About 2 months ago, I decided to begin investing at LendingClub.com, a peer-to-peer lending platform. Peer to peer lending is a method where investors like you and me can provide micro loans (as small as $25) that get pooled together for someone that needs the loan. These people pay interest rates ranging from 6% with good credit to 20% or more with more questionable credit. LendingClub.com charges a small fee of 1% for the service of pulling it all together, as well as for their significant filtering of loan candidates. In fact, Lending Club claims to filter out ~90% of loan applications.
I invested an initial $5000, but soon after decided to raise that investment to $10,000. Only the $5000 is active in loans right now, the rest is pending.
I was researching lending strategies when I came across Lendstats.com, a website that has historical loan performance data from Lending Club. Jackpot! Now I can mine the data and invest more wisely!
There are many variables at play in a loan, and I figured if I could figure out which variables led to defaults and avoid those – I would increase my profits. My goal is to get $15% net annualized return. Anything under 10% will be a disappointment, given my calculated strategy. Here are the variables I’ve concluded are most important.
- Credit Grade: D1 – G5. This is critical for high returns. D1 credit grade starts at 16.5%. If you invest in A1, you’re only looking at 6.88% minus fees and defaults. The data shows that default rate does not scale with the interest rates, meaning the riskier loans will return more on average. Diversification across many loans becomes critical.
- Loan amount: 0-35000. The data showed that the larger loans were not riskier, so I am not avoiding them unlike many of my peers using Lending Club.
- Minimum Open Lines: 6. This shows that the candidate does have several open lines of credit in good standing. Less than 6 is unusual, especially because I think Lending Club filters many of them out.
- Total Lines: 15. This proved the candidate has had enough likes open over the years to build some credibility.
- Minimum Employment Length: 4 years. This proves the candidate has reliable employment. Losing ones job is the most common reason for default.
- Loan purpose: Debt consolidation, house, moving expenses, and weddings. I do not include things like car purchases, credit cards, education, vacations, or small business costs. These things are all more likely to default. It makes sense, too. Lending Club does not have extremely low interest rates, so anyone that is using them to buy a car or go on vacation likely is not wise with money. Credit card consolidation, for example, reduced historical returns by 1.5%.
- Home Ownership Status: Own or mortgage. I did not include renting. Not that I have a problem with people who rent, but it reduced the returns by 1%.
- States excluded: California. Sorry to anyone from California, but you guys default too much. CA dropped returns by 0.5% historically.
Looking at the numbers, investing in D1 credit and above with no other filtering has extremely high default rates. In fact, the historical return is only 7.27%, which is terrible given the risk/reward ratio. On the other hand, using my filters listed above, that number is more than doubled, with a historical return of 15%.
To see my filters already worked out, click here.
[UPDATE: Lendstats is currently out of order and the owner has stated he doesn't know when/if he will resume the site. There is another great site where I've set up a similar filter that I plan to begin using going forward at nickelsteamroller.com. I've already set up a very similar filter here]
If you’re interested in signing up, you can also get a 2% bonus wen signing up by clicking on the image below:
If you have questions or suggestions, please share in the comments below.