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How I am Investing in Lending Club and Prosper in 2013

by Peter Renton on February 7, 2013

[Update: There is post out now for my 2014 investment criteria.]

My most popular post from last year in terms of both comments and page views was my How I am Investing post. I have had numerous requests from people asking if I will be updating it for this year. The answer is yes. What follows are complete details of how I am investing in both Lending Club and Prosper in 2013.

You should keep in mind that this is not investment advice nor do I recommend you follow my strategies. I adhere to an aggressive strategy that includes plenty of the higher risk loans which leads to many defaults. Every investor needs to determine the level of risk they are comfortable with and invest accordingly.

Investing with Multiple Accounts

If you saw my p2p lending investment update last month you will know that I invest in a total of six different accounts, four at Lending Club and two at Prosper. To avoid investing in duplicate loans I have made my investment criteria mutually exclusive meaning there is no overlap of loans between the filters.

How did I come up with this strategy? I have spent many, many hours on Nickel Steamroller, Lendstats and Prosper Stats backtesting hundreds of different combinations of credit criteria. This brings up an important point. My investments are based on analysis of the historical loan data and there is no guarantee that the loans will perform in a similar way going forward. Still, I believe that this data is the best tool we have in trying to achieve above average returns.

My strategy in 2013 is quite similar to what I did in 2012 with just a few minor changes. The good news is that I have been investing in some of these filters now for over 12 months and I can track their results by keeping these notes in their own portfolio. To make these comparisons more useful I have included the estimated ROI of each filter from Nickel Steamroller. Also, because I have an investment track record with some of these filters I have included the estimated ROI from my own portfolios where applicable.

Investing at Lending Club in 2013

Lending Club Filter 1 – High Income

Estimated ROI from Nickel Steamroller: 14.49%.
My portfolio estimated ROI: 14.00%. Average note age: 10 months
Link to Lending Club Filter 1 on Nickel Steamroller and Lendstats

Loan Grade: D, E, F, G
Inquiries = 0
DTI% <= 23%
Open credit line >= 8
Public records = 0
Monthly income >= $7,500
Loan purpose: All except other, small business and vacation
States: exclude CA

Lending Club Filter 2 – Medium Income

Estimated ROI from NickelSteamroller: 12.36%
This filter changed late last year so I have no valid performance data on my own portfolio yet.
Link to Lending Club Filter 2 on Nickel Steamroller and Lendstats

Loan Grade: D, E, F, G
Inquiries = 0
DTI% <= 20%
Open credit line >= 8
Total credit lines >= 15
2 Yr Deliquencies = 0
Public records = 0
Monthly income >= $3,000 and < $7,500
Loan purpose: All except other, small business and vacation
States: all included

Lending Club Filter 3 – Inquiries 1+

Estimated ROI from NickelSteamroller: 12.20%
My portfolio estimated ROI: 12.76%. Average note age: 11 months
Link to Lending Club Filter 3 on Nickel Steamroller and Lendstats

Loan Grade: E, F, G
Inquiries >= 1
2 Yr Deliquencies = 0
Public records = 0
Monthly income >= $7,000
Loan purpose: All except small business
States: exclude CA

You can see that the main difference between Filter 1 and Filter 2 is the stated monthly income. I use that field to ensure that there is no overlap between loans when I am investing in multiple accounts. You will also notice that both filter 1 and filter 2 use inquiries = 0 as a criteria so this opens up the door to use Inquiries of one or more for Filter 3.

One point I should make is that if you use the Lending Club website to invest then you will not be able to use these filters as is. The filtering capabilities on their website are not flexible enough to allow for this kind of precision and some fields such as monthly income are not even available. I believe serious investors should not use the Lending Club website to invest. There are four better options available today:

  1. Peercube.com – the most extensive filtering. Can save your own comments on the loans and invest directly by clicking on the loan URL.
  2. InterestRadar.com – portfolio monitoring, custom backtested strategies and the ability to invest directly.
  3. NickelSteamroller.com – Great filtering capabilities and the ability to invest directly.
  4. Download Active Notes Spreadsheet – all available loans are available as a download from the Browse Notes page on Lending Club – there is a small Download All link in the bottom right of the page. Then you can do the filtering in Excel and copy and paste the loan URL in Column Z.

Investing at Prosper in 2013

Prosper Filter 1 – Previous Borrower 0-1 Inquiries

Estimated ROI from Prosper Stats: 17.82%
Link to Prosper filter 1 on Prosper Stats

Loan Grade: D, E, HR
Payments on previous loans >= 18
Number of late payments  <= 9%
Allow credit score drop up to 40 points
Inquiries = 0
Current delinquencies <= 2

Prosper Filter 2 – Previous Borrower 1-5 Inquiries

Estimated ROI from Prosper Stats: 16.94%
Link to Prosper filter 2 on Prosper Stats

Loan Grade: D, E, HR
Payments on previous loans >= 12
Number of late payments  <= 10%
Allow no credit score drop
Inquiries >= 1 and <= 5
Current delinquencies <= 1
Debt-to-income ratio <= 60%

Prosper Filter 3 – New Borrower 1 & 3-year

Estimated ROI from Prosper Stats: 15.32%
Link to Prosper filter 3 on Prosper Stats

Loan Grade: D, E
Loan term: 1-year, 3-year
Total payments billed = 0 (signifies a new borrower)
Inquiries = 0
Current delinquencies = 0
Total credit lines >= 16
Debt-to-income ratio >=10% and <= 40%
Employment status: exclude Unemployed, Not Available
States Income: >= $25,000

Prosper Filter 4 – New Borrower 5-year

My estimated return on Prosper Stats for Prosper Filter 4: 15.20%
Link to my results for this filter on Prosper Stats 

Loan Grade: C, D, E
Loan term: 5-year
Total payments billed = 0 (signifies a new borrower)
Inquiries >=0 and <=1
Debt-to-income ratio >=10% and <= 40%
Min Expected Return: 13%

Each of my Prosper filters are also mutually exclusive with two filters for repeat borrowers (Filter 1 and 2) and two for new borrowers (Filter 3 and 4). Within repeat borrowers I separate the filters based on number of inquiries and within new borrowers I separate the filters based on loan term. I have these four filters all setup on Automated Quick Invest.

Now, I want to explain my Prosper Filter 4. This is a relatively new experiment that I started almost a year ago when Prosper introduced the idea of minimum expected return and so far it is performing quite well. But this is still very early days. My average note age is just 7 months and these are all 5-year loans so they have a very long way to go before we can make any definitive statements about this filter. I am tracking the loans through note size – every one of my Prosper Filter 4 loans has been an investment of $30. I have recently increased that size to $60.

Prosper’s site has much better filtering capabilities than Lending Club’s so you can easily setup these searches there. Alternatively you can use Prosper Stats to do your investing. You can save these searches and use the “Matching Active Listings” tab and click on the link there to invest in each loan one by one.

Strict Loan Filtering

I want to point out that both my Lending Club filters and my Prosper filters are fairly strict meaning that there are not a lot of loans to choose from. This is fine for my purposes but if you want to invest a large amount of money quickly it will be difficult with these filters. If you are looking to do that I suggest you start with my Super Simple High Return Strategy which is much more broad.

So, there you have it. These are the criteria I am using to invest today. I do make tweaks to my investments on a regular basis but I am quite happy with this set of filters today. You can go ahead and use these filters yourself if you like. Or I am happy for you to critique them and provide your own suggestions in the comments.

{ 52 comments… read them below or add one }

Dan B February 8, 2013 at 5:49 am

Thanks Peter for sharing such a detailed look at your filtering/investing approach. You know me well enough to know that I do my own thing & I don’t follow/copy anyones filters or strategies……………Nevertheless I’m sure that this sort of post is a TREMENDOUS resource for most readers here & I sincerely commend you for your generosity in making it available.

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Peter Renton February 8, 2013 at 6:32 am

Thank you Dan, I appreciate your kind comments. I realize there are some investors like yourself who are happy to do your own thing but based on the popularity of last year’s article there is definite interest in filtering ideas from a large number of investors.

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Anil @ PeerCube February 8, 2013 at 12:38 pm

I agree with you. There is definite interest by LC lenders in filters being used by others. Since I included shared peer filters on PeerCube, very few users have created filters from scratch. Most start out with one of the peer filters and modify to meet his/her requirements.

But overall, based on my own experience that I reject 95% of loans that show up through my filters, I have started to believe filtering may not be the right way to pick loans as loans can be very diverse. Tightening the filter parameters is one way to reduce the rejection rate but I started to work on techniques that pick out similar loans based on the loans I already like.

I am not adventurous enough yet, like you, to trust the filter completely and invest in all loans that pass the filter.

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Anil @ PeerCube February 8, 2013 at 12:40 pm

BTW, I forgot to mention, your Lending Club filters from this post are available on PeerCube as peer filters for users to try out.

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Bilgefisher February 8, 2013 at 1:09 pm

This is an interesting comment. Can you explain why you reject 19 out of 20 loans that pass your filter test? What information not in the filters are you looking for?

Jason

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Anil @ PeerCube February 8, 2013 at 3:52 pm

Jason,

My filter is based on historical loan data that doesn’t include all the attributes that are available for currently offered loans.

Actually, PeerCube commenting system has helped me in reviewing comments on past loans to narrow down the attributes that turn me off, over and over, to reject filtered loan. You can get pretty good idea about my implicit criteria by reading my comments and loan ratings.

My goal is to get filter tightened enough so that rejection rate drop to 60% or so. I don’t believe I can get the rejection rate much lower due to variety of loans and subjective nature of data about loans.

Luckily, knock on wood, the high rejection rate before lending has kept my loans portfolio without any defaults or late loans for over a year. In last year, only 2 loans went in to grace period during holiday period but quickly became current again.

Also, unlike Peter, I try to keep only a few hundred loans total in all accounts. So I am lending larger and larger dollar amount per loan. So quality is much more important than quantity for my portfolio.

Peter Renton February 8, 2013 at 2:35 pm

Anil, I noticed my filters have been added to Peercube, thank you.

Some investors like you use the filters as a starting point and carefully consider each loan. That is a perfectly valid way to invest. I prefer using the filters to determine all my investing. It is all about what you are comfortable with. I am sure in my 4,000+ notes I have some that I would have rejected if I had read the loan details or the Q&A section but I like to be able to invest quickly and easily so I accept that.

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Mr. 1500 February 8, 2013 at 7:42 am

This is awesome information. I often wonder how much more money I’m making as a result of your site. I do have one question though regarding this:

“NickelSteamroller.com – Great filtering capabilities and the ability to invest directly.”

I figured this out on Peercube pretty easily, but not on NickelSteamroller. I’d appreciate it you’d point me in the right direction on how to invest directly from NickelSteamroller.

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Mr. 1500 February 8, 2013 at 7:46 am

Ha, never mind, just figured it out: Tools, Lending Club Primary Market Tools. Click on the your saved search and you’re in the money.

Thanks again!

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Peter Renton February 8, 2013 at 10:41 am

Glad you worked it out. I thought about going into more detail with those sites but the post was already so long and I wanted the focus to be on the filtering criteria.

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Jigglebilly February 9, 2013 at 8:38 pm

Don’t forget to click filter after you click your saved search. I think this is being fixed, but the inconsistency between the backtest and Primary Market Tools is annoying.

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Randawl February 8, 2013 at 10:10 am

It’s fun to read about your updates, Peter. And I must echo Dan that your efforts are vital resource for all of the up-and-coming P2P lenders.
It’s neat to read about 100 different (successful) people with 60 different filters that have 80% similar results! I think it’s one of the draws of P2P lending that gives people a sense of originality and knowing they’re responsible for the judgement made on each loan.

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Peter Renton February 8, 2013 at 10:44 am

Randawl, There are just so many ways to filter the loans and if you are looking for the maximum ROI based on historical numbers it makes sense that there would be similar results.

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Randawl February 8, 2013 at 12:42 pm

Yes, indeed! It’s fun to read about the small variations people choose and the (sometimes large) effects it ends up having on their projected and real ROI.
Do you think that the achievable returns from newer loans that will be originated through Prosper will eventually fall more in line with Lending Club’s? Or vice versa? I think Prosper will maintain a slight margin but will fall to become more in line with Lending Club’s but with the ROI’s of both falling slightly with time.

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Peter Renton February 8, 2013 at 2:39 pm

That is a big question. Will the investor returns fall with time? Quite possibly. I can tell you my own experience. The ROI on my Lending Club investments keep increasing as more of my conservative loans mature and my average interest rate increases. With Prosper I started out aggressive from day one so the ROI on those investments are reducing as more defaults happen. Prosper is still well ahead of Lending Club in my own accounts so I agree that Prosper will probably maintain a slight margin for some time.

But two or three years out? Your guess is as good as mine.

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Simon February 8, 2013 at 10:43 am

Truly excellent work. I am excited to spend more time crunching these numbers. Also I have never used Peercube in any serious manner so I am eager to try that out as well.
Superb.

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Peter Renton February 8, 2013 at 11:06 am

Thanks Simon. I appreciate your kind words. There are so many more great resources for p2p lending investors than there were just six months ago. Good times.

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Anil @ PeerCube February 8, 2013 at 12:16 pm

When you try out PeerCube, let me know your feedback and suggestions for improvement. I am always interested in hearing about user experience and ways to improve utility of PeerCube for users.

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writing2reality February 8, 2013 at 11:06 am

Really an outstanding model of transparency for anyone looking to share their investment strategies, as well as for those looking to invest in peer-to-peer lending. It provides people, both new and old, the opportunity to evaluate their own criteria while exploring what works for others.

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Peter Renton February 8, 2013 at 2:39 pm

Thanks for your kind words.

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Roy S. February 8, 2013 at 11:33 am

I’m sure the regular readers of your site know this already, but I feel that it ALWAYS bears repeating, “Every investor needs to determine the level of risk they are comfortable with and invest accordingly.”

I should also note, that it is still possible to achieve decent returns not investing exclusively among the riskier Notes. On Prosper, I have about a quarter of AA and A Notes, a quarter of EE and HR Notes, a quarter of B and D Notes, and the final quarter of C Notes. Even with that mix of Notes, Prosper is showing that I have a 13% ROI, and my personal calculations (XIRR) are showing about 15%. Ironically (sadly?), Prosper is showing that my worst performing subset of my seasoned Notes are my C Notes.

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Peter Renton February 8, 2013 at 2:42 pm

Good point Roy. Many people are delighted with an 8% return and stick with A & B rated loans. That is a completely worthwhile strategy. My goal is to try and achieve the highest possible long term return so I go the high interest route. But I am fully aware that if we have another financial crisis my loans will be hit much harder than a portfolio of A & B grade loans. Thanks for emphasizing this so others are well aware of it as well.

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Mickey February 8, 2013 at 4:30 pm

Hi Peter,

Is the link to your last Prosper filter on prosper stats broken?

I cannot see any filters applied on that link…

Thanks!

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Peter Renton February 8, 2013 at 5:01 pm

On my Prosper FIlter 4 the link I provided was to the Prosper Stats results of this filter from my own account – the only filter I used is note size = 30 because that is the way I identified this filter in my own account. If you want to see the filter on Prosper stats you can click here. I probably should have included it for consistency but I wanted to demonstrate the actual returns from my own account.

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Mickey February 8, 2013 at 5:04 pm

Thanks Peter!

However, I am getting an error when I try to open the new link.

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Peter Renton February 8, 2013 at 5:07 pm

Sorry. I should have tested it before I published it – try it now.

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Mickey February 8, 2013 at 5:18 pm

Thanks!

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Jack February 9, 2013 at 8:14 am

Peter,

I have been reading your blog for over a year and I invest in both sites and allocate about the same amount of money that you do between the P2P offerings. I did the same thing that you did in your early investment days and invested mostly in low risk loans. Based on your feedback and findings I too, converted to your riskier loan model but not as risky.

However, the economy has been in an upswing now for 3 years and inevitably this will change. Aren’t you concerned that in a financial crisis which will happen that your high risk loan allocation could be caught with a plethora of non-paying loans which will substantially drop your returns? The facts are there is no established legal procedure to collect on loans from individuals the way one can collect from corporations (via bankruptcy proceedings).

Also, if the market heads ‘south’…….do you have an alternative strategy in mind for P2P lending or do you just plan on riding out the storm?

I’m just curious on your thoughts and I bet you have thought about this scenario…………

Thanks, Jack

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Andrew N February 9, 2013 at 11:25 am

Well we have data for what happened to Lending Club and Prosper loans issued before, during, and after the crash of 2008. Someone correct me if I’m wrong, but I’m fairly certain the loans issued during that horrible time for the economy still ended up having a yield in the positive single digits. P2P loans certainly performed better during the market at the time period.

So I would say that even if the market and economy head south again that P2P loans will remain a good investment.

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Peter Renton February 9, 2013 at 4:14 pm

Jack, I have thought about this issue a lot believe me. If we have another 2008-09 then the high risk loans will be impacted far more than the lower risk loans. But as Andrew points out it may not be as dire as you might think.

I have talked with both Lending Club and Prosper about another economic downturn and have even seen some projections from them. I feel that my aggressive strategy may take a 4-6% hit in another severe downturn, which would still put my returns in the mid single digits. No doubt a 5% return will be better than the stock or bond market during such a downturn.

Of course, there are no guarantees but I plan on riding out the storm if the economy heads south.

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Jigglebilly February 9, 2013 at 8:33 pm

As far as strict filtering goes- Do you think it’s better to invest larger amounts of money in a stricter, high projected ROI filter set, or invest smaller amounts of money in a lower projected ROI filter set?

I know I know, diversify diversify diversify…but so many things here are counter-intuitive. I’m wondering what you guys’s opinions are.

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Peter Renton February 11, 2013 at 11:39 am

My feeling is that investors should stick to the $25 minimum until they have at least $5,000 invested, preferably $10,000. But I think the benefits of diversification diminish after 400 notes. So, if you are putting a large amount of money to work then by all means increase the note size. For example, I am about to help my father-in-law invest another $100K in Lending Club and I am recommending a note size of $200, so we will end up with 500 notes.

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Roy S. February 12, 2013 at 11:45 am

There was either a Prosper or LC chart showing that no investor with more than 800 loans had a negative return. So, I think 800 or so would be a good number to reach. If you have a good filter I don’t think it matters whether you invest very little in a lot of loans or a greater amount in a much smaller loan pool.

Diversify, diversify, diversify. Blah, blah, blah. I prefer to diversify myself (I am a more cautious investor and worry about downturns in the economy resulting in lots of defaults), but really it is your money. If you feel comfortable investing a greater amount in fewer loans, that’s your deal. And if you have a great filter, it is possibly better to invest in whatever loans appear in your filter as opposed to expanding your criteria to include “lesser quality” loans that don’t appear in your filter just so you can be diversified.

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Mr. 15100 February 10, 2013 at 7:11 am

“I have these four filters all setup on Automated Quick Invest.”

Hi Peter. I know you did a write up on Quick Invest a while ago and in your last comment, you mentioned that they had turned on the “automated” feature.

Do you have an opinion on how well the automated feature works? For example, how often does it run? If it only ran once a day, you’d probably be missing out on a lot of loans.

Thanks!

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Peter Renton February 11, 2013 at 11:42 am

Automated Quick Invest runs every time loans are added to the platform. So that is twice a day during the week (after 9am and 5pm Pacific) and once a day on weekends (noon Pacific). But AQI also competes with large investors using the API and so you are not guaranteed every loan will be available to you. It is far from a perfect system but it does provide a hands-off way of investing and I use it myself for all my Prosper investing.

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White Coat Investor February 14, 2013 at 12:48 pm

What a pain in the butt to keep track of multiple accounts! I only have 2 with LC and 1 with Prosper and I find it a pain. I’ll likely consolidate it all to one LC Roth IRA account eventually since the other two were really just small “learning accounts.”

The biggest problem with P2P investing is the time requirements. Everything that can be done to minimize that is a step in the right direction. I literally don’t look at the other 95% of my portfolio for months at a time.

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Ron Helzer May 20, 2013 at 4:58 pm

Nickel Steamroller says, “in March of 2013 all searches were migrated to a new filter format to support all new data types on Lending Club” It seems their new format does not work properly with the Nickel Steamroller filter links given above. You must manually enter the annual income for the linked filters to work correctly.

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Peter Renton May 24, 2013 at 1:37 pm

Ron, I contacted the NickelSteamroller guy and he has now fixed this issue. Thanks for pointing it out.

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Rob S May 28, 2013 at 3:33 pm

Peter,

I was looking at your above Lending Club filter “Medium Income” as a starting point and running that set of filters through the NSR backtester, it is showing that F notes perform worse compared to D, E, and G. Are you seeing the same? With F showing a 11.94% ROI and without F it is showing 12.30% ROI. I am considering using your Medium Income filter as a starting point, but leaving out all F notes. Sounds like it wouldn’t make sense, but that is what the backtest is showing.

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Peter Renton May 29, 2013 at 6:10 am

Hi Rob, Yes, that is indeed what the backtesting is showing. But you should take note of one thing. There are only 117 F-grade loans that have been issued for that filter – that is a pretty small sample size to be basing any decisions on. To prove my point if you just look at loans issued since Jan 1, 2012 you will see that F-grade loans are outperforming the average. I wouldn’t recommend basing any decision on a very small sample of loans – I think you need at least 500 loans in the history before the data becomes relevant.

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Brian June 19, 2013 at 7:47 pm

Hi Peter,

How do you allocate investments between these filters? Equal amounts of each, or prioritizing the highest estimated ROI loans as they become available, or something else?

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carla carvalho June 23, 2013 at 10:23 pm

Hi,
Just wondering what the data are behind rejecting California borrowers?I thought other states (FL,AZ) were those that statistically have been shown to be “higher risk.” Thanks!

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Roland August 13, 2013 at 2:52 pm

Yes, I was also wondering why California was excluded from two of the LC filters. The only connection I could make was those two filters use higher income, and since cost of living is high in CA and people get paid more, they aren’t technically “high income” and they would skew the results. Otherwise this is an excellent post and great comments. Even though I feel pretty late to the game after researching online, I’m excited to get started.

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Peter Renton August 14, 2013 at 6:41 am

The reason I have chosen all of these filters is based on back-testing different strategies on NickelSteamroller.com. Having said that, this data changes over time and CA has been improving and I will be looking closely at whether or not to keep this exclusion going forward.

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Wes July 3, 2013 at 2:30 pm

Hi – great post here. Quick question for you about the filter testing on Nickel Roller. I noticed that you don’t have a filter on Status. Why aren’t you looking only at completed loans (i.e. excluding active loans). Wouldn’t that provide a more accurate projection?

thanks
Wes

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Peter Renton July 3, 2013 at 10:04 pm

Wes, There are some people who believe that looking at only completed loans is the most accurate way of projecting future returns. While I believe that method has merit I like to look at a broader picture. The underwriting model keeps changing, so if you are only looking at completed loans you will not be measuring any of these changes. I think discounting active late loans is more inclusive method for projections. Just my opinion and I know many who disagree, so do whatever feels right for you.

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Rowhoss December 8, 2013 at 5:51 pm

Peter,

Do you have any plans to do an update on this to compare filters?

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Peter Renton December 8, 2013 at 9:58 pm

Yes. I will be doing a 2014 update next month.

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Louis Huynh January 20, 2014 at 4:30 pm

Hi Peter,

Awesome stuff. I’m looking forward to your 2014 update!

Louis

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Sam February 9, 2014 at 7:46 pm

When is update coming for 2014?

We are all waiting….

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Peter Renton February 10, 2014 at 8:11 am

It should be published later this week.

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CHTampa February 14, 2014 at 10:53 pm

Peter. Thanks for sharing your strategies. I have been a Lending Club investor since last Sept. In the beginning, I was trying to set up different filters based on multiple criteria to optimize my return. However, I find that only a small number of loan will pass my filters. If I try to invest 10K with $50 per notes (400 notes total), it will take weeks before I can invest the whole amount. On top of that, some of the loans that passed my filter are not close to 100% funded. That means I have to wait additional days to see if they would be funded. Therefore, I changed my strategy to invest only in loans that are at least 80% funded + a couple of simple rules. I figured there are a lot of people, like yourself, that are smarter than me in setting up filters to screen the loans. If a loan is already 80% funded, that means it must be favored by other people. So far, this strategy works out very well for me.

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