Lending Club Investment Strategy

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.

  1. 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.
  2. 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.
  3. 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.
  4. Total Lines: 15.  This proved the candidate has had enough likes open over the years to build some credibility.
  5. Minimum Employment Length: 4 years.  This proves the candidate has reliable employment.  Losing ones job is the most common reason for default.
  6. 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%.
  7. 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%.
  8. 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.

(Note: This is not professional advice, just a strategy I’m using that I want to share.)

72 Responses to Lending Club Investment Strategy

  1. Peter Renton says:

    Great job on your filters here. I think you will find that you will be very happy with your returns. You are right when you say investing in just D-G loans without any filtering may not produce great returns. The only thing I would add is that I think number of inquiries to be a critical filtering criteria. I saw that you used Max inquiries = 0 which is great, but I would have mentioned it as well in your last of important filters.

    • Good point. My filters keep everything else at the default values from both Lendstats and Lending Club.

      Max Inquiries at 0 is preferred because more inquiries generally means the candidate has been turned down before.

  2. I have a post going up tonight about our Prosper experience over the last 4.5 years. And what I have to say is- beware the D loans. We did great with the HR (not enough info), but lost most of our money on folks with D credit scores. (No other filters though.)

    • Interesting. I did see that I could get higher returns with E1 and above, however there is significantly less volume so it becomes too difficult to invest at $25/loan.

      I wonder why D loans performed poorly for you. Did you do other filtering? I’m curious if Prosper tends to mark loans as D for a certain reason and that same reason tends to cause defaults.

  3. Matt B says:

    Great post on the specifics. I’ve seen several other PF bloggers talk about them, and I certainly appreciate another opinion on the subject.

  4. Funancials says:

    Not a terrible idea in the low-interest environment we’re in.

  5. Ryan says:

    The problem with those $35,000 loans is that so few of them actually get funded. They may not be risky, but you might be tying your money up for a loan in funding that never actually gets funded.

    • Yeah. To be honest, with my filters I’m sitting on a bunch of cash anyways. I’m only able to invest about $50-$100 per day, so if a loan fails to reach funding it makes no difference to me. Perhaps when I get fully invested I’ll have to keep a closer eye on that.

  6. […] Brave New Life shares a lending club investment strategy […]

  7. Interesting investment. Can I ask why you decided to diversify in this manner, rather than simply use this down market to increase positions in your extremely strong set of dividend companies? What do you expect your average rate of return to be considering your strong filters?

    • This money is more like play money since it adds up to about 1% of my portfolio. I’m just getting my feet wet with P2P lending.

      My goal is to get 15% returns. Anything over 10% is far better that I would expect to get in the stock market, which is still overpriced even after this past month of drops. I’ve actually reduced my investment in dividend stocks recently, in an effort for a more balanced portfolio (more on that soon).

      • Wow 15% returns are a genuine possibility? Interesting. I like the concept of cutting out the middle man (the banks have proven they simply aren’t that good at this sort of thing) and lending money in a manner that benefits both parties. Good opportunity for venture capitalists as well. I’ll have to re-examine this when I get some excess capital.

      • Yes, 15% is certainly possible when people are willing to take loans at 22% or more.

        What I don’t know, but plan to find out, is whether 15% is possible using my statistical method and no specific study of individual loan candidates. If a bank were to provide a loan, they do much more investigation first. But I can’t do that efficiently with $25-$50 loans.

  8. I have to admit, I have only recently even heard of peer to peer lending, and didn’t really understand what it was. Then tonight, I’ve read three articles (including yours) on the subject. Interesting concept…I’m not able to participate in anything like this right now (need to concentrate on paying off consumer debt), but sounds like an interesting thing to be involved in. Thanks for the education!

    • It certainly makes sense to first pay off debt before investing in other peoples debt.

      Use your time in debt as a reminder that you are paying someone else for giving you money up front. Then, when you get out of debt, you can reverse roles with investments – whether it’s P2P lending like this article or stocks, bonds, and treasuries.

  9. […] Brave New Life – Lending Club Investment Strategy […]

  10. That’s an interesting investment to make. But I don’t think it’s worth the time. Micro loans are hardly worth analyzing, since the investment returns will be so small compared to the time taken to analyze the investment.

    • Using Lendstats, it automatically finds the loans that fit my parameters. I click on each link holding the Ctrl key, opening a new tab. I then click on “Invest” in each tab.

      Generally I spend about 2 minutes every other day, and make about 5 loans each time. If I get only a 10% return for 3 years on each $25 loan, I make $7.50 per loan. This means I make $22.50 every other day for 2 minutes worth of work.

      That comes out to $675 per hour.

      Obviously if you are going to analyze each loan, the return is lower. On the other hand, if I was going to do a full analysis I likely would loan more than the $25 minimum.

  11. 1step says:

    I’ve always wanted to join something like this, but unfortunately I won’t make the jump until i’m comfortable with my finances. Keep us up to date :)

  12. I’m going to start p2p as soon as I have a little time to set it up. Thanks for the great filters.

  13. Andy Hough says:

    That is an interesting strategy. I’ve made a little over 10% return with most of my loans at the higher levels with a few at the lower levels to boost the overall return. It has been a couple of years since I’ve invested though and I think they have created more levels since my last investment.

  14. Zev Averbach says:

    Hey tlt/BNL! Saw this via the ERE site. It looks like if you put in the loss factors that LC shows in their stats (.17, .25, .45 for the respective days late) and restrict yourself to 60-month loans, past performance is ~15%, with or without California. :)

    • Zev – I looked into that as well. The problem with 60 month loans only are that there are significantly less of them in the database, and since LC only added 60 month loans a little while back the loans are mostly new. In fact, of the 161 loans that meet your proposed criteria – they average only 7 months old. Of course, you won’t expect too many late payments or defaults in the first 7 months.

      It’s a good suggestion, and something I want to monitor over the next few years.

      • Zev Averbach says:

        thanks for that–makes sense. i did a little more tweaking–looking at start dates of only 1/2009-6/2010 (to get a better idea of how these perform over time), DTI of ≤10%, no CA exclusion. everything else same as yours –> 15.3%.

        the number of loans is very small, though, so you’d have to be patient and/or give up a certain amount of diversification.

      • That reminds me, one of the reason I didn’t tweak a few other things (like DTI) was that while the results were better, it also made it extremely hard to loan. As it is, I’m struggling to buy more than 6-8 notes per week at $25 per. Right now I’m sitting on $4K in cash in that account, but I’m determined to take it slow and not increase notes to $50 for now.

        After a year or so, if my strategy proves to work, I will plan on increasing to $50 and possibly tighten my lending rules.

        Thanks for sharing your tweaks. Are you currently invested in LC or other P2P lending?

      • Zev Averbach says:

        I’m frankly invested at a very small level on LC (~$3k), and only after having read about your experiment via the ERE forums! I find it fascinating, and I’m starting to study their trading platform as well. I’m not being as conservative as you wrt loan amounts, but rather, for the time being, using the above “tweaked” formula based on your own, with diversification coming only with time, as the portfolio grows in # of notes.

  15. […] now been investing with Lending Club for almost 4 months.  Around that time, I wrote about my Lending Club investment strategy. Basically, I used historical analytic data to filter out loans that I believe will return a […]

  16. […] inspired by Brave New Life, who posted about his strategy for lending in a peer to peer network in Lending Club Investment Strategy Back in March 2007, we had some extra cash from yearly bonuses and decided we wanted to try peer […]

  17. Noah says:

    I’m not sure if you know this already or not, but within LC they have filters that you can use so you don’t have to the stat website.

  18. Jeannine Wheaton says:

    I tried investing in Lending Club today and had to call them up to dismantle the account after a warning message appeared that Massachusetts residents cannot directly invest in Lending Club notes. Instead, a MA resident can only buy other direct investors’ notes if they want to dump them on foliofn. Just an fyi that not all states allow Lending Club right now, so call before you try to set up the account (their FAQ does not cover this issue, it’s buried in their terms and conditions document).

  19. […] overall return on investment.  So far, things are looking good.  If you haven’t read the lending club investment strategy post, I recommend you go back and read that before you read this […]

  20. Ben says:

    Interesting article. I have been keeping an eye on P2P lending for a while now, but haven’t jumped in yet. Would you mind disclosing whether you get any financial gain from Lending Club by recommending their services?

  21. […] rate of return. Lucky for us, my fellow blogger over at Brave New Life has already established excellent criteria so I’ll just link you to his site where you can get that information. I’m not always […]

  22. Linda says:

    Thanks for sharing these criteria and your experiences. I’ve been investing in LC and Prosper since 2008 and am still pleased with the results. There is one thing though that I have still not figured out. I’ve heard people talk about the “Debt Con” differentiated from “Credit Cards” and that ROIs differ accordingly but I haven’t figured how they are distinguishing them. 1. How can I tell which is which? 2. Do the borrowers who post listings understand the difference and rightly label their listings? Thanks for any clarification you can provide.

    • I’ve seen a lot of people fill out the form wrong, where they state “debt consolidation” then the description talks about paying off a high interest credit card.

      That said, I don’t spend time worrying about it when I’m picking notes. I filter out credit cards, but because I like to streamline the investment/reinvestment process and do it very quickly, I don’t spend the time to check each $25 loan to make sure it’s not a credit card. Even though my filter removes CC payoff loans, I don’t expect the difference in return to be significant enough to warrant the time to look at each loan so carefully.

      Incidentally, my returns are over 15% right now, so the strategy seems to be working pretty well.

  23. Jeff says:

    Is it just me, or does the “Months Since DQ” not work? I assume this means “Months Since Last Delinquency”. If so, I’m pretty I put in 99 in the max column and it still returns notes with delinquencies under 99 months.

  24. Rory says:

    I believe your expectations of results to be highly optimistic based on a manual data analysis (not through lend stats). Looking at the performance of all fully paid loans in your specified criteria, actual default performance is 5.02%/year or 15.08% cumulative default for notes held to maturity. Had you been invested in notes that have already matured, you would have had a real return of 4.5% on those notes.

    The reason that Lend Stats is appearing so optimistic is because it factors in new or not yet completed loans into its default rate but this is misleading because new notes have a low default rate. What this means is that if you do not indefinitely increase your investment, as your notes mature, your real returns are going to plummet. Without an increasing investment, you will not have enough new notes to cover the losses on the old notes; but buying into these new notes requires you buy further more in the future! A never ending spiral upwards to keep your positive momentum on the front end of the notes. It is like a sub prime mortgage company staying in business by simply increasing its sales of mortgages year after year, at some point however, the losses must be taken.

    I should point out that if one did continually reinvest, annual return for your criteria on current note rates would NAR of 14.08%. Not terrible, but not worth the risk because this rate can be nearly achieved with much less risk and eventual real return upon maturity.

    Another thing to consider, in your criteria we have a very small sample size of mature notes to know final default rates (26 notes). This makes the return we are seeing highly suspect. The margin of error could mean our notes return anywhere from -.69% to 9.07% at maturity, or NAR between 13.01% and 16.30%. At such small sample sizes you can find all sorts of high returns by playing with the filters, but they are not statistically reliable.

    • Unless I misunderstood your math, you are not accounting for the principle paid prior to the default – am I right?

      For example, if a loan defaults after 1.5 years and I’m getting 18% prior to that – then I’ve been paid 27% in interest of the loan + about 1/3 of the principle. Not that I didn’t lose money on the deal, but it wasn’t a disastrous hit.

      Also, can you explain why you think there are only 26 matured notes? In my filter, I only included notes that are matured and that included 265 notes – a value I consider statistically significant.

  25. […] overall return on investment.  So far, things are looking good.  If you haven’t read the lending club investment strategy post, I recommend you go back and read that before you read this […]

  26. Jason Jacks says:

    Check out some of my posts at http://www.p2panalytics.com regarding defaults and note selection. Keep in mind, as more data becomes available over time, the analysis of investment strategies becomes more fruitful.

  27. Mike S. says:

    I’d give a warning to any new investors considering putting money into Lending Club. Lately, they’ve been sending out notices to many of the people who have borrowed. Here’s how that works:

    1. Borrower requests loan. Investor assumes they will get interest over the life of the loan and pay a 1% fee to Lending Club as the loan is paid back.
    2. Borrower’s credit score improves when they use loan to pay down credit cards. Seeing this, Lending Club contacts the borrower and encourages them to take out a new Lending Club loan at a lower rate (because of their improved credit score).
    3. Borrower does this and pays back first loan in lump sum. Investors get shafted, as they pay the entire 1% fee on the principle without getting the interest on the full life of the loan.
    4. Investor must now take the lump sum and find another loan to try and invest in.

    In short, investors pay far more than a “1% fee” in practice, and Lending Club does little to respect their investors.

    This high turnover also makes it frustrating investing at Lending Club. It takes a lot of work to find good notes to invest in, and then Lending Club encourages the borrowers to re-fi and take out new loans to pay off their first.

    • I don’t see it as dirty business to encourage lendees to try to qualify for lower interest loans. Of course, I realize LC profits from this, but so does the borrower.

      If the loan payouts were running rampant, I’d be more concerned. But out of my almost 400 loans, I’ve only had 24 paid off so far after 1 year. Plus, when investing at 15% and greater interest rates, I get that first 1% back the first month of interest. So it’s really just not that big of a deal. I think it would be more substantial if you were investing in the A-grade loans at 6-7%.

  28. […] you haven’t read it before it, and assuming this interests you, you might want to first read my initial investment strategy, as well as my previous quarterly […]

  29. Raymond G says:

    Played with the filters, and FL is another candidate to be excluded.

    • Interesting. I looked at the raw data, and it seems like the default rate on loans originating in 2007 and 2008 for Florida was extremely high, and has since recovered some.

      I’ll keep an eye on this, and may look to filter out FL in the future. This may have been a result of the housing downturn in FL, much like in CA back in 2008.

  30. Raymond G says:

    Sorry, forgot to mention that it’s better to use filter in LC for the benefit to exclude loans already invested in.

    • The LC filter is better now than it was when I originally wrote this article. At that time, the Lendstats filter had more variables to filter on.

      As for duplicates, I always use the same computer, so I can see which loans I’ve already invested in simply by seeing the different colored hyperlinks for the pages I’ve already visited. Not the most scientific method, but it works…

  31. Joe says:

    Thanks for this post, it’ll be really helpful for future LC investments. Do you plan on doing an update that includes this year’s data?

  32. Martin says:

    Is Lendstats.com working? It looks to me like not operational and at the bottom it shows Error: Out of memory… (some problem with handling php code).

  33. […] Before you put any money into LendingClub, you should research the complex filtering tools and develop an investment strategy. Since I’m lazy, I copied the strategies of folks who have demonstrated success tweaking and scientifically re-checking their own returns. For example, here’s one from a blogger named Brave New Life. […]

  34. […] 3 months I write an update on my on my Lending Club investment, based on my patented LC investment strategy.  And now that another quarter has passed, it’s time for an […]

  35. Firefergy says:

    Correct me if I’m wrong but by adding “credit card” to your preset filter you lower your loss rate by .2% and open up a few more notes for purchase.

  36. th55 says:

    I live in a state that doesn’t allow me to buy new notes, but instead can only trade notes via FolioFN. It doesn’t look like the filters are very robust there. Has anyone had any experience buying through this platform?

    • There are a bunch of readers that have emailed me about this. Not sure you’ll get a good response on this post since it’s old, but if ask the same question on my quarterly update in February and hopefully you’ll get some good feedback.

    • ggeyler says:

      I live in PA, so I’m stuck to FolioFN interface. To describe it quickly – It Sux! You definitely have to put in more time as their filters are pretty much non-existent. I usually filter only on ‘Current’ loans and then sort by Credit Score change. I usually invest in loans that have the credit score going up. Finally, I sort by percentage markup – I usually don’t go above 2% markup. One thing that saves my life is that you can check which loans you want to buy and then proceed on to the next page and when you are ready just hit ‘Buy’ and it will pull in all the loans.

  37. […] reports by stating “Every 3 months I write an update on my Lending Club investment, based on my patented LC investment strategy.  And now that another quarter has passed, it’s time for an […]

  38. […] unfiltered search. What’s worse, only 10% are lower-grade, which makes any kind of coherent filtering on the current set completely useless – there just aren’t enough notes to go around. […]

  39. […] tried two different strategies since I started. The first strategy was from the Brave New Life Blog and the second strategy was based on my own research at NickelsteamRoller. So far I’m […]

  40. […] tried two different strategies since I started. The first strategy was from the Brave New Life Blog and the second strategy was based on my own research at NickelsteamRoller. So far I’m […]

  41. […] tried two different strategies since I started. The first strategy was from the Brave New Life Blog and the second strategy was based on my own research at NickelsteamRoller. So far I’m […]

  42. ImaginaryNumber says:

    It’s high time for another “quarterly” Lending Club Investment Update :)

  43. Igor says:

    That kind of thinnikg shows you’re on top of your game

  44. Carla says:

    Clicked referral link and signed up but they said there is no 2% bonus available.

  45. […] article that really got me comfortable with putting money into Lending Club came from Brave New Life, mostly seeing that despite the newness of the platform there was still enough data to start […]

  46. […] article that really got me comfortable with putting money into Lending Club came from Brave New Life, mostly seeing that despite the newness of the platform there was still enough data to start […]

  47. […] start investing in riskier loans, I’m using the strategies from Brave New Life and the excellent Lend Academy. I’m buying loans with each strategy and sorting them into a […]

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