How I am Investing in Lending Club and Prosper in 2012

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[Update: There is a new post detailing my Lending Club and Prosper investment strategy for 2013.]

One of the things I love about p2p lending is the transparency. By this I mean that anyone can download the entire loan history of Lending Club and Prosper and analyze the data for themselves. I am trying to bring a level of transparency to my own operations on this blog by giving you an inside look at my investments.

Last month I provided a snapshot of all my p2p lending accounts and today I will continue along on that journey by revealing exactly how I am investing in Lending Club and Prosper today. I first detailed my investment criteria nine months ago in a post that described how I was investing with Lending Club and Prosper back then. I gave you two strategies each for both companies and today I am going to expand on that.

No More Conservative Lending Strategies

The biggest change in my investing in the last nine months is that I have ditched the conservative lending strategy at Lending Club. In my main Lending Club account I had been focusing on B- and C-grade loans for quite some time. But I decided that was simply leaving money on the table so late last year I switched course and decided to focus purely on loans grades of D and below at Lending Club on all my accounts (except for my Lending Club PRIME account).

Now, this created something of challenge. As I detailed in my last post I want to invest in multiple p2p lending accounts without investing in the same note twice. So, after spending way too much time on Lendstats exploring hundreds of combinations of selection criteria I came up with these sets of filters that provide no duplication of notes. I have provided a link below each filter to the Lendstats page that shows the returns one might expect when running these filters. If you don’t know what some of these fields mean you should learn more about credit reports (just google “understand credit report” and you will find plenty of articles).

Lending Club Filter 1 – High Income

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
Link to Lending Club Filter 1 on Lendstats

Lending Club Filter 2 – Medium Income

Loan Grade: D, E, F, G
Inquiries = 0
DTI% <= 25%
Open credit line >= 8
2 Yr Deliquencies = 0
Public records = 0
Monthly income >= $3,000 and < $7,500
Loan purpose: All except other, small business and vacation
States – exclude CA, GA and TX
Link to Lending Club Filter 2 on Lendstats

Lending Club Filter 3 – Inquiries 1+

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
Link to Lending Club Filter 3 on Lendstats

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. Because all three filters don’t invest in loans originated in California I could easily setup a fourth unique filter for loans just issued in that state. I haven’t done this mainly because there are not enough loans that meet my criteria.

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. So what I do is download the spreadsheet of all available loans from the Browse Notes page – there is a small Download All link in the bottom right of the screen. Then I can do the filtering in Excel and invest from there.

Prosper Filter 1 – Previous Borrower 0-1 Inquiries

Loan Grade D, E, HR
Payments on previous loans >= 12
Number of late payments  <= 9%
Allow credit score drop up to 100 points
Inquiries <= 1
Current delinquencies <= 1
Link to Prosper filter 1 on Lendstats

Prosper Filter 2 – Previous Borrower 2-5 Inquiries

Loan Grade D, E, HR
Payments on previous loans >= 10
Number of late payments  <= 10%
Allow credit score drop up to 100 points
Inquiries >= 2 and <= 5
Current delinquencies <= 1
Link to Prosper filter 2 on Lendstats

Prosper Filter 3 – New Borrower 0 Inquiries

Loan Grade D, E, HR
Payments on previous loans = 0
Inquiries = 0
Current delinquencies = 0
Open credit lines >= 10
Debt-to-income ratio <= 75%
Link to Prosper filter 3 on Lendstats

Prosper Filter 4 – New Borrower 1-2 Inquiries

Loan Grade D, E, HR
Payments on previous loans = 0
Inquiries >= 1 and <=2
Current delinquencies = 0
Delinquencies in last 7 years = 0
Bankcard utilization <= 95%
Open credit lines >= 10
Debt-to-income ratio <= 75%
Public records last 10 years = 0
Employment status: exclude Unemployed, Not Available
Link to Prosper filter 4 on Lendstats

The bulk of my new investments on Prosper go towards repeat borrowers. I have found repeat borrowers to be an excellent group of borrowers and you can see by clicking on the Lendstats link with each filter that they provide excellent returns.

Long time readers will know my love of the Number of Inquiries filter so you might be surprised by Filter 2 where I go with number of inquiries between 2 and 5 (I have long maintained that inquiries = 0 is one the best filters you can have). But I let the Lendstats ROI numbers be my guide here. And even though a previous borrower has two or more inquiries on their credit report with the additional filters in place here you can still generate an excellent ROI.

Now, I don’t want to be one dimensional and ignore new borrowers, so filters 3 and 4 provide a way to invest in new borrowers that is also likely to produce a good return. Again I am using number of inquiries as the way to separate the note selections to avoid duplication.

So, there you have it. These are the criteria I am using to invest today. It makes investing with multiple accounts a breeze or you can just as easily use these criteria on one account. Feel free to use these filters yourself if you like. Or you can always critique them and provide your own suggestions in the comments.