors? What are the different strategies that we can take with our accounts?

That’s what we are going to be looking at today – increasing our peer to peer lending returns, particularly looking at six different ways we can do this, three simpler ones, and three that are a little more advanced. So, let’s get started.

#1: Diversification of our Investment in 200 Notes

The first, most important thing we can do to have a good solid return in this asset class is by diversifying our investment in at least 200 notes. We’ve said this before, but it’s worth saying again. To demonstrate, LendingMemo did a study last year where we looked at all the investors on Prosper’s platform, because back then they had their investor data open as well, and we found that out of diversified investors, only 4 out of 3800 had lost money.

So it’s actually difficult to lose money in peer to peer lending if you diversify yourself in 200 loans. So, again, this is the most important thing we can do, and we will put it back again at number one for this video as well.

#2: Keep Cash Balance Low

The second thing we can do is pretty simple, and that is to keep our uninvested cash low. Now, there is two different ways we can do this, but the concept is the same. We are going to have borrowers making repayments back into our account, and we need to log into our account and put that money to work or else its just going to be sitting there, earning no interest and lowering our overall return.

Scheduling Moments to Reinvest

So the two ways we can do this is by creating a schedule where we can log into the platforms intermittingly throughout the month or so and put that uninvested cash to work. Some people do that by pulling out their smartphone throughout the day to reinvest in more loans. Some do it on Thursdays at 3pm on their desktop, or on the 1st of the month they log into their Lending Club or Prosper account. Whatever the case is, there needs to be some sort of rhythm or schedule where you go into the platforms and put that money to work.

Automating Your Investment through Lending Club PRIME

But another great option is this: automating your investment. Now, Lending Club and Prosper both have automated services, and they are both pretty decent. Lending Club actually just lowered the minimum required investment to get involved in their PRIME service, and that service will automatically invest in loans for you. You can even invest using a filter, and that way is really going to do a good job at keeping that available cash low.

Automating Your Investment through 3rd Party Sites

Now for those of you who want to get really involved in your investment, people like me, you can actually invest through 3rd party sites. There are currently three open to the public: Lending Robot, BlueVestment, & Interest Radar, and these are all decent services that allow you to automatically invest in more loans without you having to log into the platforms at all. So, great way, but the most important concept is to keep our uninvested cash low.

#3: Increasing Returns through Adding Risk

Another great, really simple way we can keep our peer to peer lending returns a little higher than normal is by adding more risk, and the two easiest ways that we can add more risk are by investing in lower grade loans and also investing investing in longer term loans.

Now, as we know, both the platforms have seven grades, so if we stay more on this side of things you can see that the returns for investors have actually been on ten and eleven versus the safer A and B-grade loans only have 5=8%. So if you can kind of push your investment into taking more risk, you have the potential to earn much better returns, and the same goes for the term. Three-year loans are only giving investors an 8% return, but five-year loans are returning investors a 10.5% return overall.

Investors like me who actually enjoy taking on a bit of risk, I focus on five-year loans on the more riskier grades, and I have been earning a higher return as a result of that.

#4: Investing through an IRA

There are also three more complicated ways that we can increase our accounts, and one is to invest through an IRA. Now, a lot of you might not feel comfortable doing this without getting a good handle on peer to peer lending first off, but once you have a good handle on Lending Club or Prosper, you might want to consider opening up an IRA.

Like we said, most investors are earning between a 5-10% percent return, but actually, after taxation, it looks more something like 3.5-7%. So it really takes a big ding out of your return to have to lose of bunch of it to taxes. In fact, I did a little bit of a study before I did today’s video, and I looked at, you know, what a Roth IRA through Lending Club earn over 30 years as compared to a taxable account. And it was, over thirty years, the returns were twice the taxable accounts returns.

So I looked at a Lending Club account that starts with $5,000, adds $5,000 per year, and has a 10% return over all (which is a little generous, I know, but that is what I did), and I found that the tax-free account earned like $950,000 and the taxable account only ended up with $500,000. So, huge benefits to investing through a Roth IRA. I highly recommend it. Do that, it is a great option.

#5: Investing with a Filter

Another is with a filter, and we will focus more on this in the next video, but for instance, people who are shopping around for credit, every time they look for credit it is going to add an inquiry to their account, and people who have more inquiries actually have lower returns: 8.5% versus 9%.

So if you can simply invest in people who have had zero or one inquiries in the past six months, you get a 0.5% bump to your overall ROI. It’s not guaranteed, but that is what has happened in the past, and that is an investing approach that many of us take, but we will look more at filtering in the next video.

#6: Selling Your Loans on Foliofn

Let’s finish with this: selling loans on Foliofn. Now, Prosper does not allow the sale of late loans, but on Lending Club you can actually sell your late loans on the secondary market. For instance, Lending Club has given the data that if a loan goes into Grace-Period, it has a 23% chance of defaulting at that point.

Now I want to ask you a question: if you had the option to sell your loan at a 20% discount, and you knew that it had a 23% chance of defaulting, would you? And I think that would be actually really a great idea because, arguably, you would earn a 3% margin on that loan.

The same goes for loans 16-30 days late. Lending Club says that 49% of them default, so if you could sell them for a 40-45% discount on the secondary market, would you? I think that would be a great idea, a great opportunity, and lots of investors on the secondary market are kind of crunching the data and they are saying, “You know, I actually am interested in that discounted note.”

So don’t let your loans that are late just kind of sit and rot off in the corner. Throw them on the secondary market, see if there are some buyers for them and overall you are going to have a bump to your overall return.

So there you have it: six great ways to increase our returns. In our next video we are going to be looking at filtering our loans in an entire video.

The post Increasing Returns in Peer to Peer Lending – Whiteboard #8 appeared first on LendingMemo.

I know what it is like to look for a loan. While you usually have your finances in order, a sudden situation has caused you to need a little extra cash. Perhaps you are having a medical emergency. Maybe you are trying to pay off your credit cards and want to consolidate your debt at a lower interest rate. Whatever the case, there are a number of places where you could go for a loan, and Wells Fargo is one of those places.

The problem is, they are not the best option. They are used by people only because they are popular. Wells Fargo is one of the biggest banks in the United States, people wanting a loan often choose Wells Fargo because their billboards and banks are visible in every major city.

A much much better option is applying for a loan through Lending Club. And while you might not have heard of Lending Club before, it is a really good idea to explore all the options before settling on a Wells Fargo loan. Looking at another option is what we will be doing today.

Getting an Online Unsecured Loan: A 6-Step Process

Getting an unsecured loan over the internet is basically the same six steps wherever you go.

Step #1: Fill Out an application

The first thing you have to do is fill out an initial application asking for a loan amount and term. A loan’s term is the number of years you want the loan to be paid back (for Wells Fargo, they offer 1-year to 5-year loans). You will also have to submit some basic information like your date of birth and yearly income. This allows the company to pull your credit history.

For Wells Fargo, online applications are only accepted from people who have had an account with them for at least a full year. If you are brand new to Wells Fargo, you will have to visit one of their branches if you want to apply for a personal loan.

Step #2: Your Loan is Approved (or Denied)

Once your information is submitted, companies like Wells Fargo will crunch the math of your application. They will look at the big picture (your credit history and current income) and score you to see if you qualify for a loan.

Often this is when borrowers get declined. The big three reasons why banks decline a loan application is because:

• the credit history is too young (earliest credit line is too recent or has too few lines of credit)
• the credit has too many negative marks (late payments, etc)
• years of employment or yearly income is too low

Step #3: Get Quoted an Interest Rate

If you meet their minimum credit score, they will offer you an interest rate for the loan amount and term you requested. For instance, if I go to the Wells Fargo repayment calculator, I see that the best rate they offer people is 7.2% (though most people will get a rate higher than this).

Step #4: Accept the Interest Rate

Alright! Once you apply for a loan, get qualified, and get offered an interest rate, you have the choice to either accept or turn down the loan. This is a really important step in the process. If you find this interest rate to be too high, you need to consider looking elsewhere. An interest rate that is too high means huge fees for your loan over the years you pay it back.

For example: if I got the $15,000 3-year loan in the above picture, I would pay $1,730 in interest. But if Wells Fargo offered me a higher rate like 12%, then I would pay $3,000 in interest! That is a difference of $1,300, a solid reminder that interest rates are important.

In short, you need to find the lowest rate possible before you accept a loan’s offer.

Step #5: Get the Cash

If you do get qualified and accept the loan, the amount is then transferred to your bank account, usually electronically, though some banks just write you a check.

With Wells Fargo, the only way to get this check is by driving to an actual branch and going inside to sign the forms in person. This may be inconvenient for some, but doing this allows Wells Fargo to possibly get people cash the same day they apply for a loan.

Step #6: Pay the Loan Back

This usually occurs over a number of years until the loan is paid back in full, but many borrowers choose to pay it off early (this is called prepayment). Some loan companies charge a fee for early payment, but Wells Fargo does not.

Wells Fargo Personal Loans versus Lending Club Personal Loans

If we compare Lending Club and Wells Fargo side-by-side, we see that in many ways they are the same. Both companies offer loans to people that are unsecured, meaning they are not tied to any collateral like a house or car. Also, both have no prepayment penalty if you want to pay the loan off early.

Wells Fargo has some advantages over Lending Club:

• Lending Club’s maximum loan is $35,000. But Wells Fargo offers loans nearly three times as large – up to $100,000.
• Lending Club only offers 3-year and 5-year loans. Wells Fargo, in contrast, offers a wider selection of terms: 1-year, 2-year, and 4-year repayment options.

Lending Club Can Be Easier. Wells Fargo Can Be Quicker.

Everything is done online at Lending Club. They less like a bank and more just a website, and this means you never have to leave your house to get a loan through them, which can be really nice.

Wells Fargo requires you to visit one of their branches in person to get the loan finalized. But the benefit Wells Fargo offers is a same-day loan. It is possible to get approved for a loan at Wells Fargo and walk out of one of their branches that same day with cash in your pocket (well, a check actually). In comparison, Lending Club takes six business days to get you your money.

So you may want to ask yourself what you need more: (1) the ease of applying at home on your computer, or (2) the quickness of going into a Wells Fargo branch and getting a loan on the same day you apply.

The Main Reason Why Lending Club is Better: Lower Interest Rates

Many people do not consider the options when they need a loan; they simply go with whatever they know. But this means that many of them are stuck with higher interest rates than they could have received somewhere else.

For instance, take people with perfect credit. In our example from earlier, we saw that Wells Fargo offers borrowers with excellent credit a 7.23% interest rate on a loan. However, Lending Club offers borrowers with perfect credit a 6.78% interest rate on a loan (this includes Lending Club’s origination fee). Imagine I got a $35,000 3-year loan with each. For the Wells Fargo loan, I would pay $4,037 in interest. For the Lending Club loan, I would pay $3,778 in interest.

That is a difference of $259 for the exact same loan.

Interest Rates on 5-Year Loans at Wells Fargo Are Especially Bad

This problem is particularly bad at Wells Fargo when we look at the rate they offer borrowers who want to repay over five years. See the example below:

Wells Fargo’s best interest rate for 5-year loans, the one they offer to people with excellent credit, is 9.2%.

In comparison, Lending Club offers 5-year loans to premium borrowers with an APR of 7.3%. So for a $35,000 loan through Lending Club, you would pay $6,880 in total interest and fees. Total interest for the same loan through Wells Fargo? $8,837.

For this loan, going through Wells Fargo would cost an extra $1,957.

Suddenly a lower interest rate seems really important, don’t you think?

Lending Club in the News

Some of you may never have heard of Lending Club before, so here are some stories about them in the news:

1. CNN: Is Peer to Peer Lending the Future?
2. The Wall Street Journal: Google Makes Investment in Lending Club
3. CBS Evening News: Share and Share Alike – Lending Club

A More Detailed Review of Lending Club

If you want to see the entire Lending Club loan process outlined greater detail (with screenshots), you should read about my own Lending Club experience. I got a $2,350 loan from them in six days and really enjoyed the entire process.

Read: Lending Club Review for Borrowers

Bottom Line: YMMV (but Lending Club is Better)

YMMV stands for the phrase ‘your mileage may vary’. It means that no site on the internet (including this one) can predict which will offer you a better loan for your specific needs. It may be the case that you look for a $25,000 loan at both Wells Fargo and Lending Club, and get a better rate with Wells Fargo. Or maybe you need a $50,000 loan, an amount that Lending Club does not offer. Whatever the case, I suggest you check your rate at both and go with whatever is better.

That said, I believe that Lending Club not only offers lower interest rates to people with excellent credit (as we saw above) – they offer lower rates to everyone. I believe that, on average, most people are going to get a better rate on a personal loan if they go through Lending Club.

Check your rate at Lending Club (won’t hurt your credit score)

Questions/comments? If you enjoyed this post please like or tweet it below.

[image credit: Ron Cogswell "'Wells Fargo' sign"
"Money, Money, Money" by Daniel Borman CC-BY 2.0]

The post Wells Fargo Personal Loan? Get a Lower Rate with Lending Club appeared first on LendingMemo.

In peer to peer lending, it can be confusing to choose a few loans for investment from among the hundred that are available. In this Whiteboard video, we break down the concept of filtering a platform’s available loans so as to discover those with the greatest potential.

Video Transcription

Once you begin investing on a platform like Lending Club, and you have set up your grades and risk approach, you are still going to have a large number of loans available to invest in. So the question is, out of this say 100 or 200 number of loans, which loans are best?

And that is a job for filtering. Now, filtering loans has been arguably given a little more credit than it probably deserved over the last couple years. I would say that filtering in peer to peer lending is second to diversification, to things like investing in lower grade loans (increasing your risk), to using an IRA, those things are a lot more stable and trustworthy approaches to boosting your peer to peer lending returns.

That said, I have a little special place in my heart for filtering because its one of the most fun parts of this whole asset class, is being able to look at this large pool of loans, run some statistics on it and say, “This little small cross section is actually what I am interested in,” and then to hopefully earn a higher return as a result of that analyses.

Filtering the Eligible Dating Pool

So that is what we are going to look at today, and to get started, I’m going to talk about the pool of eligible people to date. So, let’s imagine you had a large group of people (you saw the entire nation laid out) and you had all the people who were eligible to date in a room. It would look something like this, it would be this bell-shaped curve, right?

Over here, on this side of things, there would be people who would be worse to date. And over here on this side of things, there would be people who would be a little better to date. And down the middle here, this would be people who were a bit more run of the mill, that would be OK to date.

Simple Dating Filter – No Alcoholics

Now, if we could filter out certain populations in this room then we could experience more positive dates, right? So let’s say, as a simple filter, we could filter out, in this giant room of all these eligible people who could date, all the alcoholics – we kind of kick them out. Nothing against alcoholics, I have a lot of love in my heart for alcoholics, I just would not date them. So let’s say get them out of the room. On a whole, although our typical average was here, all of a sudden it has moved a little bit over to here. It has moved over, slightly better.

A More Complex Dating Filter

And what if we could push that filter a little farther. What if we could say, “OK, I don’t want to have any people in the room who are drug addicts or alcoholics. Everyone in the room has to have some kind of exercise schedule. Everybody in the room should eat a balanced breakfast, right? And everybody in the room should own less than five cats.”

So, all of a sudden, you are starting to push the overall quality of the people in the room farther and farther to the right. And the more complex and the more particular you would get with your filter, the overall average positive dating experience you would have. So that right there is a pretty loose example that is similar to peer to peer lending filtering.

Filtering in Peer to Peer Lending

Now let’s look at peer to peer lending filtering. This only works because all peer to peer lending historical data is public. It is totally open. You can go on Lending Club or Prosper’s site. You can download giant spreadsheets of all the loans they have ever issued, and then you can analyze these spreadsheets to discover “better” performing loans.

I put better in quotes because, even though we might say they have performed better in the past, that is not an indication that they will perform better in the future. So I will put that classic caveat out there: past performance is no guarantee of future returns, and that is particularly true with filtering.

Filtering Sub-Grades on Lending Club

That said, here we are with Lending Club, and they have these grades. They have grades A through G, and I have kind of broken down C, D, & E here. And there are sub-grades to each. There are grades D1, 2, 3, 4 & 5. Now here is where it gets interesting: all the D4 loans on Lending Club’s platform are given a 19.2% interest rate.

Now I want to ask you a question: do you think they all deserve a 19.2% interest rate? Or maybe some of them actually deserve a slightly lower interest rate. Maybe some of them deserve a slightly higher interest rate. So that is what we do with filtering, is we kind of look: OK, here is this giant bell-shaped curve of D4 loans, all of them getting a 19.2% interest rate, so the general bulk of them are going to kind of … Lending Club people, the people who assign these grades are really smart, and I trust that the majority of those people are hitting the 19.2% right on the nose.

A Simple P2P Lending Filter – No Inquiries in the Last 6 Months

That said, what if we ran a simple filter on this giant group of borrowers? What if we said, “Ok, the more times people look for credit when they go out into the world and they say ‘Hey, I need a loan’, that is indicative of them shopping around for credit”. What if we said, “I want to have people who have had no inquiries in the last six months.”

Well what we have found in the past, and again, this is no promise for the future, but what we have found in the past is that average kind of slips a little bit to the right, it kind of pushes over to that one side.

A More Complex Peer to Peer Lending Filter

And what if we pushed a more complex filter. What if we said, “OK, for all these D4 loans we are going to have no inquiries in the last six months, they all have to make $5,000 or more per month, none of them can have had a past bankruptcy, and none of these loans can be purposed for small businesses.”

What we have found is that actually our average return is going to be pushed a little bit over towards the ‘above 19.2%’. And that is all filtering is. Filtering is taking the bell-shaped curve of the grades that Lending Club or Prosper has assigned, and it is kind of leaning over to that one site, using very simple, easy to understand filters like, for instance, hey surprise surprise, people who start a business have a higher default rate than people who are consolidating their credit cards.

Makes sense. People with a higher income pay their loans back easier. So it is very comprehensible. We can kind of throw these general cross-sections and filters towards the platforms and earn a higher return as a result of that.

So there you have it: peer to peer lending filtering. In our next video we are going to be doing a screencast of Nickel Steamroller and looking at how to create a filter ourselves.

Questions/comments? If you enjoyed this you can like/tweet it below.

The post Introduction to Filtering Peer to Peer Loans – Whiteboard #9 appeared first on LendingMemo.

Five weeks ago the London-based newspaper Financial Times broke a story that Wells Fargo, one of the largest banks in the world, had issued a memo banning their staff from taking part in Lending Club and Prosper (full article). The key line of the Wells Fargo memo is:

“… peer-to-peer lending is a competitive activity that poses a conflict of interest.”

Financial Times then went on to analyze why this ban was issued, stating that “tensions between banks and peer-to-peer platforms have arisen because the P2P model cuts traditional lenders out by matching capital directly with borrowers [emphasis mine].” So in the view of Financial Times, the decision of Wells Forgo to forbid their employees from entering the peer to peer space had to do with how Lending Club and Prosper directly threaten Wells Fargo as a company.

Kathleen Pender at the San Francisco Gate then approached Wells Fargo for further comment two days later (full article). Wells Fargo replied to Pender’s piece with a wordy paragraph containing this key statement:

“In response to a specific question about investments in peer to peer lending companies from a small group of team members in one of our licensed businesses [...] the guidance given to these team members was based on our code of ethics.”

In short, Wells Fargo disagreed with the Financial Times’ angle that the memorandum was issued for competitive reasons, instead arguing that the memo was issued for purely ethical considerations.

Financial experts did not buy it. Mark Calvey of the San Francisco Business Times transitioned from news of the memo into highlighting how “the lending platforms can offer loans at lower rates than banks charge.” CNBC moved from the memo to immediately talking about how peer to peer lending is “cutting out the bank“. David Snitkof at Orchard Platform analyzed both the ethical and competitive angles – himself leaning into the memo’s rationale being about the threat that peer to peer lending poses to Wells Fargo’s future:

“Wells Fargo’s new policy may be an example of how a new incumbent reacts to a potentially disruptive new business model.”
(Wells Fargo Restricts Employees From P2P Lending)

In summary, the jury has returned with a verdict: Wells Fargo feels threatened by peer to peer lending. This, then, poses the question that we will attempt to answer today: how does a company like Lending Club or Prosper pose a threat to one of the largest banks in the world?

Wells Fargo versus Peer to Peer Lending: Size Comparison

A cursory comparison of the two institutions reveals stark differences. For instance, let’s look at the income of Wells Fargo as compared to Lending Club (last reported quarter):

Or consider the number of employees at Wells Fargo’s disposal:

In short, when looking at size alone, Wells Fargo should not have any reason at all to worry about this “fringe” sector (MarketWatch). And yet they issued a corporate embargo against a company a fraction of their size. Comparing GDP, this is akin to the United States of America issuing a trade embargo against the island nation of Mauritius.

So something else must be going on, and I think it has something to do with how this new way of issuing loans “cuts traditional lenders out” (as stated by the Financial Times piece). The technical term for being cut out like this is disintermediation, and its power becomes easier to understand if we take a small detour down digital-memory lane.

How the MP3 File Killed the Music Industry

Let’s remember back to the bygone internet days of June 1999. A fuse had just been lit that would go on to have an astounding global impact. A music distribution program called Napster was quietly released, taking advantage of a new compression technology called MP3, a file format that dramatically shrank the space used by a digital song file. Whereas before digital music took up too much space to be transferred via the modems we used back then, suddenly everyone’s favorite music was available with the click of a mouse. The nation began (illegally) downloading their favorite songs with carefree abandon. Napster reached an astounding 10 million unique users in less than two years time.

What happened next is the stuff of history. The record industry fought tooth and nail against digital music, a national superpower versus a five megabyte file. Lawsuits were issued. Napster’s creator Shawn Parker was sued and forced to shut down. Terse FBI warnings were emblazoned on a billion audio CDs, and famous rock bands like Metallica joined the cause against piracy. The record companies, previously stiff competitors, suddenly made nice and threw the entire collaborative weight of their industrial bulwark against this problem, desperate to remain in power.

The 5MB file won. Back in 1999, the music industry was experiencing record revenues, around $19 billion. By 2009, just ten years later, it was 40% of its size (source).

These days the record companies have been relegated to a humbler corner of the overall music ecosystem, making the majority of their profit from the sales of digital singles. They still promote artists and produce music, but their power has been greatly diminished.

Furthermore, this digitization of the global economy has been happening everywhere, and it has been slaying all sorts of industry giants. Kodak, a hundred year old company that was at one point included with other national standards on the DOW Jones index, went bankrupt in 2012 after years of failing to adjust to digital photography. Disintermediation (Wikipedia): it is what happens whenever a product or service makes an established industry player unnecessary and redundant.

How is technology so powerful? It does things cheaply and efficiently.

The key reason of why the MP3 got so popular had to do with one particular feature: its inherent efficiency. Yes, the format allowed many new listening improvements (anyone remember MilkDrop?). But most importantly, the MP3 was simple. Try as they might, the record companies and their immense distribution truck-lines could not complete with the ease of their product being available in people’s homes with the click of a button. The MP3 was just too efficient, too easily gotten, stored, and shared to lose.

The Efficiency of Peer to Peer Lending

Similarly, Lending Club offers astoundingly low loan rates because they are cheaper and more efficient than banks have ever been. Like iTunes, a peer to peer lending platform is based totally online. They have no vaults or cash-holding requirements. They have no tellers they pay to sit at a counter and await walk-in customers. Lending Club’s only infrastructure is a server farm in Nevada and an office in San Francisco, and this lean profile has allowed a small staff of only 200 employees to issue billions and billions of dollars in loans.

So it makes sense to say that peer to peer lending is to the banks like the MP3 was to the record companies. Both seem starkly simpler mechanisms than the brick and mortar establishments. But can we back up this bold claim with hard data? How can we prove that peer to peer lending out-prices the banking establishment?

To answer this question, the memo-issuing Wells Fargo is actually a perfect comparison. Unlike other big banks in the United States, they regularly issue personal loans through their Community Banking program, loans similar to those of Lending Club.

Operating Expense Ratios: Wells Fargo vs. Lending Club

To make this comparison, we need to compare each company’s efficiency, not their size, but the relative ease with which each company can issue loans at all. For example, if it costs Wells Fargo $2.00 to issue a $1000 loan, and it costs Lending Club $1.00 to issue the same loan, then Lending Club would be twice as efficient.

The measure of a loan issuer’s efficiency (their operating expense ratio) is found by dividing (A) a loan issuer’s expenses by (B) the total value of all its loans that are still in the process of being paid back.

Finding the Efficiency of Wells Fargo

Wells Fargo makes it easy to discover this ratio through their Investor Relations page. In the Quarterly Supplement for their most recent quarter (pdf), we find a page titled Community Banking. Underneath are the “Annual Loans, net” and “Noninterest Expense” numbers we can use to calculate the efficiency of Wells Fargo.

Finding the Efficiency of Lending Club

Lending Club’s operating expense ratio is more complicated to calculate because the company is growing so quickly. We have to open up their most recent 10-Q filing with the Securities & Exchange Commission, find their cost and issued loans for that quarter, and use some math to extrapolate these numbers into perpetuity. Basically, we see how Lending Club did last quarter and project its future as if the company simply repeated last quarter’s performance over and over.

Note: Here is a white paper outlining how I discovered these expense ratios: Why Peer to Peer Lending Will Replace American Banking (pdf).

The chart below contrasts their operating expense ratios, with Lending Club’s projected using their last filed quarter’s performance.

Dividing their expenses by their outstanding loans, we can see that Lending Club is currently something like 270% more efficient as a company than Wells Fargo. The numbers get even more interesting if we zoom the camera out. Here is the efficiency of both companies for the past three years:

Not only is Lending Club a much more efficient company than Wells Fargo, but their efficiency continues to improve each quarter. In contrast, Wells Fargo’s efficiency generally stays the same, drifting between 5.5% and 6.5%. If you couple this efficiency with Lending Club’s growth chart, a dramatic picture begins to emerge:

What momentum. It’s possible that peer to peer lending poses the greatest existential threat that American banking institutions have ever faced since their companies began.

Suddenly, Wells Fargo’s memo seems less like an overreaction and more like an understatement. Even though Lending Club is a fraction of the banking titan’s size, its efficiency and growth endangers the very core of Wells Fargo’s business.

How Wells Fargo Will Fight (and Why They Will Lose)

This begs another question: why does a resource-rich company like Wells Fargo feel threatened by peer to peer lending’s efficiency when they could simply create a low-cost platform themselves? Their recent memo shows that they see the writing on the wall, so why don’t they simply pivot their company to match this threat?

I had a chance to sit down with Lending Club’s CEO Renaud Laplanche back in October and ask him this very question. His response:

If you look at the history of innovation, there are very few examples of that happening, of incumbents reducing their cost structure and out innovating the low-cost technology-based entrant. [ ... ]

There have been many examples of this happening before, whether it was when Borders could not react fast enough to Amazon or when Blockbuster could not react fast enough to Netflix and eventually went bankrupt. There have also been many attempts at companies trying to survive by spinning out low-cost operations. Ten years ago, because of pressure from Southwest and Jet Blue, all the major airlines spun out low-cost alternatives. Delta launched Song; United launched Ted. But these alternatives ended up having exactly the same cost structure.

Full Interview: Renaud Laplanche on How JP Morgan Chase is Like Blockbuster Video

The Humbling of America’s Banking Industry

Download the white paper: Why Peer to Peer Lending Will Replace American Banking (pdf)

In conclusion, Wells Fargo will never be able to compete with Lending Club because doing so would require too radical of a shift. As Wells Fargo states in their Today brochure, they operate through “more than 9,000 locations”. Each of these nine thousand branches has to be maintained and kept secure, driving up the cost of the company and disallowing them from ever offering lower rates than a peer to peer lending company. Do you think Wells Fargo would be willing to lay-off their 270,000 employees and close thousands of branches if it meant they could survive? Heck no. More likely they will try their best to balance both, and do both poorly.

Interestingly, it seems like the very branches that enable Wells Fargo’s current success are the one thing that will drive them to bankruptcy. I would not be surprised that in twenty years Wells Fargo will be relegated to some niche product like fire insurance, similar to how Kodak, having been ejected from its beloved film industry, spent its final years selling computer printers.

I continue to be transfixed by this dramatic national shift. The greatest economic force in our nation today, arguably in world history, is en route to be humbled by a couple hundred people and a server farm.

The post Why Wells Fargo is Terrified of Peer to Peer Lending appeared first on LendingMemo.

Investing with a filter is one of the key ways that we can earn a higher return on Lending Club and Prosper. In today’s video we use the NickelSteamroller.com website to create a filter for ourselves from scratch, going on to use it on Lending Club’s platform.

Related post: A complete look at the features of NickelSteamroller 2.0

Video Transcript

In this video we are going to be continuing our focus on filtering through a screencast of NickelSteamroller.com. We are going to be using NickelSteamroller to build a filter using the historical loan data. Enjoy.

To create a filter in peer to peer lending, begin by pointing your browser to the NickelSteamroller.com website. NSR is a peer to peer lending tool and statistics site created by Michael Philips and Rocco Galgano, and they have generously provided this free for self-directed investors like ourselves, which is pretty great.

NickelSteamroller.com Home Screen

On the home screen, you can see a summary of both Lending Club and Prosper’s returns by year. Now there’s a lot of really interesting and important information spread throughout this site, but in this video we are only going to focus on one thing, and that is the backtesting/filter tool. If you are interested in an overview of NickelSteamroller, you can click the link below this video for a review I wrote overviewing its features.

Let’s begin by clicking the Lending Club ‘Backtesting/Filters’ link, and you can find this under the Analytics header.

NickelSteamroller.com Filters Tool

In this tool you can see a number of blue terms next to boxes, and these are the different criteria we can use to create a filter, but first let’s just click on the blue Filter button.

Beneath the All Matching Loans header, we now see the total returns for all of the loans in Lending Club’s history. So, for instance, the total return on all these loans has been 8.70%, the average interest rate of all these loans offered to borrowers has been a 14.47% interest rate on a loan. The total money lent out has been $3.6 billion. Investors have earned $348 million in interest. 261,000 loans have been issued, and the average age on these loans is only 14 months, so it is kind of young, the data is. The loss rate has been 4.9%, so that is the percentage principal lost to borrowers who default on their loans. The total loss in dollars has been $121 million, which is quite sizable. Finally, $13.9 million in fees has been paid back to Lending Club.

If you are just learning about peer to peer lending or filtering for the first time, some of this may be confusing to you. But don’t worry, that’s OK. To help, today our focus is only going to be on one of these figures, and that is the ROI (return on investment). We will keep an eye on the count as well, but our main concern is higher returns, so feel free to ignore the rest of the numbers and just focus on the figure on the far left.

Now the process for creating a filter is pretty simple – its just two things.

1. Adding a breakdown
2. Using that breakdown to refine the filter

That is all there is to it. We simply repeat steps #1 and #2 until we attain the filter we desire. The only thing we need to keep an eye out for is our loan-count. The historical loan count has to stay above 1,000 so that our filter remains statistically significant.

Let’s begin by adding a few of the more common breakdowns. Michael has six of the most common breakdowns set as default for this tool, so I’ll simply going to refresh my browser and reclick Filter to bring up these breakdowns.

So here’s the browser refreshed, I click Filter, and here are six of the most common breakdowns that people use. You can see that they are:

• Loan Grade (or Risk Grade)
• Loan Purpose
• Issue Date
• FICO Score (which is their credit score)
• Annual Income
• Inquiries in the last 6 months

Breakdown #1: Loan Grade

Let’s focus first on top one: Loan-Grade. This is the letter grade that Lending Club gives every loan to indicate how risky it is as an investment.

We can see that the returns have been statistically higher for C-G grade loans than for A & B grade loans. If we feel comfortable taking on a bit of risk, we could focus our filter on these lower grades by scrolling to the top and checking only the boxes for C-G grade loans.

Clicking Filter now removes A-B grade loans, and you can see that our overall return that was originally 8.7% has climbed now to 10.18%. Not bad.

We can continue to push this projected ROI higher by further refining the filter. We do this by looking at, you guessed it, additional breakdowns. I am going to keep using NSR’s default breakdowns, but I am going add sub-filtering, and that is, I am going to make the minimum loan count 1,000 so that all of our breakdowns are statistically significant.

Breakdown #2: Loan Purpose

So now let’s look at another breakdown. Let’s scroll lower and look at Loan Purpose. Here we see all the different reasons why borrowers say they need a loan, and if we look closely, we see that one of these purposes has had significantly lower returns than the rest: small business loans. Let’s scroll back to the top of the page and filter out small business loans.

We do that by going to Purpose, going to Select All, and then scrolling to Small Business and unchecking that. Clicking Filter, now we see that our return has climbed again, to 10.48% from 10.18%.

Breakdown #3: Annual Income

If we scroll down to look at additional breakdowns, we see that Annual Income is another great one we can use. This is how much money, obviously, that a borrower makes per year, and we can see that people with higher incomes are naturally better at paying their loans back.

Those who make less than $30,000 per year have historically given us a return of around 7% return, and those who make double that, say $60,000 per year, have given us something like 10%. So let’s go back to the top and filter out people who earn less than $60,000 per year.

We can do in the Annual Income box, and you can see that there are two boxes: one for minimum, and one for maximum. So to filter out people who earn less than $60,000 per year, we can simply put 60,000 in the minimum box.

Clicking Filter now increases the ROI to 11.36%, a pretty significant bump up from our last one.

Breakdown #4: Inquiries in the Past Six Months

Let’s finish with one more breakdown. Scroll all the way to the bottom and look at the breakdown for inquiries in the past six months. We see that the ROI again is higher for borrowers that have fewer inquiries, which makes sense if we remember that people who are repeatedly applying for credit are probably less stable in their repayments.

So, let’s scroll back to the top and add a filter that only focuses on borrowers with zero inquiries in the past six months. Now, interestingly, I can’t find it here, and that is because this criteria is found under the Credit tab, which is a little more complicated.

I’m going to go to the Credit tab, and I’m going to find the blue boxes that say Inquiries in the past 6 months (Inq Last 6months). Here I am going to put 0 for the minimum and maximum.

Clicking Filter, I see that my returns have again bumped up, and this time to 12.5%. Pretty great.

You can continue playing with this tool, possibly earning higher and higher returns as you discover better and better filtering criteria. The only thing to watch out for is your loan count. If it goes below 1,000 your filter is no longer statistically accurate, so you need to keep it above that, and obviously this filter with 26,000 historical loans is actually quite significant.

A loan’s basic factors for each loan are listed under the Common screen, and these are the most common elements of every borrower. But their credit factors are in the Credit tab, so this is the more complicated side of the filter. If we go under the Results option we can then set a breakdown if we want to look at an additional one.

Extra Breakdown: Home Ownership

If we wanted to create an another breakdown, for instance, for home ownership we would click on “create an additional breakdown”, scroll down to home ownership, select this, and click Filter. This will bring up the Home Ownership breakdown at the bottom of the tool. If we look closer we see that borrowers with a mortgage, for instance, earn a half percent higher return than those who rent or own their homes. This might make sense considering only people with good credit can get a mortgage at all.

If we filter for people who have a mortgage (we do that by going to the top here, going to common, going to Home Ownership, selecting just the box for Mortgage, and clicking Filter) our overall ROI jumps from 12.5% to 12.7%.

It’s worth mentioning that the loans that this tool is based on are still being repaid, and many will eventually default. Remember: just because this current filter has historically given investors a 12.7% return does not mean it is guaranteed to keep doing so in the future. Most investors on Lending Club earn between a 5-10% return, so all this filter does is hopefully help us land on the higher side of that average.

Review Today’s Filter

Let’s review the filter we created today:

• C-G grade
• No small business loans
• Income $60,000/year or higher
• No inquiries in the past 6 months
• Home ownership: Mortgage

If we logged into NickelSteamroller we could then save this filter, then use to find more notes through the Loan Market > Active listings link. But today we are actually going to go over to Lending Club’s website itself and save it there, so let’s do that right now.

Adding the Filter to Lending Club

Alright, on Lending Club I am going to go to the Browse Notes screen and create the filter that we just made on NickelSteamroller. First I am going to go down to Interest Rates and click the boxes only for C-G grade notes. Then, to remove any small business loans I am going to go to Loan Purpose and I am going to only highlight the loans that are not small business – so I will highlight all of then and then uncheck small business loans.

For income of $60,000/year or higher I simply move the minimum slider to $5,000/month. For inquiries in the past six months I will go down to that option down here and slide the slider all the way over to the left. For home ownership I go to the top and check the box only for Mortgage.

If I update results, we see that the platform goes from 700 down to only 21 loans.

Now, it is important to remember that tighter filters may have fewer loans available. So if you create a really great filter that has only 2 or 3 thousand historical loans, it might be statistically valid, but it may not have any available loans on Lending Club’s platform, so you may need to loosen up your filter so as to find more availability.

The post Building a Peer to Peer Lending Filter on NSR – Whiteboard #10 appeared first on LendingMemo.

If you have remained in the wider peer to peer lending conversation for the past year or so, you have come to see the general picture that is unfolding. On the one side you have the lending companies, Lending Club and Prosper, who have created exchanges that enable a freer flow of capital between investors and borrowers. On the other side you have sites by investors themselves, from tool/statistics sites to news and commentary sites. And this is how the conversation continues to progress. The platforms issue another month of loans, usually with a few notable changes from the previous month, and this issuance recatalyzes a conversation that moves in waves across the web.

Speaking about my own experience, this dynamic has been really enjoyable to witness. Different parties come and go, the platforms sometimes change, but the rhythm has remained. To boot, the conversation is remarkable for its overall candor. Yes, there are people out there who are quite critical of peer to peer lending, who cite it as an unstable bubble or whatnot, but the national consensus has decided that this asset class is a good thing, and you can see that in the relationships that have formed within its ecosystem.

Here’s something: almost all of the people in this conversation get along. For example, Ryan Lichtenwald launched PeerSocialLending in May, and in six months his site has already been referenced by the rest. There are exceptions of course (like the API vs. screen scraping divide), but on the whole this wider group of interested individuals is generally eager to hear what one another have to say.

And this is what makes it so refreshing to cover. Peer to peer lending contains so much latent possibility for the future of national finance that a refreshing abundance-mentality has almost been woven into its DNA.

There is another variable at play, which is the leadership of Peter Renton, the person behind Lend Academy and the most experienced voice of us all. Peter makes no apologies for being a cheerleader for this asset class, and I think it is fair to say that his persistent encouragement has sort of engendered a spirit of applause within the wider dialog.

In short, peer to peer lending has become a joy to watch and write about – both for the latent possibility it possesses, as well as for the general candor of its participants. The only struggle, of course, has been how electronic this whole thing is. While an online-only approach to issuing loans has helped keep overall platform costs low, cutting out the banks and giving lower rates to borrowers than ever before, it has the negative side-effect of also keeping us behind our computer screens. And while online-only loan issuers and online-only investor voices have accomplished a great deal, there remains a great need to have a gathering per year where we can meet face to face and actualize this thing that is happening.

LendIt 2013: Michael from NSR looking like a stud (and me needing a haircut)

The LendIt Conference, founded by Lend Academy, Nowstreet and Disruption Credit, has become that exact opportunity, and in two months it will be happening again. May 5-6 will bring all of peer to peer lending’s voices under one roof in San Francisco. Lending Club and Prosper, typically just dot-coms on some unseen server rack somewhere, will arrive as real people – people eager to listen and share the work they have done. Programmers like Michael Philips of NickelSteamroller will share lunch with statisticians like Bryce Mason of P2P-Picks. Cocktails will be sipped, information will be passed around, and a generalized consensus will form about what this whole thing is and where it is going.

I attended LendIt in June last year. Here are my personal highlights:

• Lending Club’s CEO Renaud Laplanche started things off with a great morning keynote on how technology is adopted (video)
• Lending Club and Prosper actually sat down and had a conversation together, which rarely happens
• Michael Philips from NickelSteamroller gave a presentation on how both companies differ in their investor API
• Getting to meet cash-lined institutional players, many who turned out to be authentic and personable people
• Meeting great people for the first time: Dara Albright, Matt Symons, Brendan Ross, Howard Freedland, Matt Burton, and James Jones
• Feeling the excitement in the room while learning a lot of new information

In summary, peer to peer lending happens on the web. The internet is the foundation of why this is all possible. However, at its core this foundation is really just a network of people, people who are working hard to transform the banking industry into something more stable and simple. For those of you who are as fascinated by this trend as I am, the chance to attend the LendIt on May 5-6 is an unprecedented opportunity to leave the internet behind and experience the faces and voices of this revolution first hand.

Hope to see you there,

Simon

Register: LendIt 2014 (15% discount for LendingMemo readers! Coupon code: LMDISC)

Note: Regular registration ends May 15, so if you want to avoid $400 in late-registration fees, I would register soon. Also, I receive no financial compensation for writing this post.

[image credit: Germán Póo-Caamaño "Bay Bridge at Night"
CC-BY 2.0]

The post Attend LendIt! The P2P Conference Comes to San Francisco in May appeared first on LendingMemo.

Peer to peer lending has spawned a diverse ecosystem. A growing number of investment advisers, managed funds, and websites have formed that focus exclusively on investing through Lending Club and Prosper. Part of this ecosystem has been the rise of third-party statistics and auto-investing sites. In today’s post I have some heavy news to share: third-party auto-investing with Lending Club, as it stands today, is going to be cut off.

The Pain-Points of Investing Through LendingClub.com

This collection of third-party sites has risen up in the past few years to provide a very important service. People like myself, having spent a lot of time on Lending Club’s platform, have come to realize that not all the loans are the same. For instance, the graphic below shows the current number of Lending Club’s C-grade loans available for investment:

Obviously, there are some slight differences within this group of loans. Some are C4 loans with a 15.3% interest rate while others are C5 loans with a 15.6% interest rate. But if we drill down into each loan’s specifics, there are dramatically large differences between them, particularly in the credit history of each borrower.

Savvy investors have used tools like NickelSteamroller to discover which of these differences matter. For example, loans from borrowers who have had zero credit inquiries in the past six months are statistically less likely to default; they are more likely to pay their loans back in full (see this video). As a result, loans with no inquiries are in higher demand than those with one or two inquiries, so many investors do their best to buy loans immediately when Lending Club adds new volume to the platform (6am, 10am, 2pm, & 6pm PST). If they wait until later in the day, the higher-quality loans have already been snatched up.

Furthermore, Lending Club itself has made it a bit of a task to filter their own platform’s available loans. Despite years of investors requesting otherwise, the small section of their website dedicated to filtering their available loans remains overly simple. My favorite example of this problem is on the right: their filter for a borrower’s Earliest Credit Line. There is a dramatic difference between borrowers with five versus nine years of credit history. Loans with nine years are often more valuable, yet Lending Club has kept these borrowers lumped together for as long as I can remember.

As a result, investors have had the chore of examining the credit details of each prospective loan one by one, a lot of work for those who invest regularly throughout their week.

The Launch of Interest Radar, et al.

This pain-point was addressed when third-party tool sites like Rev’s Interest Radar arrived on the scene in 2012. They were quickly celebrated by the wider self-directed lending community for the ease they brought to peer to peer lending (see the Interest Radar forum). Particularly, these tools did two things better than Lending Club’s site:

1. They allowed detailed filtering of the Lending Club platform. No longer were investors constrained to Lending Club’s own loose filtering. Investors could find loans that matched incredibly precise filtering criteria.
2. They allowed auto-investing when new loans were added to the platform. No longer did regular investors keep the tedious habit of setting hourly alarms throughout the day. They could simply save their highly-tuned filters and set these filters to automatically invest in additional loans. Lending Club eventually released their own auto-investing tool (PRIME), but this tool did not invest during the peak times as mentioned above, so the need for a 3rd party tool remained.

Screen-Scraping is Not Best-Practice

Unfortunately, the medium with which these sites operated was by screen-scraping Lending Club’s site. In short, third-party auto-invest tools used a program to simulate each investor actually logging into Lending Club’s website, artificially moving a mouse and clicking Place Order, investing in loans as if the person themselves was logged in.

This method is still being used today, but it is rife with long-term problems. First, it conflicts with Lending Club’s own Terms of Use. See below:

Secondly, this method uses Lending Club’s website in a way it was not designed, so it has the added risk of being error-prone. For example, if Lending Club was to change the layout of their website without notification, these tools could inadvertently invest in loans their users did not want. This danger is further exacerbated by the screen-scraping tools that offer to auto-sell notes. While mispurchased notes could at least be sold at cost, wrongfully sold notes are permanent.

To boot, these tool sites require investors to share their Lending Club username and password. And despite these sites having good security features in place, the real danger remains that these site’s databases could be compromised and their Lending Club accounts then plundered by hackers. Such a scenario, either a large-scale screen-scraping error or a compromised credential database, would be a small disaster for Lending Club and peer to peer lending as a whole. It could erode the public perception of peer to peer lending that has only recently begun to feel secure.

Screen-Scraping Slows Lending Club’s Website

Also, it seems that a large number of investors are using screen-scraping to query the list of available loans from Lending Club, then placing orders for these loans through API. These queries, often thousands per second, put tremendous strain on Lending Club’s system, slowing the investor experience for those trying to invest normally through the website.

As a result, it seems in Lending Club’s best interest to end the practice of screen-scraping and force investors to use their platform in a way that is both safe and consistent. I spoke with Lending Club’s COO Scott Sanborn recently, and he seemed to affirm that screen scraping will eventually be cut off, focusing on the issue of server-load:

“Screen scraping is not allowed under our terms of use, but it is important to understand that we put this policy in place specifically to address activity that slows the platform and degrades the user experience for other investors, and currently that is our emphasis in enforcing it (i.e. we monitor the platform, and if we see something happening that has an impact on the platform’s performance, we take action).”

Why We Love Third-Party Tool Sites

Even though I have never used his service, I actually have a lot of respect for people like Rev at Interest Radar. Having personally invested manually at Lending Club for my first year or more, I can attest that filtering their loans one by one is a ton of work. And setting hourly alarms to get access to the best loans feels a bit ridiculous. Wealthy institutions may have the money to set up custom auto-investing systems, but us regular folks have only talented indie-programmers like Rev to turn to.

I am grateful for the beer-stained coders who stepped into the gap and worked long hours to provide the services that self-directed investors needed. And it is heavy news that the current functionality of their auto-invest tools needs to be severed if Lending Club wants to enter its future with security and stability. But screen scraping has to go. As an advocate of peer to peer lending as a whole, I feel that an en masse screen-scraping error or a compromised credential database would be a terrible headline for everyone involved, not just Lending Club.

A Functional API Mostly Helps Institutional Investors

But here is the tension: if it is cut off, the only approved way to auto-invest in loans has been to use their API. For those who are unaware, investing via Lending Club’s API means communicating with their platform in pure code. It is an incredibly stable and secure way to invest by sending strings of console text to their server. Unfortunately, there are some major problems with forcing third-party tools to use the API:

1. The current API is not fully functional. For instance, there is no API command to query Lending Club for your available cash balance. As a result, investors have to track how much cash they have available in some less-consistent way. Some API investors get around this by screen-scraping their account’s cash balance before then placing orders through the API.
2. A fully functional API could kill small-dollar retail investing. Despite finally providing sites like Interest Radar with approved automation, a polished Lending Club API would mostly be a boon for big-dollar hedge funds and other financial institutions. The best C-grade loans, as mentioned above, would go to whoever had the fastest server – the technical elite, if you will. In short, a wide-open API would mean better loan access for rich investors.

Self-Directed Investors Between a Rock and a Hard Place

This leaves us with a tough situation today. As screen-scraping is cut off, the API promised to replace it is not totally functional, and when it does eventually gain full functionality, it may actually do more harm than good since the best loans may simply go to those with the fastest servers.

Dear Interest Radar & Friends

A new era has arrived, and screen scraping is getting left behind. Any service out there needs to be ready for the hammer to fall, because peer to peer lending has entered the big leagues (Economist). As Lending Club prepares for this year’s IPO, you can bet that they will begin to tie up any loose ends that have been put on the backburner. My wager is that Lending Club will end screen-scraping by the year’s end.

Dear Lending Club

We love peer to peer lending. Not only do we enjoy the justice of how it cuts out the banks, but also for the way its medium democratizes third-party services. Like you, we believe innovation happens on the small-scale. We have tasted the first-fruits of a self-directed investor ecosystem, want it to continue, and want to invite you to guide its best practices.

Mr. Laplanche, what about an API that keeps the playing field level while also promoting a creative ecosystem of third-party tools?

[image credit: Steven Depolo "Harmony Brewing Glass of Beer"
Josep Ma. Rosell "Cut my breath"
CC-BY 2.0]

The post Lending Club Will End Screen-Scraping Auto-Investing Tools appeared first on LendingMemo.

In our last edition of Reader Stories, we met Huntly from New York City. For this one we get to meet Logan, an engineer from Colorado. The continued purpose of Reader Stories is to add a bit of emotion and humanity to this entire online-only enterprise, helping to warm the nation to peer to peer lending. Also, I do enjoy sending bags of gourmet Stumptown coffee by mail.

While Logan’s returns are a bit inflated because his account is so young (read more: the return curve), his story gives a great look into the motivation as to why people are getting excited about peer to peer lending. Also, it is great to see another investor who is diversified in over two hundred notes.

Meet Logan: a Lending Club Investor from Johnstown, CO

#1. In a sentence, where do you live and what do you do for work?
I live in Johnstown, CO, am married, and work as a network engineer.

#2. How did you discover peer to peer lending?
I discovered Lending Club about a year ago while searching for investments online. It sounded interesting at the time, but I had little money to invest so I did not look any further into it.

#3. What convinced you to take the plunge and open an account?
Once I had some money to invest, I took another look at Lending Club and did a lot of research to figure out if this was the right investment for me. From everything I read, the returns were better than the average returns on the stock market and it sounded a lot more enjoyable investing in people than in stocks.

#4. What is your return today? Are you happy with it?
Lending Club shows my NAR at 20.99%. I calculated my XIRR and it is 13.57%. Either way, I am happy with the return I am getting. My goal is to maintain a return of 12% or more. The average age of my notes is 57 days.

#5. What does your family or friends think of your investment?
My mom does not know a thing about investing, but she liked the idea of Lending Club enough that I got her to invest a few hundred dollars to try it out. A friend of mine has done the same and plans on adding more soon. My younger brother has invested nearly $8,000 in Lending Club so far, and likes it so much that he is going to continue adding money as it becomes available. My wife also loves the idea and fully supports me investing our money in Lending Club.

#6. Has anything been disappointing or unexpected?
I think I did enough research that I pretty much knew what to expect. But I am surprised at how popular Lending Club has become lately, which means the good loans get funded fast!

#7. What is the best part about peer to peer lending?
It’s fun! I like that I can see information about who I am investing in, and that I can be as picky as I want. It is also nice to know that I can make a double digit return while helping somebody else consolidate their debt to save money.

Thanks Logan!

Share Your Story on LendingMemo – Get Coffee

Getting spotlighted on LendingMemo is simple. In 1-3 sentences each, answer the following questions:

1. In a sentence, where do you live and what do you do for work?
2. How did you discover peer to peer lending?
3. What convinced you to take the plunge and open an account?
4. What is your return today? Are you happy with it?
5. What does your family or friends think of your investment?
6. Has anything been disappointing or unexpected?
7. What is the best part about peer to peer lending?

Email your answers to readerstories|at|lendingmemo.com with (1) a picture of you or your family & (2) a screenshot of your Lending Club or Prosper home screen.

Note: I am looking to spotlight people over 45 years old. I do enjoy people like Huntly or Logan because they are similar to myself, but the average reader on this site is retired. Let’s hear from you!

The post Reader Story #2: Introducing Logan, an Engineer from Colorado appeared first on LendingMemo.

Did you know that you could get money in your bank account using just your signature? It’s true. By simply signing your name on an application, you have the ability to get access to all sorts of credit: from credit cards to 5-year loans.

Signature loans are different from collateralized loans, which are basically loans where you put up some item as insurance. For instance, if you get a mortgage loan to buy a home, your house is collateral on that loan, an object still owned by the bank. If you fail to pay back the loan, the bank then takes your house. A mortgage is an example of a non-signature loan.

A signature loan, on the other hand, has no collateral to back it up. Sometimes called a good-faith loan or unsecured loan, a signature loan is backed up by the good credit of the borrower, nothing more. So if you get approved for one but fail to pay it back, you would only get a nasty mark on your credit history. For this reason, banks typically offer signature loans with high interest rates. Collateral-backed loans (like mortgages) almost always have lower interest rates than signature loans.

But recently there has been a breakthrough called peer to peer loans, a new kind of signature loan with a much lower interest rate than typical no-collateral loans. The companies that issue peer to peer loans are not banks, but are completely run through the internet. Because they do not have to pay tellers or vaults, they can offer lower interest rates than ever before.

Four Reasons to Get a Signature Loan Through Prosper

Prosper is one of these websites that offers peer to peer loans. Here are three great reasons to get a signature loan at Prosper.

#1. Prosper signature loans have lower interest rates. Period.

As I wrote earlier, Prosper is not a bank, so they have far fewer bills to pay than a big expensive bank. As a result, they can offer amazingly low rates on loans to people – as low as 6.73% for people with great credit.

A bank, on the other hand, often offers people with great credit a 8% interest rate. What is the difference between 6.73% and 8%? Let’s imagine you took out a $15,000 3-year loan with both. For the 6.73% interest rate loan you would pay $1,607 in total interest over three years. For the 8% loan, you would pay $1,922 in interest. That is a difference of $315 for the exact same loan.

In short, getting a low rate on your loan is really important.

#2. Prosper loans are simpler

Non-signature loans, like a car loan, involve all sorts of paperwork that authorize a local bank to take the car back from you if you fail to repay the debt. Secondly, these collateralized loans almost always require you to drive somewhere and sit down to sign paperwork. In this way, non-signature loans may offer better rates, but they can also involve a more complicated application.

A Prosper loan, in contrast, is done online from the comfort of your home. No need to drive anywhere. At some point in the application someone from Prosper may call you on the phone to verify your identity, but otherwise it is all electronically done through a computer. Simple and secure.

Prosper loans also have a fixed interest rate. For people who take on debt with their credit cards, the rate able to change without much notice. For example, if you are late on a payment, a credit card company can increase your interest rates. But with a Prosper loan, your interest rate will never change, even if you are late on a payment. The percentage you are quoted when you check your rate with Prosper will always be the rate you have to pay over the life of the loan. Simple.

Finally, you can always pay your Prosper loan off early without a penalty. Very simple.

#3. Prosper signature loans are quick

Getting a loan from a local bank can require a week or two where the bank runs your credit and considers whether or not you qualify for a loan. But Prosper qualifies you using an electronic method that is much quicker than anybody else. For instance, when I took out a Prosper loan in November, I had the money in my checking account just four business days later (read my review of Prosper loans).

For people who need money fast, Prosper is a really great option.

#4. For major debt, a Prosper loan is better than using your credit card

Do you know how most people go into debt? They use their credit cards, and this is a terrible idea. While a credit card is a great way to take on short-term temporary debt, it is a really bad tool for long-term debt. For example, I personally use my credit card to keep all my debt organized. But I always pay it off at the end of every month. All my long term debt (mortgage, student loans, car loan) is held in low-interest loans.

Here are the two main reasons why credit cards are bad for major debts:

1. Credit card interest rates are too high
2. With a credit card, you can always take on more debt

Let’s focus on point two: the ability to take on more debt. With a credit card, you can always be tempted to take on more debt while also paying it off. This “freedom” means the money is always moving in two directions, and results in many people remaining stuck in debt for a long time, bringing on stress and reducing their quality of life.

But with a Prosper signature loan, there is no option later on to add extra debt to the loan. The money can only flow one way. With a Prosper loan you always have a set date (either three or five years from your approval) where you will no longer be in debt. For many people, a guaranteed date of being debt-free is an incredibly good feeling to have.

Bottom Line: Check Your Rate at Prosper

Your signature has power. It can do a lot of things all by itself because it is a symbol of how responsible you are with money, how trustworthy you are to pay debt back. If you have decent credit (640+), loan companies like Prosper are really eager to get a signature loan in your hands because of how secure you are as an investment.

Secondly, your signature is all you need to apply for a peer to peer loan, a new kind of loan that is completely done through the internet. Since peer to peer loan companies are not banks, they can provide you with a lower loan than anywhere else.

Don’t believe me? Check your rate at Prosper and then walk into your local bank and check your rate on an unsecured loan there as well. Prosper’s rate will likely be lower.

Questions/comments? If you enjoyed this post please like or tweet it below.

[image credit: Luigi Crespo "IMG_8318"

John Ward "Keyboard"
Squeaky Marmot "Whoops... collateral damage" CC-BY 2.0]

The post 4 Great Reasons to Get a Prosper Signature Loan appeared first on LendingMemo.

Today marks the completion of my eight month study: The Liquidity Project. Every week, from May 2013 through January 2014, I gradually discounted my taxable Lending Club account until it was completely sold off. The resulting data paints an extremely interesting picture of the secondary economy that exists in this backsection of the Lending Club website.

The Problem: P2P Lenders Have Struggled to Liquidate Their Accounts

Peer to peer lending has often been celebrated for its liquidity. Not only are its returns more stable than the swings that often characterize the stock market, and not only are the returns incredibly lucrative in the face of more traditional investor yields, but the secondary markets on Lending Club and Prosper have contained an avenue for people to sell off their investment if they ever need the cash. As a result, many proponents of this asset class, myself included, have proclaimed that peer to peer loans contain good liquidity. We feel that if someone needs to exit this asset class without taking too big of a hit, they can do so.

The problem inherent in this claim is that little proof exists to support it. Also, the wider investor community’s experience has often been quite variable and unconsolidated. In short, there has been a lack of hard data to help investors correctly price the notes they are trying to sell. As a result, investors seeking to exit peer to peer lending have often struggled in how to begin liquidating their accounts.

The Solution: An Eight Month Study on Foliofn Liquidity

The Liquidity Project (as initially outlined in this post) is a first-attempt at establishing a baseline for account liquidation. By gingerly lowering an entire portfolio’s price on Foliofn (the secondary market for Lending Club loans), each individual note’s markup became solely dependent upon its quality and characteristics alone. As a result, particular markup/discount thresholds could be identified so as to help future investors quickly liquidate an entire portfolio while still earning a respectable markup.

Methodology: Create a Sell-Calendar, Record Note Sales, and Analyze

My first Lending Club account was chosen to be liquidated for this project, an account containing 35 active notes worth around $1,000.

(click to zoom)

Starting the 29^th of May, I listed all these notes for sale at the maximum possible markup (+50%). Following a selling calendar, I lowered the markup on these notes every three days until the account was liquidated.

• From a 50% markup to 20%, the premium dropped 2.5% every three days until July 4.
• From a 20% markup to 10%, the premium dropped 1% every three days until August 3.
• From a 10% markup to 6%, the premium dropped by 0.5% every three days until Aug 27.
• From a 6% markup until every note was sold, the premium dropped by 0.25% every three days.

The project ran eight months, with the final note selling January 29, 2014. The portfolio’s markup/discount had adjusted 50 different times. Since Lending Club auto-renews the Foliofn listing whenever its price is updated, every note remained for sale on the platform for months at a time, from late May until every was sold.

Note: Originally I had 40 notes in this project, but five went late or were paid off, so only 35 were used. Also, my original intention was to sell a comparable number of Prosper notes the same way, comparing the liquidity of one platform against the other. Despite identifying these notes and opening their sale on Prosper’s Foliofn section, I gave up this goal when I realized how Prosper’s site frustratingly does not renew listed notes when they are repriced. Having to dig through my entire Prosper investment for specific notes (no portfolios) every 7 days was too tedious. As a result, this study became only focused on Lending Club.

Four Major Insights into the Lending Club Foliofn Secondary Market

As a reminder, all of these sold notes contained a Current status. The markup/discount was calculated from each note’s outstanding principal.

Insight #1 – Notes with ‘Current’ status sell from an 11% markup to a 4% discount

Even though the project started in late May, two months went by without a sale. But in July a number of low-grade notes were the first to sell, earning a surprising 11% premium. The project continued until late January, when the last sub-par notes were sold at a -3.75% discount.

Insight #2: Notes with higher interest rates sell at higher premiums

The above graphic demonstrates how the notes with higher interest rates were in greater demand, and earned a higher premium on Foliofn. This can be seen more easily in a breakdown of average markup by loan grade:

E, F, and G-grade notes earned an incredibly high markup, the Fs and Gs selling with a 11% markup to their outstanding principal. B-D grade notes earned far less than this. It deserves mentioning that there were more D grade notes (16 D vs 9 E-G), so their markup may be more accurate of the market as a whole.

Surprisingly, the entire portfolio was sold at a 3.66% markup. After 1% in fees, this account was liquidated while earning a 2.66% premium. While no seller should ever take eight months to liquidate his portfolio, this 2.66% result does propose a best-case scenario and baseline for future investors (including the Sacramento Method below).

Insight #3: Notes with healthier FICOs sell at higher premiums

This result was my favorite of the bunch. I would even go so far as to say that the beautiful curve of this chart makes the entire eight-month project worth the time. I am not sure what the implications are of knowing that sell price is so deeply tied to how a borrower’s FICO has changed. Perhaps it just further encourages us to improve our initial loan selection criteria so as to imbue our overall account with as many quality borrowers as possible.

Insight #4: Notes with more outstanding principal may fetch a higher premium

This seems the loosest insight, but purchasers of notes on the Lending Club Foliofn secondary market seem eager to find notes with a greater percentage of outstanding principal.

Further Research is Needed

While this project seemed to use decent methodology, it could be improved upon. First and foremost, the number of notes in this experiment (35) were too few, though I am pleased that this data contains good correlations despite this weakness. However, a similar study with hundreds of notes would give far clearer results. Secondly, additional statistical factors could be interesting to look at, like number of missed payments, loan term, and note size. A larger liquidated portfolio that contains a mix of sizes and terms would be ideal. Thirdly, this project did not include A-grade notes. Finally, it would be really interesting to do something similar with notes that have gone late. I was able to do that with a single note during this project. A single D-grade Late note with a FICO drop of -175 sold at a 49% discount.

How to Quickly Liquidate Your Account? The Sacramento Method

Most people who are trying to liquidate their account are attempting to do it in the quickest manner while also earning as much premium on their healthy notes as possible. As a result, I would like to theorize a five-day liquidation method based on this project’s results: the Sacramento Method.

Named after its five sell points (a zipcode in Sacramento, CA is 94204), this method prices notes at five efficient markup/discount points so as to liquidate an account in less than a week while still garnering a respectable premium.

• Day 1: Price notes with a 9% markup over outstanding principal
• Day 2: Offer a 4% markup
• Day 3: Offer a 2% markup
• Day 4: Price notes without a markup/discount
• Day 5: Offer a 4% discount

If I would have used this model, I would have drastically lowered my sell time while still earning a 2.7% markup on my portfolio. Minus fees, this method could theoretically have liquidated my entire account and earned me a net 1.7% premium in just 5 days. Of course, there is no guarantee that Foliofn performs the same way today as it did back then, but it is possible.

The reason I feel confident in the Sacramento Method is for the way it first makes space for high-markup notes, spends three days cutting the common markup arena more gradually (4/2/0), and finishes by catching discountable notes. This method seems more effective for accounts containing a medium to high degree of risk, since this is what it was built around (project’s avg. interest rate is 17.2%). It will probably be less effective for people who have low-risk portfolios containing many A-grade notes.

Disclaimer: This Method is Conjecture

It is worth repeating that this entire project, its data, and its method was based on a small sample size (35 notes), and as such, its overall quality is speculative. Foliofn is a turbulent environment that requires a far more rigorous project than this one before any real conclusions can be made. Furthermore, even if this project had a decent sample size (800 notes or more), no method or theory is a guaranteed way of liquidating your account at an overall premium.

However, I am willing to posit the Sacramento Method as a preliminary standardized approach to account liquidation, and I am eager for more rigorous studies in the future to prove it wrong or uphold its conclusion.

Download the Liquidity Project Data

The Liquidity Project (results).CSV (right-click & Save As…)

Questions/comments? I am open to pulling the data apart in additional ways upon request.

The post Liquidity Project Complete: Introducing the Sacramento Method appeared first on LendingMemo.

Each quarter I post the current state of my peer to peer lending accounts. I am a lender who enjoys maximizing my return through fine-filtering available loans with the highest interest available.

As you can see in the following table, I continue to celebrate positive returns on both Lending Club and Prosper.

Figuring Out ROI Can Be Tough

Calculating your peer to peer lending ROI (return on investment) is tricky business. If you want the easy route, both Lending Club and Prosper offer you their sometimes inflated number. Calculating your ROI with XIRR through Excel is probably the best, but this still does not take into account any notes that have gone late (and are, as such, no longer worth their full value). Michael’s Portfolio Analyzer at NSR includes a reduction from these late notes, but does not do well with loans bought or sold on the secondary market (which I have done many times). I have included on-site and XIRR ROIs for comparison’s sake (see my analysis of calculating XIRR return).

Accounts Breakdown

On average, my returns stayed the same this quarter as last quarter.

Prosper Taxable Account: 12.52% ROI

I added an extra $2,000 last quarter, and you can see it in the lowered average note age and the fact that my Prosper overall return rose by 6 basis points. For what it’s worth, I introduced C-grade loans into my Prosper account this quarter, and you can see it by the fact that the average interest rate on the loans I am investing in dropped from 26.89% to 25.28%.

I have earned almost $3,000 in interest on this account, but nearly half that amount (46%) has been lost in principal to defaulting borrowers. This large loss is a result of the higher-risk borrowers I am investing in. Considering my overall return remains above 12%, I am comfortable with this huge-up & huge-down approach. In my investing strategy (and at my age), I actually find this tumultuous toss a lot of fun.

I do not recommend this higher-risk higher-reward approach for most investors, especially for those starting out. That said, it continues to work well for me, and I plan on continuing this practice into the near future.

Lending Club Roth IRA: 13.10% ROI

This account has been enjoyable as well. For those not keeping track, I experienced my largest number of defaults ever this quarter – ten loans in all, and will probably accrue additional ones in the next quarter. That said, my overall return remains above 13%. I continue to push for returns on this account through smart note selections. My average weighted rate (the interest rate of loans I invest in) continues to inch upward, going from 21.28% to 21.36%.

It is worth mentioning again that I used to sell notes that had gone late by using my Sell Late Notes on Foliofn strategy. Unfortunately, Lending Club has gently informed their lending community that this is now not allowed. There has not been an official announcement yet – just the top gray box on this page. However, you can read the continuing saga on this topic over at the Lend Academy forum (Thread: Folio and IRAs).

Just 14% of my Lending Club notes have a 36-month term, and the average grade is E3. Similar to my Prosper account, I do not recommend such a higher-risk higher-return approach for most investors.

Riding the Return Curve

As outlined in my Riding the Return Curve post, my overall return continues to slightly drop as my account matures.

It is interesting to see how I continue to beat out the majority of Lending Club investors. I attribute this to the various strategies I employ, as well as patience and a bit of luck. I will be coming out with a post in the coming month regarding the filters I use on these accounts, though investors who have been in the game a while will not find any real surprises.

More than anything, I continue to be amazed by the reality of peer to peer lending. This thing works. This quarterly update, like those that came before it, prove this asset class to be both real and lucrative.

Tell you wives. Tell your friends. Things are changing. In fifty years from now when lending money to responsible people is the norm, we’ll all look back and shake our heads at the task most Americans faced in the late nineties when the mainstream way to save for retirement was corporation-based mutual funds.

The post 2014Q1: My Returns at Lending Club & Prosper – 12.86% ROI appeared first on LendingMemo.

Last week I had the privilege of traveling to San Francisco and having a conversation with the two peer to peer lending platforms. Aaron Vermut, who recently changed in his title from President to CEO, had spoken in my previous interview on the transition it was undergoing from its previous management (Read: Vermut on Prosper’s Transformation into a Contender).

This interview was different. While still considerate of the past struggles, Vermut spoke candidly on Prosper’s turnaround being complete, how the recently crossed threshold of $1 billion in issued loans is only the beginning of Prosper’s overarching goal to transform American finance.

Interview with Aaron Vermut, CEO of Prosper Marketplace

On April 3^rd, Prosper crossed $1 billion in issued loans. What is the significance of that milestone?
First and foremost, it establishes the turnaround. Last year was really about survival for this company. When our new team came in here, the company was in the low $400 million originated. Today, the majority of the loans Prosper has originated have been in the last year under the new management. Crossing that number has allowed us to put a stamp on April 3^rd and say, “This is the day we turned the company around.”

Prosper has hit an inflection point and is now making money on each loan, something that was not the case until the fourth quarter of last year. Before, our expenses were going up and our losses were also going up. But if you look at our recent quarterly statement, what you finally see is our losses going down.

Having an outstanding team has been the driver behind our success.

There are a vast number of things going on underneath the hood at this company. As I have mentioned before, this is a more complex business than I anticipated before we got here because it touches credit modeling, pricing, consumer marketing, etc. Peer to peer lending platforms are incredibly complex to operate, but having an outstanding team has been the driver behind our success.

What I think is really telling is that, while it took eight years for this company to issue $1 billion in loans, we will cross $2 billion this year as well, issuing a second billion dollars in 2014 alone.

Related to your point on these platforms being complex, would you cite that as a reason why additional platforms haven’t launched?
People have tried. But as [President] Ron Suber says, they fail to launch and launch to fail. This is a little bit like open-heart surgery. I could tell you how to do it, but you could not necessarily do it yourself. To the credit of what was here when we got here, it was a functioning platform. It was originating loans, so that gave us a lot to work with.

Do you think another platform will ever launch? Will there ever be competition besides Lending Club?
I’ll answer that question in two ways. Firstly, we have lots of competition other than Lending Club. In fact, we do not really even see Lending Club as the competition because the addressable market is so big. Lending Club and ourselves may have business model similarities, but we are certainly not the only companies who are lending money to people. The press likes to call us competitors, but there are…

… Discover personal loans.
… Discover personal loans, there are lots of other point-of-sale products and prepaid credit cards, and so on. The personal credit space is huge. Prosper lives inside the unsecured consumer credit of that space. We will differentiate ourselves through our product, service, transparency and being good guys, through word of mouth. One of the things that is really resonating now, and it has taken a year, is our investment in customer service. A year ago there were just 12 people in a conference room doing call-center work. Today we have 64 people in a call center doing inbound customer service.

So why haven’t additional peer to peer lending platforms launched?
That’s the second part to your previous question. The first part is, and let’s be clear, our competition is quite broad. The second part is, as I mentioned earlier, this business is complex. Getting the credit modeling right is very hard. Getting the consumer marketing piece right is very hard. And when I say hard, I do not just mean that it takes extra work. It also requires a team of incredibly smart people.

It is a ton of work in a lot of different directions, all very complex.

Look at Lending Club and Prosper: hundreds of millions of dollars have been invested just in this peer to peer space. It is platform business, so you have to have great technology. You have to register state by state. You have to get the SEC to sign off. It is a ton of work in a lot of different directions, all very complex.

The regulatory and legal piece is actually huge. There is an extra barrier, which is that the SEC has actually not approved anybody to do peer to peer lending other than Lending Club and Prosper. And I believe that is because the volume of information we send those guys is impossible to get through. We file hundreds of S-1s on loans every day. Why would they want to create that much more work?

I think it has been really hard for anyone else to build a scalable business. Look, this company has worked since 2006 to get there, and that success is why Prosper has value.

It’s worth remembering that there are plenty of companies in the consumer credit space, they just don’t look like Lending Club or Prosper. There is SoFi, OnDeck, Kabbage, LendUp, and so on. Everyone is trying to find a way into the larger category of unsecured consumer credit. OnDeck and SoFi are basically using their balance sheet to buy loans. SoFi is securitizing them and rebuying, so they have a sort of hybrid model. OnDeck is using their own capital.

One of the things that makes Prosper so unique is that, unlike a bank, we use institutional and retail borrowers. We are not capital constrained. So as we grow, we do not have to keep going out and raising more money. We simply bring customers on board.

You guys do seek out rounds of investor funding.
We do for operating capital. Companies like OnDeck and SoFi raise money to invest in loans.

What is the danger of a platform like Lending Club expanding from personal loans into small business loans?
Small business lending is a completely different credit model. It is a different borrower with different underwriting. I’m not going to criticize it, but Prosper already has a very good credit model that works, which is probably the most important thing that we do. Our job is to make sure we are pricing the loans correctly and estimating the net-loss charge offs so that investors can make an informed decision. If we do that wrong, it’s over.

So if we have a credit model that works for unsecured personal loans, you can’t just apply that to business loans. Business loans involve both the business and a person. You have receivables. The loan uses a fundamentally different credit model. Yes, you can earn a higher return, but you can also lose your shirt. If you look back in history, a lot of companies that got good at this went into that, and that exact thing happened to them.

Philosophically, I believe in sticking to our knitting. We are in a huge addressable market, and our point of differentiation is that we are going to be the best in the business of personal loans.

Regarding the tremendous rate of growth within consumer lending, it seems en route to interact with the wider American story at some point. What does a platform like Prosper look like when it becomes a staple of national finance?
The longer-term vision for us is to change the way people experience access to credit. So, rather than going to a bank and explaining yourself, rather than having to wait three weeks to get an appraisal, we really want to create an easy, understandable customer experience. There are brands that we admire whose purpose is to simply delight the customer, to positively surprise people and treat them with respect, and that is kind of what we are trying to go after in financial products. I think it is a clear point of differentiation from the way the credit cards and the banks have treated consumers.

I just took an Uber car to get here this morning, and was pleasantly surprised when they asked me if I wanted a bottle of water.
Living in San Francisco, I have had time to look at that company. What is so cool is that, when you are an Uber driver, you go to training and they say, “Differentiate yourself from a taxi. This is not a taxicab. Offer people some water.”

To that point, 51% of our loans fund in two days. You experienced the speed with which our loans fund when you got a loan for yourself. We are now averaging three days to fund per loan. Philosophically, Prosper is focused on the borrower experience, and we want people to be delighted by their experience here.

LendingMemo aims to be an education hub for self-directed retail investors, focusing on the way peer to peer lending empowers average folks to get their hands dirty with their own investing and pull out a great return. What will the lender picture look like in 10 years?
I would like to see retail investors, whether it was high net-worth or actual retail, be 50% or more of the platform. I truly believe that, in order to make this a 100-year company, this has to happen. I mentioned this on the Prosper blog, but if you look at where we are right now, last year was about survival. Survival meant proving to the world that you can profitably originate loans, acquire borrowers, and fund the loans.

Let me give you the context. In October or November 2012, Prosper had a single user who was funding a massive piece of the loans on the platform. The company had started to spend a lot of money on marketing, was bringing in loans, but this user suddenly dropped off the platform. So all these loans, all that money they spent, died on the vine, and the company was shell-shocked.

Our team came in here and said, “Let’s clean up the corporate structure, and then go out and create lender stability.” That meant putting in place a bankruptcy remote and addressing this class action lawsuit. It meant cleaning up the bank structure stuff and making sure the backup servicer was in order.

The previous backup servicer wasn’t in order?
It was, but now we have a hot backup instead of a cold backup. If the company went out of business, the previous servicer would have to ramp up. Our new servicer is already running. From a risk perspective, that is a big difference.

Huge. It’s reassuring to investors.
Right. So we cleaned up this corporate mess, and then we went out and created lender stability. We said, “Let’s bring on some institutions. We need to know that if we go out and spend millions of dollars on finding borrowers that the loans will get funded.” So we brought on a couple of partners and went off to the races. Last year was about creating that proof.

We have not added a single new institutional lender to the platform this year. (We are adding one, but it is a AA-grade buyer, a bank, because AA-grade loans are not getting funded very quickly.) Back to your question on our lender environment, our stability and growth has allowed Prosper to now begin focusing on retail. We are growing really quickly, are poised to issue over $100m per month by May. So if retail shows us it has the headroom to grow, then we don’t have to add institutional lenders. If it doesn’t, then we have add institutional dollars to soak up the extra demand.

Perhaps one thing to keep in mind, and you probably know this better than myself, but retail investors seem like they’re a romantic bunch. It may take a while to get them on board, but then they stick with you. I guess I just wouldn’t expect mom and pop investors to quickly jump into sudden loan availability.
Right, but we want to create an environment where they can start coming in, giving it headroom to see where it goes. Remember that we have retail, high net-worth investors, hedge funds, banks, and BlackRock. BlackRock, the world’s largest asset manager with $4 trillion, is interesting because they are a kind of hybrid. They are investing their client portfolios into the funds that own the loans, so they are going to be a little stickier. But hedge funds, if the climate changes, may be gone. A lot of these other guys have leverage, and the leverage providers are all the same people, and that creates correlation. If one bank says it is done, then everybody using that bank is done as well.

That is why retail investors are so important.

That is why retail investors are so important. That is why Prosper is committed to find more retail platforms to come on here, whether it is through wealth management or something else. But it’s also important to state how hard it is to go out with a sales force and market $5,000 investor accounts. It just doesn’t scale.

That makes sense. I guess I’m just interested in what a mature retail-investor platform looks like perhaps 10 years down the road.
Prosper, ten years from now, is going to be a multi-billion dollar company investing in a diverse set of financial products. Retail investors would be investing in the product set that is currently only available to banks, card issuers, and debt issuers. We could have mortgage loans, auto loans, personal loans — the whole suite, and actually have it funded by the world instead of large pools of capital that are captive to these companies.

Really, that is the overarching goal here. The thing that scares the banks is that this is a disruptive disintermediation of their capital consolidation – it is the democratization of credit. And I would love to see that. It would be really cool. The returns that people can earn on those products, if they are constructed properly, could be a suite of investments that none of us have access to today. This is an idea whose time has come.

But it’s still complex. If you think about the way that Prosper worked when Chris Larsen started the company, it was like eBay for credit. But I think it was proven pretty quickly that, while free markets are good for pricing many things, us as lay people (and I would put myself in that group) are not good at pricing credit risk. So this has to be a mediated platform. If you put somebody like Prosper in the middle, and you can actually have a bank without a bank, and that is what we are building today.

The post Exclusive: CEO Aaron Vermut Reflects on Prosper’s $1B Issued Loans appeared first on LendingMemo.

In our last edition of Reader Stories, we met Logan from Colorado. For this one we get to meet Jack, a tech reseller from Illinois. The continued purpose of Reader Stories is to add a bit of emotion and humanity to this often-dry online investment, helping to warm the nation to peer to peer lending. Also, I do enjoy sending bags of gourmet Stumptown coffee by mail.

Jack has been involved with peer to peer lending since 2008, nearly since it began. He has sizable accounts in both Lending Club and Prosper – over $200,000 total. An experienced investor in his late forties, Jack probably represents a more common investor in peer to peer lending than myself.

Meet Jack: Husband, Father, and a Truly Seasoned P2P Investor

Lending Club Account

Prosper Account

#1. In a sentence, talk about your family, where do you live, and what do you do for work?
I live in Downers Grove, Illinois and work as a technology reseller. I am married and have two teenage daughters.

#2. How did you discover peer to peer lending?
I was looking for ways to leverage my discretionary income outside of stocks and bonds. My savings account was just not producing any money — I believe at the time is was a scrawny 0.25%. I did find an online bank that provided me with 0.85%, but that still was less then my worst year in peer to peer lending. In early 2008, I googled alternative investments and found Prosper.

#3. What convinced you to take the plunge and open an account?
Sometimes you just have to say, “What the heck.” I jumped in with a small amount of money to figure it out. My first Prosper account went though the whole financial crisis, including their “quiet” period. I opened my first Lending Club account in 2011 since I wanted to spread my risk across two platforms.

#4. What is your return today? Are you happy with it?
I have taken my lumps. I made a bunch of mistakes at first, like over-reading the loan descriptions of why people needed the money (and not really filtering them at all). Also, I used to invest too heavily within individual loans, so my account was not evenly diversified.

I am happy with my returns since I changed my risk tolerance from ultra-conservative to somewhat aggressive. At that time, we were coming off of the 2008 financial crisis, so I only invested in A and B-grade loans. After one year, I started coming across the various peer to peer lending blogs and switched my strategy to loan grades of C and below, since it seemed people were getting better returns in these riskier loans without a large increase in defaults. On Lending Club I went from an 8% to almost a 10% return in the past 18 months by switching to this strategy. On Prosper, I am still hovering around 8% since it is very difficult to find the riskier loan grades without an API. Also on Prosper, once a loan goes late you cannot sell it on the secondary market.

I am learning all the time, but am on my way to returns that are copacetic with in this environment.

#5. What does your family or friends think of your investment?
I tell many people about this industry and its potential for a rapid paradigm shift, but many of them are still skeptical. I believe this asset class is going to dramatically change the landscape of lending and banking as we know it today, particularly after the Lending Club IPO. This will allow them to lend and borrow in every state and challenge the banking industry for years to come.

#6. Has anything been disappointing or unexpected?
Oh sure: the Prosper quiet period, a lack of quality loans, the dinnerbell-like feeding times,  and the loss of Prosper-Stats when you could compare yourselves to other investors [Ed: Investor data on Prosper used to be public]. I could examine how these folks were lending and getting better returns. I was regularly adding money to my Prosper account, so I also enjoyed watching my name move up the charts each month in regard to how much people were investing.

Basically I miss the good ol’ days of peer to peer lending. :) Now there are many sites like LendingMemo that I save as my favorites to get the latest and greatest news about peer to peer.

#7. What is the best part about peer to peer lending?
You make money and you help others out at the same time. Win-win!

Thanks Jack!

Share Your Story on LendingMemo – Get Coffee

Getting spotlighted on LendingMemo is simple. In 1-3 sentences each, answer the following questions:

1. In a sentence, talk about your family, where do you live, and what do you do for work?
2. How did you discover peer to peer lending?
3. What convinced you to take the plunge and open an account?
4. What is your return today? Are you happy with it?
5. What does your family or friends think of your investment?
6. Has anything been disappointing or unexpected?
7. What is the best part about peer to peer lending?

Email your answers to readerstories|at|lendingmemo.com with (1) a picture of you or your family & (2) a screenshot of your Lending Club or Prosper home screen.

Note: The national climate will change through stories like these. If you care about spreading the word of p2p lending, let’s hear from you!

The post Reader Story #3: Introducing Jack from Downer’s Grove appeared first on LendingMemo.