How I am Investing in Lending Club and Prosper in 2014

Investing with Lending Club and Prosper in 2014

Every year around this time I share my investing strategies here for everyone to see. These are the filters I use every day to invest on both Lending Club and Prosper. These strategies have been tweaked a little over the years but my overall approach has not changed since 2011. I invest in high interest loans at both companies and I try to minimize the risks by only choosing certain subsets of these high interest loans.

You should keep in mind that this article does not contain investment advice and I do not 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.

Some Background on Filtering

It can feel a little overwhelming when you first start investing. You wonder how you should go about choosing loans. When I first started I did it kind of randomly with very little strategy. Then, for a while I let Lending Club choose the loans for me. Finally, I decided to get serious. What did I do? I spent dozens of hours analyzing the loan history of both Lending Club and Prosper.

The original goto site for this kind of analysis was Lendstats. Today, Nickel Steamroller is the leader and that is the place where investors should go to analyze the p2p lending loan history. Prosper and Lending Club make their entire history available for public analysis and Nickel Steamroller has produced an excellent tool to easily inquire on this history. You can get very detailed with this analysis with dozens of data fields to choose from. I encourage all serious investors to spend some time studying to see what has produced above average returns in the past.

Before I go any further I need to stress this point. My investment decisions are based on historical analysis. There is no guarantee that the loans will perform in a similar way going forward. And if the economy tanks as it did in 2008-09 then it is likely that future returns will look quite different.

One final important note about filtering before I show you how I am investing. You need to make sure you are choosing a broad enough cross section of loans when doing your analysis. If you run your filters and you see only 200 loans, for example, out of a 250,000 loan universe then you can not read much into your results. The rule of thumb I use today is that any set of filters must produce at least 1,000 loans (preferably more) to be considered a relevant result.

If you want to compare my filters today to previous years here are links to my 2012 and 2013 strategies.

Investing at Lending Club in 2014

Lending Club Filter 1 – High Income

Estimated ROI: 13.80% (from Nickel Steamroller)
Link to Lending Club Filter 1 on Nickel Steamroller

Loan Grade: D, E, F, G
Inquiries = 0
Public records = 0
Monthly income >= $7,500
Loan purpose: All except other, small business and vacation

Lending Club Filter 2 – Medium Income

Estimated ROI: 11.75%
Link to Lending Club Filter 2 on Nickel Steamroller

Loan Grade: D, E, F, G
Inquiries = 0
DTI% <= 20%
Open credit lines >= 8
2 Yr Delinquencies = 0
Public records = 0
Monthly income >= $3,000 and < $7,500
Loan purpose: All except other, small business and vacation
Term = 36 months

Lending Club Filter 3 – Inquiries 1-2

Estimated ROI from NickelSteamroller: 10.92%
Link to Lending Club Filter 3 on Nickel Steamroller

Loan Grade: D, E, F, G
Inquiries >= 1 and <= 2
Now Delinquent = 0
Public records = 0
Monthly income >= $7,000
Loan purpose: All except small business
Term = 36 months

Lending Club Filter 4 – Super Simple

Estimated ROI from NickelSteamroller: 12.39%
Link to Lending Club Filter 4 on Nickel Steamroller

Loan Grade: C, D, E, F, G
Inquiries = 0
Monthly income >= $4,000
Loan purpose: credit card, debt consolidation

The first point to note about these four filters is that filters 1, 2 and 3 are all mutually exclusive. You can deploy them across multiple accounts as I do and be assured that you will not get any duplicate notes. As you can see my two favorite filters are income and number of inquiries. I have found these two fields have some of the most significant impact on returns and I like to use them everywhere.

I have used filter 4, which I call Super Simple, when I need a broad filter to deploy more cash. The Super Simple filter will capture more than 10% of the loans hitting the platform although many of these loans are popular and will disappear quickly. But if you are using the API or even if you are investing manually you can usually find plenty of loans to invest in using this filter.

Long time readers will also notice that I am no longer filtering by state. In previous years I have excluded California and other states but I have decided to stop that practice. I have done this for a couple of reasons. One, by using good filters you are reducing the negative impact of including a “bad” state. Two, I want the largest possible universe of loans to invest in with the filters I have chosen. And I just don’t think it makes a big enough difference to your ultimate returns any more.

I should also point out that I supplement these filters with the P2P-Picks credit model. I do this by logging in at feeding time and frantically selecting the loans to invest in my main Lending Club account.

Investing at Prosper in 2014

Prosper Filter 1 – Previous Borrowers

Estimated ROI: 15.72% (from Nickel Steamroller)
Link to Prosper Filter 1 on Nickel Steamroller

Loan Grade: C, D, E
Payments on previous loans >= 18
Number of late payments  <= 1
Inquiries = 0
Current delinquencies <= 2

Prosper Filter 2 – High Income

Estimated ROI from Prosper Stats: 14.97%
Link to Prosper filter 2 on Nickel Steamroller

Loan Grade: C, D, E
Loan term: 36 months
Inquiries = 0
Stated Income: >= $50,000

Prosper Filter 3 – Super Simple

My estimated return on Prosper Stats for Prosper Filter 3: 12.62%
Link to Prosper Filter 3 on Nickel Steamroller

Loan Grade: B, C, D, E, HR
Inquiries = 0
Open Credit Lines >= 10

The first thing that regular readers will notice is that my Prosper filters are more broad now than in previous years. This was done out of necessity. Even with investing through the API it has been hard to keep my cash fully deployed. Having said that, with the changes that I wrote about earlier this week I may be able to refine some of these filters going forward. My cash is fully deployed now at Prosper for the first time in over 12 months.

For a number of years my favorite filter at Prosper was repeat borrowers. Back in 2010 and 2011 these loans were overpriced and they produced some excellent returns for investors. I still like investing in repeat borrowers because a good payment history is an excellent predictor of future behavior but these loans are relatively hard to come by. In the last two weeks I have invested in just three loans with my repeat borrower filter and I am investing through the API.

So, there you have it. These are the criteria I am using to invest today. There are literally millions of other ways to invest and my selections are certainly not the only way to go. I am happy for you to critique them and provide your own suggestions in the comments.

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writing2reality
Feb. 14, 2014 7:48 am

As with the previous years, thank you for sharing your filters Peter. As you’ve mentioned, there needs to be some depth of data in order for it to be statistically relevant when selecting a filter to use. I know for my filters, while there were some promising leads and return levels when using some of the newer loan attributes on NSR, however I couldn’t justify putting a filter together using them as no loan is close to being paid off with those criteria (less than two years old).

As a heads up, all of the permalinks to NSR are not working (I emailed Michael yesterday prior to posting my investment criteria post).

Hntnfsh4evr
Hntnfsh4evr
Feb. 14, 2014 8:32 am

I have LC filters that include income, lack of public records, no delinquencies, home ownership, as well as excluding a few states. I question the strategy however all the time. I would ask…what do you think is the market inefficiency you are capturing with your filters? In other words, what do you think your edge is over the LC or Prosper scoring model? I also remain curious why LC doesn’t offer secured funding to investors collateralized by their LC account. Seems like they are leaving a low risk income stream off the table.

Valdar
Valdar
Feb. 14, 2014 1:20 pm

Are you no longer filtering by Loan Category in Prosper either? You used to say no to all loans that were “Green Loans”, “Business” and “Household Expenses”.

Laurie
Laurie
Feb. 15, 2014 3:21 am

Hi Adam! Are you using these filters with any auto investing platform and how is that going? Awesome information, thank you so much!

Laurie
Laurie
Feb. 15, 2014 3:56 pm
Reply to  Peter Renton

Thank you Peter! I just went back and read your most recent returns and you mention using the new Prime on one of your accounts. How is that working and are you using the Super Simple Filter for that one? I’m glad to hear about NickelSteamroller.com working well and I appreciate all your valuable advice!

BruiserB
BruiserB
Feb. 15, 2014 4:23 pm

I notice you are now filtering for 36 month loans only in your 2nd and 3rd Lending Club filters. What’s your reasoning for this? Also I see you’ve added C grade notes to the Super Simple filter. Is that just to get more volume?

Frank Chiu
Frank Chiu
Feb. 24, 2014 1:42 pm
Reply to  Peter Renton

Peter,

Are you concerned that 36 month D/E/F/G loans puts additional pressure on the borrower due to a higher installment? This may lead to a higher natural default rate compared to those with a 60-month term.

tim hyde
tim hyde
Feb. 18, 2014 2:54 pm

Peter

many thanks for sharing your strategy on p2p lending.
Have you found the bad debt experience on 36 month loans better than you or the platform expected? Intuitively i steer clear of longer term loans in the UK to avoid what i call the unexpected event risk of job loss, financial hiatus, credit crunch like 2008 or in our current climate floods, storms, hurricanes etc.
Secondly do you have or see any appetite for index-linked loans where the bid is for a real interest rate with capital and interest rate adjusted for consumer price inflation every 3 months on balance outstanding. It is probably of more interest to companies and institutions, but all this QE will end up in inflation sometime soon.
Tim

Jeff
Jeff
Feb. 24, 2014 2:45 pm
Reply to  Peter Renton

In my initial investments, I didn’t do any filtering by term. I just had some very basic filters.
Once I found out about NSR, I started really playing around with all sorts of options to see what would give the highest expected return. To my surprise, the returns were close to 2% higher for the 60 month loans over the 36 (at least for the current filtering criteria I’m using).

Of course I’ve only been doing this for about 9 months now, so don’t have the wealth of personal historical info that you have. But I’m still surprised to hear you invest mainly in 36 month loans.

At least for me, it’s really difficult to go against the numbers I’m seeing from NSR.
I suppose I’ll find out in the long run if the 60’s were a good idea.

John
John
Feb. 25, 2014 2:38 am

Thank you, Peter!

Regarding the Prosper filters: I’m having a bit of trouble mapping the NSR filter set onto the Prosper filters, which I’d like to do in order to use Prosper’s auto-invest function. Specifically, I don’t see how to enter “Number of late payments <= 1" given that Prosper seems to use a percentage, rather than an absolute number. Also, I'm not clear whether your late filter is referring to the 31 days late.

Finally, assuming I’m I correct in understanding that NSR does not currently have an auto-invest feature, are you using Prosper’s auto-invest to do your purchasing for you?

-John

Dan
Dan
Feb. 25, 2014 12:29 pm

I’ll take a little less interest for a 3 year loan because it means I get my principle back faster to reinvest. This means I get my initial investment back sooner. For instance, $25 in a three year loan will only take about 2 years or so to get my initial investment back (depending on the interest rate). So, while I’m finishing collecting for the third year of my loan, I’ve already reinvested my $25 in another loan. However, with the 5 year loan, your initial investment is tied up for a lot longer… probably more like 3 years to get your initial investment back. Yes, even though the interest rate may be the same for both a 3 and 5 year loan, you can invest in more loans over a period of time. Basically, over a 5 year period in 3 year loans, you’ll collect an additional year of interest compared to investing in 5 year loans.

I use the rule of 72 a lot (divide 72 by your interest rate to find how long it takes for your principle to double). 12% will double your investment in 6 years. But, if you’re reinvesting constantly as money is paid to you, this is shorter… probably more like 5 – 5.5 years depending on whether you do 36 month or 60 month loans.

On top of that, since there’s less chance the 36 moth loan will default, and I can get my money out of P2P lending more quickly (if some unforseen disaster happened), 36 month loans are the way to go.

John
John
Feb. 25, 2014 11:31 pm
Reply to  Peter Renton

Dan (and Peter),

Although there are some advantages to 36-month loans over 60-month loans, I’m having a hard time seeing how this statement can be correct: “Basically, over a 5 year period in 3 year loans, you’ll collect an additional year of interest compared to investing in 5 year loans.”

If you’re constantly reinvesting all your money, and the interest rates are identical there should be no difference in return between the 36 and 60-month notes. Or am I missing something here?

-John

Dan
Dan
Feb. 28, 2014 2:52 pm
Reply to  John

Your interest is the same for a 60 month or 36 month loan, but your principle is divided by the number of months.

In a sixty month loan you put in $25 at 10% interest. Here’s what you collect:
6 mo: +3.75 = $3.75
12 mo: +3.75 = $7.50
18 mo: +3.75 = $11.25
24 mo: +3.75 = $15.00
30 mo: +3.75 = $18.75
36 mo: +3.75 = $22.50
42 mo: +3.75 = $26.25 *Reinvest $25 in 10% five year loan*
48 mo: +3.75 = $30.00 6 mo: +3.75 = $3.75 ($33.75 Total)
54 mo: +3.75 = $33.75 12 mo: +3.75 = $7.50 ($41.25 Total)
60 mo: +3.75 = $37.50 18 mo: +3.75 = $11.25 ($48.75 Total)

In a 36 month loan you put in $25 at 10% interest. Here’s what you collect:
6 mo: +5.41 = $5.41
12 mo: +5.41 = $10.83
18 mo: +5.41 = $16.24
24 mo: +5.41 = $21.67
30 mo: +5.41 = $27.08 *Reinvest $25 in 10% three year loan*
36 mo: +5.41 = $32.50 6 mo: +5.41 = $5.41 ($37.91 Total)
42 mo: +3.75 = $26.25 12 mo: +5.41 = $10.83 ($43.32 Total)
48 mo: +3.75 = $30.00 18 mo: +5.41 = $16.24 ($48.75 Total)
54 mo: +3.75 = $33.75 24 mo: +5.41 = $21.67 ($54.15 Total)
60 mo: +5.41 = $37.50 30 mo: +5.41 = $27.08 ($59.56 Total)

Notice the $10.81 difference after 5 years? This is not how much more interest you have made, but it’s the amount of additional investing dollars you have achieved over a five year period. To figure out your profits you would have to extrapolate this out to a 15 year interval (multiple of 3 & 5), but I don’t have the time. With the three year loan you can reinvest your principle 15 months earlier than with a five year loan…which means 15 months of extra interest.

“Basically, over a 5 year period in 3 year loans, you’ll collect an additional year of interest compared to investing in 5 year loans.”

BruiserB
BruiserB
Feb. 28, 2014 4:06 pm
Reply to  Dan

Your example only works because you are assuming an account with one note and you are having your collected payments sit idle earning no interest until you have enough income to buy another note. So with the 5 year note, you are waiting until month 42 to reinvest any of your earnings. On the 3 year note, you can reinvest your earnings at month 30.

However with many notes in your account, you pool all of your payments and buy additional notes as soon as you have at least $25 in your account. So your repayments don’t sit idle for several months as they do in your example….with enough notes you are able to repurchase new notes on an almost continual basis. If you scaled up the number of notes in your example, you’d find that you could buy more notes with the first month’s payments and the difference wouldn’t be what you think it is.

I do think there are some factors in favor of 60 month loans.
– You get a higher interest rate for a given borrower’s credit history. I think the loan grade drops by 1 Letter for a 60 month loan. So an A2 rated 36 month borrower gets to pay B2 rates if they choose a 60 month loan.
– The impact of LC’s 1% charge on your return is less over a longer time.
– The borrower has lower payments and can always choose to pay faster if they want. The loan will have a lower effect on the borrower’s monthly budget, although they will have to pay for a longer time.

There are factors against 60 month loans.
-A default a given number of months in results in higher principal loss.
-Someone who is less confident in their own ability to repay is more likely to choose the longer term.
-The borrower has more time to accumulate additional debt if they haven’t changed their lifestyle and they can get further in trouble.

Dan
Dan
Mar. 4, 2014 11:36 am
Reply to  Dan

Hey Bruiser,

As with any example, there are limitations. I went with 1 note to illustrate a point and keep things simple. I see your point, but it doesn’t really make a difference when you examine the whole picture.

You’re assuming that you will have the same amount paid back to reinvest every month even though the payments are spread out over a longer period of time on a 5 year loan. All I am illustrating is that you can reinvest your money faster with 3 year loans because the principle is paid back faster (even though the interest paid is the same per year).

Besides, regardless of how many three year notes you have, you will get paid your principle back faster than five year loans.
EXAMPLE: Andy invests in 1000 three year notes at 10% interest, and Billy invests in 1000 five year notes at 10% interest. Andy will have reinvested his $25,000 one whole year before Billy. This will give Andy an additional year of investing power. After just one month of collecting, Andy will already have reinvested more money than Billy and have more notes because Andy collects more principle for his 3 year loans… This actually compounds my example previously posted.

BruiserB
BruiserB
Mar. 4, 2014 12:13 pm
Reply to  Dan

Dan, I’m sorry, but your logic still doesn’t make sense to me. Given a hypothetical situation where there are no defaults and everyone pays as scheduled, it just doesn’t make any difference if you are paid back on a 3 year schedule or a 5 year schedule. With a 3 year schedule you just increase the turnover of your loans. Yes your principal comes back quicker and you reinvest it quicker, but what difference does it make if you get it back sooner and it’s reinvested (in a 3 year loan) or if it’s lent to someone for a longer period of time and they are paying you interest on it (in a 5 year loan)? Let’s take your logic even further….what if Lending Club offered 1 month loans….would they be better? You would get paid all of your principal plus one month worth of interest every month. You would then reinvest all of your money monthly…way faster than Andrew in your example. But over the long term you wouldn’t be any richer than Andrew or Billy, you would all have identical results assuming all loans were 10% and all were repaid. And if you were paying Lending Club 1% of the turnover each time you got paid, you would be poorer than Andrew who would be poorer than Billy…..so from a fee standpoint, you actually don’t want to get paid quicker. You’ll notice this when you have a note paid back after just one month and Lending Club’s fee is as much or more than the interest you made.

Now that’s not saying 60 month loans are better than 36 month loans, because the example is ignoring defaults. As I mentioned before it could be that people who are less confident in their own ability to repay or who are less responsible will opt for a 60 month loan. This is balanced out somewhat by the fact that those who take 60 month loans pay a higher interest rate than those who take 36 month loans. There are many factors that determine how much you will make over time by investing, but loan term in and of itself is not a factor.

Further info:

https://www.lendingclub.com/public/60-month-notes.action

Dan
Dan
Mar. 7, 2014 1:40 pm
Reply to  Dan

Hey Bruiser,

At DAY 1 you have the same ammount of notes in both 3yr & 5yr notes. At MONTH 1 you have more notes that you reinvested in with the payments from 3yr notes. The same with MONTH 2, 3, 12…. ect.

Could you please provide a mathmatical example to explain your theory.

BTW… BruiserB, do you work for LendingClub? They’ve been really pushing the 5 year loans lately (fewer 5yr loans = fewer notes invested = less money for LendingClub).

Dan
Dan
Mar. 7, 2014 1:53 pm
Reply to  Dan

Also, LendingClub rounds up your payments to them every month… so my payments on my 3yr and 5yr $25 notes are both $0.01. 36 months = $0.36; 60 months = $0.60.

BruiserB
BruiserB
Mar. 7, 2014 5:22 pm
Reply to  Dan

Hi Dan,

Maybe consider this….Instead of comparing a 3 to 5 year loan, compare either of them to an infinite year loan, which you could also call an interest only loan, which would be effectively the same thing as putting your money in the bank and earning interest. The bank never pays you principal back….they just keep paying you interest each month and you add the interest to your balance (effectively reinvesting it) and the next month you make interest on your original principal plus the interest earned. For simplicity, let’s assume 12% (because that is 1% per month). Start with $1000.00….at the end of the first month you will get $10 in interest and your balance will be $1010.00. The next month you will get $10.10 in interest and your balance will be $1020.10. The third month you will get 10.201 in interest and your balance will be 1030.301. At the end of any month (n) your balance will be $1000*(1.01)^n. After 36 months you will have $1430.77. After 60 months you will have $1816.70. Remember this is an infinite year loan, you are never paid ANY principal back….you just get interest that you immediately invest again at 12% annual interest.

Now construct your own example of a 36 month loan of $1000 at 12% interest. Each month you will receive a payment consisting of some principal and some interest. The interest will equal 1% of the outstanding principal for that month. In the first month that will be $10 (the same as in the savings account) plus some principal….let’s call it P (you could find the exact amount if you work out the amortization table for a $1000 loan over 36 months at 12%. So the balance of the original loan will be $1000-P and you will receive a payment of P+$10 in interest. Let’s assume you don’t have to wait to have $25 to reinvest but that you can buy a note for P+$10. So going into month 2 you have total investment of $1000-P+P+10, which happens to equal $1010.00 just like in the savings account. If you work out a 5 year amortization chart the principal paid that first month will be smaller than in the 3 year example…..let’s call it p (small p). Well the balance on your original investment will be $1000-p and you will receive a payment of p+$10 in interest. It doesn’t matter that pp, the fee is higher for the 36 month loan than the 60 month loan and is least for the infinite month loan. The faster you get your principal back, the faster you pay Lending Club a fee. The most favorable is the interest only infinite loan because you never pay Lending Club a percentage of your principal.

You were correct about Lending Club rounding and charging $0.01 per payment whether it was a 60 month or 36 month loan on any $25 note. If you took out larger than $25 notes your could get the rounding to work out better. This was actually one of my pet peeves about the way Lending Club charged fees. Just two days ago they changed this and they will charge us fractional cents.

https://kb.lendingclub.com/siteupdates/articles/Site_Updates/Changes-to-Lending-Club-s-rounding-method

I hope this makes sense….I’m sure some finance person can put up some equations to explain this better than I have. No, I don’t work for Lending Club. I’m just an individual investor who has been at this for 3 years now.

Like I said before, differences in defaults may lead to differences in performance for 36 vs 60 month loans, but the length of loan in and of itself has no effect. The fees paid over time are lower for 60 month loans.

BruiserB
BruiserB
Mar. 7, 2014 5:47 pm
Reply to  Dan

Something got botched up 2 paragraphs above the link I included….looks like I somehow cut out a few sentences of what I was saying….hope it still makes sense. I was showing that after the first payment of the 5 year loan you would still have $1000-p+p+10 or $1010.00.

Then I started a paragraph comparing the fees. Since P>p>0, then the monthly fee for the 36 month payment will be higher than the fee for the 60 month payment which will be higher than the fee for the infinite month (no principal) payment.

Dan
Dan
Mar. 10, 2014 8:36 am
Reply to  Dan

In your example you’re not calulating in the compounded interest from the additional principle you’re getting paid back, which is what this is all about. If you factor that difference in, you’ll see the additional currency accumulated. Actually, if you calculated that, you would see the exact amount of additional money you received from your example.

BruiserB
BruiserB
Mar. 10, 2014 8:54 am
Reply to  Dan

Oh I certainly am! But you seem to be forgetting that any principal you get paid faster reduces the principal on the original loan and therefore reduces the amount of interest that the original borrower is paying you. You are just moving the principal from one loan to another, but you’re not earning interest on the same principal in two loans at the same time.

Dan
Dan
Mar. 19, 2014 11:28 am
Reply to  Dan

What filters do you use Bruiser?

BruiserB
BruiserB
Mar. 19, 2014 11:59 am
Reply to  Dan

My first year I just invested on my own choosing A-E grade loans and tried reading each of the loan descriptions before deciding whether or not to choose a loan. When I started getting my first defaults I realized that I wasn’t a particularly good judge myself. I have invested additional funds over the last two years pretty much following Peter’s filters and modifying each year as he has. I mostly invested manually and tried to create the filters as best as I could using Lending Club’s filtering capability and subscribing to Nickelsteamroller.com email alerts with filtered notes. I was having trouble getting online at the right times to get enough funds invested and experimented with loans in the 50-100 range. I also invested a chunk at once using Lending Club’s high rate auto select. The bad thing there is that it invested in a few loans with up to $275 per loan. I had a couple of those default but also have some that are paying regularly.

This last year I’ve started using the automated investing tools. I like both Lending Robot and BlueVestment. This has revolutionized my investing. I’m able to keep all cash invested and don’t have to worry about logging in 4 times a day (although I find myself logging in more frequently now to see how the auto tools are working!). I have moved my loan amount back to $25 and have no issue getting funds invested, so I’m much more diversified now. I had about 75% loans 5yr and 25% 3yr. This has moved to 66/33% recently as I’m also using the P2P.Picks.com picks that can be integrated into BlueVestment and they only pick 3 year loans because those are the only loans that have full payment/default history available.

Overall I’m getting about 11% net return (using the XIRR method with my deposits and current account value) and am quite happy. I was considering giving up until the auto investing tools became available. It’s a fast changing industry, so it will be interesting to see if it can still stay profitable for the individual investor….I hope so!

Dan
Dan
Mar. 25, 2014 8:52 am
Reply to  BruiserB

Thanks for the info.

I’ve only been using lendingclub coming up on 2 years, but I have no defaults yet, and the inflated percent lendingclub tells me I’m getting is 13.63% currently. I have mostly 5 year loans, but I’m trying to move to more 3 year loans. I only do $25 on notes. Right now there are a lot of good high interest loans within my filter, but I’m assuming it’s due to tax season.

This is my filter setup:
Months Since Last Record: 60
Revolving Balance Utilization: 70%
Loan Purpose: Refinance Credit Card, Car Financing
Max Debt-to-Income Ratio: 30%
Exclude Loans Already Invested In
Months Since Last Delinquency: 60
Open Credit Lines: 19
Inquiries in the Last 6 Months: 0
Exclude Loans with Public Records
Delinquencies (Last 2 yrs): 0
Min Length of Employment: 3 years
Interest Rate: B-G
Home Ownership: Mortgage, Own

That’s my basic filter, but I also glance at each individual loan’s “Borrower Credit History,” and if it’s not all zeroes in the right column, I skip it.

Laurie
Laurie
Jan. 6, 2015 11:49 pm
Reply to  Dan

Hey Dan, is that more than 19 Credit Lines on your filter?

Tabbycat
Tabbycat
Mar. 30, 2014 4:27 pm
Reply to  BruiserB

Bruiser,

Your examples are solid, as is your logic.
Dan has created a perpetual motion machine — thanks for clearing the smoke.
I think you’ll do well in this biz.
In fact, you already have.

60-month loans are substantially riskier than their 36-month sisters — we all agree on that. You’ve brought up some risks I never considered; there are undoubtedly more. One risk that is almost never mentioned is the additional *market* risk — the fact that market rates and inflation may rise and swamp your nice little 11% return (see “Home Loans in the 70’s”). This is a BIG drawback, one that makes every longer-term loan worth less, even after defaults and other risks are equalized.

Dan
Dan
Mar. 31, 2014 10:06 am
Reply to  Tabbycat

Well, after 1 month, the person investing in only 3 year loans will have more money in the bank to reinvest. After 3 years, even more. It’s simple math. Test it in a compounding interest calculator, and you’ll see the difference. But I’m not tryin to argue about this any more. That’s why i asked about more pertinant information like filters.

Claude
Claude
Jun. 1, 2014 1:04 am
Reply to  Tabbycat

Have to agree with Dan. There are many reasons we demand greater interest rates on longer term notes. When you invest in a longer term note, you are putting your money at greater risk. Think about US treasuries. Treasuries are priced on expected forward yields – that is, a one-year treasury note is priced such that if you bought one-year treasury notes every year for 10 years, the issuer is trying to make it so that you’ll be indifferent towards buying a 10-year treasury or 10 1-year treasury notes to avoid arbitrage. I very highly doubt this degree of market efficiency is present in P2P lending, as I don’t even really think this is the goal. The US wants to hedge against bad things happening in 5-years by motivating some investors to invest in 10- or 20- or 30-year bonds, while the shorter term investors might win or lose from taking the risk of market swings.

In practice, you don’t have unlimited funds to loan out, so let’s back off on that kind of claim, as even though something is better in theory it may not be best in practice. If you have a constrained amount of money to spend, 3-year bonds necessarily pay off faster than 5-year bonds. This means that the principal, which is also paid back faster, is more quickly redeployed and earning compound interest. In a market of constant lending opportunity, wouldn’t you rather always get $50 from a loan to redeploy in other loans than $10? Because when you invest that $50, you’ll again get part of the principal back per payment, and continuously reinvest it. Same with $10, but you’re just reinvesting smaller bits of your principal. So by getting more principal back each time, as well as more interest, your compounding power is greater.

Again, we try to make up for that by having higher interest rates. If a higher interest rate means that the 3-year bond paying $5 per pay period (P+I) and the 5-year bond also pays $5 per pay period (P+I), then your compounding power is same it just takes longer to get all the principal back on the 5-year bond.

Sorry for the use of “bond.” For all practical purposes, these are bonds. Regardless, I’d rather be invested in 3-year bonds unless the return characteristics are really that different. It pays to look at the borrowing guidelines too. It is true that one might be overconfident in their ability to pay a note in 3-years, but I personally would be weary of those that needed 5-years to pay back. If you are looking for compounding returns though, 3-year notes will allow you to redeploy money faster unless the difference in interest between 36 and 60 month notes is enough to make up for lower returned premium per period.

John
John
Feb. 25, 2014 12:43 pm

Hi Peter,

When I set up your LC Filter 1 – High Income on NS I get an ROI of 14.11%, but when I set up essentially the same filter on InterestRadar I get an IRR of 11.9% (choosing either 7k+ or 8K+ monthly income). I realize that ROI is not the same as IRR, but does it make sense that they are so different for (nearly) the same set of filters? And if it does make sense, which of these is the more useful number for calculating returns?

-John

scott
scott
Feb. 28, 2014 12:57 pm

When you create a filter for example the ones above, do you have a general number of past loans that fit into this filter for the filter to be valid? For example, Filter 1, if only 5 past loans in the history of Lending Club ever fit into that filter, the filter would be considered too tight. So, in your opinion, how many past loans makes a filter to be considered a wide enough net? 100 past loans? 1,000 past loans?

scott
scott
Feb. 28, 2014 12:58 pm

Bluevestment and NickelSteamRoller – What are the differences / value between one over the other for auto investing? Any info would be great!

scott
scott
Jan. 30, 2015 8:41 am
Reply to  Peter Renton

I just started using NSR but I am unable to automatically assign a note from an ‘Investment Strategy’ with NSR to its corresponding portfolio within LendingClub. Any idea on how to do this?

scott
scott
Mar. 1, 2014 11:13 am

Income Verification – I see that many of your filters, and you have stated, that Income and Inquiries is a big indicator for you. For income, it is my understanding that these loans are funded without the income being verified. If this is true, this is a stated income loan so how can you put so much weight on income. Is there something that I am missing?

scott
scott
Mar. 4, 2014 12:36 pm
Reply to  Peter Renton

Thank you for your answers!

Daniel Bower
Daniel Bower
Mar. 3, 2014 7:32 pm

Dear Peter,
Thank you so much for your newsletter. I’m using Prosper, and have been trying to use this filter you suggested for 2014:
Loan Grade: C, D, E
Payments on previous loans >= 18
Number of late payments <= 1
Inquiries = 0
Current delinquencies <= 2

I'm not clear about how to enter all the parameters of this filter in the Prosper search feature. On February 25, I saw a comment that clarified the "=18″
and also “Current Delinquencies <=2" – is that equivalent of the "Delinquencies in last 7 y:"?

Thanks again.

john anderson
john anderson
Mar. 23, 2014 9:50 pm

Hello Peter, I haven’t really searched any sites about Prosper or Lending Club in the last few years when i last used Eric Credit Community and Lendstats. I’ve been a prosper lender since 2007 and Lending Club since the very beginning. I am really upset that Prosper can only come up with so few prospective laons while Lending Cluub has so many. Any ideas why there is such a difference in the number of listings between the two? I also like the prior loan filter but was annoyed i could not use it on Lending Club. At one point it was my main filter. Thank you for your efforts.

Chris Bidar
Chris Bidar
Apr. 10, 2014 4:06 pm

Hello Peter, I’m wondering why you need 1000 loans per sample for you to think that you have a good size? I feel like getting 400-600 would be enough to come to strong statistical conclusions. Is there a particular reason you are picking 1000?

Njatl
Njatl
Apr. 11, 2014 9:02 am

Hey Peter! I am new to P2P lending. Can I ask you some questions?

Does Delinquency matter? “Delinquencies in 2 year” or “Delinquencies after 24 months”? I am very cautious about Delinquency so far. Looks like some notes with 2 or 3 “Delinquencies in 2 year” get funded very quickly. Very curious about it.

How do you think of “Major Derogatory”?

Thanks a lot

Luke
Luke
Apr. 22, 2014 3:18 pm

Hi Peter,

Do you notice a huge jump of available loans at the times that LC unloads? I’ve been just doing some research lately and no matter what time I log in, the filters you have produce less than 100 loans at any given point for me.

Jacob
May. 5, 2014 8:54 am

I just discovered your site Peter and I love it. I’m a small investor but have recently put more of my cash to work in Lending Club and Prosper. Me and colleague of mine would often talk about what we thought might be the “secret sauce” that would lead to out-sized returns. But we really didn’t have an engine to back test our ideas on. My colleague is good with databases so he downloaded Prosper’s info directly. We experimented with running data by states and also by profession. I can’t remember the exact results of our queries, but it seems as if there is a significant difference in default rate when you run by queries.

In your experience, have you seen an advantage of trying to filter by profession? When I would manually hand-pick notes (which is too time-consuming to do now, I often gave preferential treatment to a profession that I considered more in demand. My rationale went something like this: a computer programmer is going to have an easier time replacing his income than someone who derives their income from sales. I also often gravitated to loans made to individuals whose stated profession seemed to be either rather insulated or which I felt would be adversely impacted by a negative credit event (e.g. teachers, nurses, engineers, postal workers, attorneys, etc.). Of course, I have no real data to back this up, just my “gut”. I’d love to hear your thoughts.

Chris
Chris
May. 28, 2014 12:35 pm

I’m trying to figure out if the automated investing system basically gets first pick on stuff, beating out manual investors.

Analysis of MAY 28 10:00am upload: there are 1633 loans on platform => 1716 appears at about 10:01 after batch processing. 83 new loans are inserted. ~30% of the overall funding appears immediately (automated investing?). The highest single loan funding is 63% (assumption: auto invest caps at 60% initially?).

At 10:09 the first new loan is fully funded and de-listed from browse notes section (8k loan). The highest remaining new loan funding is at 81%.

1711 loans remain at 10:20. Overall funding is still only 29.6% on the new loans. Max remaining single loan funding is at 92.4%.

At 11:00 D-G rated notes has dropped from 625 originally to 614. Loan inventory is at 1680 (so 11 high yield notes and 25 A-C notes funded after 1 hour).

Conclusion: For the things actually listed, you have about 10 minutes after listing to get into all “prime” high interest notes (at least I assume they meet a lot of people’s criteria to get funded quickly). Almost half the new notes are funded in the first hour after listing, which is enough time for a diligent “manual” investor to run a search and take action.

Automated investing doesn’t preclude manual investors, at least for the listed notes. However, if anyone using automated investing gets a note chunk immediately following a batch and the loan is fully funded immediately, then it means you ARE getting first pick on notes with automated investing. It’s subtle but Lendingclub has stated that first pick goes to those with the highest % of cash in their account (“Automated Investing prioritizes accounts with more available cash as a percent of the overall account size and places orders for those accounts first”).

The trading account may be a better way to put your money to work however. There are over 2000 notes with a yield to maturity >= 20% and premium = 25 (potentially going into grace). If you account for duplicate listings of the same note, then you have a couple 100 notes with a high yield to pick from, more if you include the newly issued high yield notes.

There is definitely a loan shortage though for larger investors so cherry-picking C-G notes even will leave you with a lot of cash not invested. If you lower your YTM to 15% and premium still max 5%, you find about 5000 listings. I limit premium because too high a premium means the default risk is much higher than what is normal for that yield (so actual yield is less than normal).

Chris
Chris
Jul. 3, 2014 7:27 pm

I wonder if someone could run an analysis, as the loans will pop up somewhere in the data eventually even though they are not in the “browse notes” list anymore. Would like to know if loans are disappearing before I can even see them; what I observed was at least all loans listed within a few seconds did not fund 100% for at least some minutes (and it was slow for over 90% of the loans after about 60% funding via PRIME automation?) so manual investing is possible. If there are loans disappearing immediately, then they are 100% from the API services and there is no way to get it “within seconds” as it is gone in a fraction of a second. I have no way to determine that however and I don’t know where to find the fully funded “new” notes.

Shane
Shane
Aug. 29, 2014 3:52 pm

That debate between Bruiser and Dan…. I think 36 mos vs 60 mos comes down to one thing: If you think interest rates are going up, you’d be better off in 36 mos notes, if you think they’re going down, then 60mos notes will be better.

No matter what, if your money is fully utilized (if you reinvest right away), you are not going to earn more per year than your APY. You earn less APY on 36 year notes because you’re taking less risk and getting repaid faster. But it’s APY that rules the day. Yes, with a shorter loan, you get your principal back quicker. What then? You reinvest!

If your models are indicating you will make more funding many short term loans for the reasons you state, i can only suggest that your models are not correct or you’re not looking far enough to see total ROI.

Frank
Frank
Oct. 5, 2014 8:50 am

On the repeat borrowers filter… Have you considered that this is an artifact of prepayment/refinancing? P2P lending sites push borrowers to refinance when interest rates drop because it boosts their origination fees and pulls a portion of their commission forward. If so, these borrowers are actually more risky. You have to look at these laddered notes as one continuous loan. Though less likely to default on any single note, they could be more likely to default eventually. Further, you’re more subject to call/interest rate/reinvestment risk.

Dustin
Dustin
Dec. 10, 2014 1:19 pm

Hi Peter,

Thank you for the work you do. One question, where do I find the “Payments on previous loans >= 18” Prosper criteria?

I see “Previous Prosper Loans” and “Total payments billed” but nothing that fits exactly.

TIA!

Dustin

Dustin
Dustin
Dec. 10, 2014 1:24 pm

Sorry one more:

I do not see the “Number of late payments <= 1" criteria either.

Just "31+ days late payments billed:" and "<31 days late payments billed:" which only allow a percentage input.

Thanks agan!

MW
MW
Dec. 20, 2014 3:04 pm

Hi Peter-

Im new to this world of investing and was curious what reading/resources you would suggest to speed up my learning curve. (other than your blog of course)

Thanks in advance for your input!

Happy Holidays~

Dr Welch
Dr Welch
Jan. 5, 2015 11:47 pm

Peter I always have a question so on your super simple filter for prosper you have the following:

Loan Grade: B, C, D, E, HR
Inquiries = 0
Open Credit Lines >= 10

so open credit lines you want over 10 so does that mean that you enter 10-99 (the below is the exact set up from prospers page…

Additional Criteria
Inquiries in last 6m: ____to____ inquiries
Open credit lines: ____to____ credit lines

THX

Dr Welch
Dr Welch
Jan. 7, 2015 12:14 am
Reply to  Peter Renton

Peter,

Thanks so much… I have been following you for a few years and find that you are by far the most knowledgeable on the subject. I was wondering if you were going to be participating in the LC IPO and what you thought about it. I think I am going to participate but I know you are mainly out of stocks at this point.

Dr. J

Dr Welch
Dr Welch
Jan. 6, 2015 12:13 am

Peter,

When I attach the super simple to my Lending Club account… it is asking me for an allocation to each grade C, D, E, F, G

(the pop up)

Please make sure your Target Allocation is a number between 0 and 100.

how do you have those allocated?

Dr Welch
Dr Welch
Jan. 7, 2015 12:12 am
Reply to  Dr Welch

Peter thank you so much for the info

Dr Welch
Dr Welch
Jan. 10, 2015 1:33 am

Peter,

So I am starting to get a higher amount of notes (just crossed the 1000 mark). I am a serial investor and basically am trying to set P2P as auto pilot where I can check on it maybe once per month. With that being said I use your “super simple” Prosper and Lending Academy Accounts using their automated investing tools. I see that you use Bluevestment and Nicklesteamroller for their auto investing…. can you please explain to me why one would want to do this…. what are the advantages ect…. over using their built in tools.

Dr. J

David
David
Feb. 8, 2015 12:18 pm
Reply to  Peter Renton

Hello Peter.

I am extremely new to all this (as a matter of fact am waiting for a $2500 deposit to LC to show up and the initial deposit/withdrawl from Prosper to happen for the same amount), so excuse the simple (-minded) question. First off, thanks a lot for all the great information and experience you are sharing. It’s invaluable.

Is there a primer available anywhere for using p2p-pick.com? I have registered/subscribed on the p2p-pick site, have a Blue Vestment account set up but am missing something about how all this works together or these resources integrate. I really want to get off on the right foot, and your filters above are extremely helpful and perhaps all I need, but I would sure like to know how to use some of these other tools that are available.

Again, please excuse the simple question…

Thanks!