Lending Club is a P2P platform that connects borrowers and investors. Borrowers can get a personal loan through an online application process. The interface is quick, easy to use, and has low transaction fees for the borrower. LendingClub provides the funds to the borrower at various interest rates, ranging from 6% to over 25%. The rate the borrower gets depends on a variety of variables such as credit score, salary, past late payments, type of loan, etc. They provide the funds to the borrower, and then chops up the loan into $25, $50, or $100 pieces and sells them to investors with a small fee added on. The majority of the loans available to investors are $25 a piece.
As an investor (my side hustle), I'm always looking for interesting passive investing ideas. I came across LendingClub when trying to seek out a specific type of borrower in the real world. Bob, an acquantance of mine, had recently bragged to me about the car he just purchased. I wrote about Bob in my post called Who Pays 20% interest to Buy a Fancy Car? Bob's car wasn't expensive, it was the fact that he paid 20% interest rate that got me inspired to go looking for other Bobs that wanted to borrow money. To summarize who Bob is, he is generally a young male that gets a significant raise in his career and doesn't know how to handle the sharp increase in pay. Instead of saving money, Bob tends to buy more than he can afford and borrow at insanely high interest rates because he can afford the payments and because he wants to show off (also known as trying to Stunt). I'm not going to mention any names, but I've run into a few Steemit users that look like they might be tryin to Stunt with all that whale steem.
My experience at LendingClub
When I discovered LendingClub, I was hoping to find more Bobs. What is great about LendingClub is that they allow anyone to download historical loan details (defaults, borrower info, etc). I love data and analysis, so this was a perfect fit for me. I ran regression analysis, and tried every angle I could think of. I found a lot of Bobs! I narrowed down Bob's details to the following:- Salary higher than $75k
- No past defaults or late payments
- Established credit score of at least 2 years
- No education loans (because education loans stick with you, bankruptcy doesn't get you out of them)
- Avoided larger city locations where $75k doesn't get you much
- My final consideration was the age of loan. Lending Club offers 36 and 60 month loans. Since I was buying used loans, I focused on loans there were at least 25% paid off already. My theory (and data verified it) is that most defaults happen early on in the loan. The more principal you have paid off, the less likely you are to default.
There were several other minor factors as well. If you're a data nerd like I am, it's really pretty interesting to go through their data. Not only did I find many Bobs, but I also found quite a few people with titles like financial adviser, portfolio manager, director of finance trying to get $30k loans with interest rates of 20% +. If you get a loan of 20%+ in today's environment and you're in the finance industry, there better be a really good reason....or you should be fired.
My Investment
I invested $10k to start with at Lending Club. Because I live in a state that does not allow buying loans directly from LendingClub, I had to buy loans from their secondary market. This is where investors who bought loans can now buy and sell to other investors. I bought various loans ranging from 18% to 26%, because that's the interest rate Bob was willing to pay. LendingClub does publish their own guideline for returns, which ranges from 5% to 9%. The higher the interest rate, the higher the default rate. My regression analysis showed that I would experience as high as 4% default rates, which would result in 16% + returns. My numbers looked too bullish, but there was so much cushion in the rate of return that I had to give it a try!
LendingClub is similar to crypto ICOs
LendingClub has many issues. The first being that it is publicly traded so stock price matters a whole lot to those running the company. The CEO actually got in trouble several years ago because apparently his friends/family members were taking out loans towards the end of their fiscal year to boost their loan numbers. High loan numbers meant a high stock price. Hmmm...manipulating stock price, sound familiar? Borrower names aren't provided, but since the other borrower/loan data is public, some smart analyst figured it out and posted it online.
The second issue is that LendingClub was setting the interest rate based on various factors. But, the investors had no say in what rate the buyers should get. It's almost always better to allow the free market to set the price, instead of a centralized party. After all, LendingClub was incentive to find more and more borrowers to grow stock price.
The final issue is that the investors had more money to invest than buyers were willing to borrow. The hype around P2P loans was crazy at the time. Investors loved the idea of getting 10%+ passive returns, but there weren't enough buyers. As a result, LendingClub allowed in borrowers that really shouldn't have been allowed to get a loan. And they gave borrowers a lower rate to attract more buyers.
The Result
The default rates went through the roof. The safe loans there were supposed to generate 6-7%, were now getting below 4%. Some investors were losing money because of borrower defaults. LendingClub was not holding any of the loans themselves, so they did not aggressively try to get money from defaulting borrowers. A traditional bank or credit card company has a whole process setup to collect on late payments. Defaults are often sold to collect agencies, who hound the borrower. On LendingClub, defaulting borrowers ended up with bad credit for 7 years, but got off relatively easy.
Instead of getting a 15% return, I ended up selling all my loans after about 6 months. The defaults were coming in much higher than I had expected for my Bob loans, and they were higher across the board. The stock price tumbled and LendingClub was forced to finally put in place better controls. It was a good learning experience for me and it's a still a great source of data. Every few weeks, I'll download their latest loan data to look at trends in the marketplace. Are default rates going higher/lower, how the buyer demographics are changing, etc.
If you actually read the full post above, it should be pretty clear that I don't recommend being an investor on LendingClub. Although I only invested for a short amount of time there, the main problem that hasn't been solved is that LendingClub is incentivized to help the borrower and not the investor. The investor demand is still significantly higher than borrower demand. In many ways, this is similar to many ICOs happening today. ICO investor demand is much higher than the value ICOs shares available. And there are too many developers/founders that are incentived to screw the investor. I know some won't screw the investors, but greed is a very powerful thing!
