When I started investing in peer to peer lending in 2009 I have to admit I was pretty clueless about it. I started small and really didn’t do much research. Consequently my returns were not that great, dipping under 5% at one point.
Since then, I have learned a great deal about investing in both Lending Club and Prosper. And thanks to third party sites like Lendstats I have been able to do a ton of analysis using different filters to see what has worked in the past. Now, there is no guarantee that what worked in the past will continue to produce the best returns in the future but I believe the analysis is worthwhile and I continue to base my investment decisions on this analysis.
Lending Club Loan Filters
I have two accounts that I actively manage at Lending Club, I also have two Lending Club PRIME accounts in my wife’s name (a traditional and a Roth IRA) which I won’t be discussing here. For the two accounts I manage I use a different strategy for each. For my original Lending Club account, I have tried all kinds of filters but have settled on this relatively conservative strategy for a while now. Both strategies invest in 36 month as well as 60 month notes. I should also note that when I actually invest I download the current loans in a CSV file and do my filtering there.
Conservative Lending Club Strategy: B-C Grade Loans
My main account is now focused on B and C grade loans, I don’t invest in A grade loans because I don’t think the interest rates are high enough for investors. That is just a personal choice, A grade notes are popular with many investors. Here are the filters I currently use for my reinvestments on my main taxable account.
Credit Grade: B1-C5
Total Lines: 10+
Revolving Debt: <=$16,000
Credit utilization: between 20% and 95%
2 year DQ’s: <=2
States excluding: CA, FL
Loan Purpose: all
Monthly income: $4,000+
Employee length: 4+ years
Here is link to these filters on Lendstats. As of today, the estimated ROI on loans with these filters is 10.5%. Now, I could go through the filters and discuss the relative merits of each one, but I have really just let the data dictate the filters. I have played around with different values and these are the best filters I have found for the B & C credit grades. You can get higher returns if you narrow down further, but I like to have a pool of at least 500 loans. Currently, Lendstats reports there have been 595 loans with these criteria funded since January 2007.
Aggressive Lending Club Strategy: D-G Grade Loans
For my new Lending Club IRA account that I opened in April I use a different set of filters. I focus on different loan grades here to avoid doubling up on any loan. I also have chosen a more aggressive strategy to see if I can achieve a higher ROI. I am focusing on the riskiest borrowers on Lending Club so this strategy will not be for everyone.
Credit Grade: D1-G5
Open Lines: 6+
Total Lines: 15+
2 year DQ’s: <=2
Public Records: 0
States excluding: CA
Loan Purpose: credit card, debt consolidation, education, home improvement, house, moving, renewable energy, vacation, wedding
Employee length: 4+ years
The estimated ROI for these loans according to Lendstats is 13.37% with 492 loans meeting these criteria since January 2007.
Prosper Loan Filters
With Prosper I also have two sets of filters that I am running right now. Both are very aggressive, targeting just the higher risk loans. I do not use a conservative option on Prosper.
The way I look at it is this. Prosper allows access to a higher risk borrower than Lending Club, with allowable FICO scores down to 640 (660 is in the minimum on Lending Club) with the higher interest rates to match. On Lending Club G rated borrowers pay 22-23% interest. On Prosper most D, E and HR rated borrowers pay more than that. I try to diversify my peer to peer lending investments across both platforms with exposure to borrowers in most credit grades. So my Prosper investments are focused on these lower credit grades.
With all my analysis on Prosper, I only look at loans originated after Prosper reopened in July 2009. Prosper changed their risk management dramatically then, so I think there is little point in doing any analysis on loans from Prosper 1.0.
Aggressive Prosper Strategy 1: Previous Borrowers
As I mentioned in my recent post about previous borrowers on Prosper, I think this is the best category of borrowers as far as risk-reward goes in all of peer to peer lending. These are people with a proven track record of paying back a previous loan and this is where I am focusing most of my investments on Prosper. I use a pretty simple list of filters here:
Prosper rating: D, E, HR
Current DQ’s: <=1
Payments on previous loan: 24+
Late payments: <=1
According to Lendstats these loans have an estimated ROI of 22.78% and there have been 472 loans issued that meet the above criteria. Now, I don’t expect to net a 23% return on my investment in these loans, I expect there will be many more defaults as the loans age. Prosper estimates the ROI for these filters will be 11.84%, but I think they are being conservative there and I expect it will be several percentage points higher than that.
Aggressive Prosper Strategy 2: E & HR Loans
I also dedicate a small amount of money to people who are not previous borrowers. I have much stricter criteria here because these are borrowers with no track record on Prosper.
Prosper rating: E, HR
Debt to Income: <=75%
Total credit lines: 16+
Current DQ’s: 0
Previous loans on Prosper: 0
Public record 1 year: None
Credit history: 6+ years
Employment: Employed, Self-employed
According to Lendstats the estimated ROI of these loans is 24.86%. One word of warning, though, the pool of loans for these filters is very small – just 173 loans issued since July 2009 so the estimated ROI of this strategy could change dramatically. I consider this strategy quite speculative so I only allocate a small amount of funds to this. Which is just as well because there are not many loans on the platform with these criteria.
One final point. I rarely read the loan descriptions. The only time I do this is if, for example, I have ten loans that meet my criteria but only enough cash in the account to reinvest in seven loans. I will then quickly scan the loan descriptions and eliminate three loans arbitrarily. I reinvest funds weekly on Lending Club (it takes me about 15 minutes), on Prosper I have an automated plan so I rarely even look at the loans there.
So, that is how invest today. I am always interested in hearing opinions from others? What criteria do you use and how did you decide on it? Please leave your comments below.