How I am Investing in Lending Club and Prosper in 2017

In the early days of Lend Academy I regularly wrote about my investment strategy for Lending Club and Prosper. I discussed the wonders of filtering and how analysis of historical trends can really boost returns. There is a popular saying, though, when it comes to investing: “past performance is no guarantee of future returns”. So it goes with marketplace lending.

Ryan covered this in some depth in this post a few months back. A few years ago E-grade loans at Lending Club were the best performing investment out of all their loan grades. In 2015 they were the worst performers. If you look at the analysis that Ryan did you will notice that B-grade loans from 2015 are the best performing segment.

So, if you were like me and you saw that D, E and F-grade loans were the best performing loans historically you focused your investments on those grades. But a person with a portfolio of B-grade loans would have likely outperformed the D, E and F-grade investments in 2015 and 2016. Now, we have had many interest rate increases since then so again the future may well be different from the past, we just don’t know. I guess my point is it pays to be well diversified.

The other point to note here is that, despite the challenges from 2015, Lending Club and Prosper are generally getting better at underwriting. What I mean by that is that it is more difficult today to find pockets of miss-pricing than it was a few years back. Whereas you could easily see a 4% or 5% lift in returns by applying some simple filters today the lift is more like 0.5% or 1%. And of course, there are no guarantees there will be any lift at all.

Regardless, I think it is still useful to apply some basic filters, particularly if you have multiple accounts, and so I will share below my strategies that I am using across my myriad of investment accounts at Lending Club and Prosper.

How to Actually Invest

Before I get to my strategies I want to share the different options for investors to actually place investments:

  1. Do it manually – login on a regular basis and browse the available loans to make your investment.
  2. Automated platform tools – both Lending Club and Prosper allow investors to setup automated investing.
  3. Third party tools – NSR Invest and LendingRobot both offer tools to allow automated investing. Investors can choose a predefined strategy or deploy a custom filtering strategy.

Most of my Lending Club accounts I invest through NSR although I do manage one through LendingRobot and for another I use Lending Club’s automated investing tool. For Prosper I invest through NSR using my own strategies as well as one of NSR’s fully managed options and I also use Prosper’s automated tools.

A couple more thoughts before I get into the details of my strategies. First, as I said above I think it is important to have full diversification among long grades and you can do this between accounts or if you only have one account you can do it by applying multiple filters to one account. Of course, you can also just choose all loan grades for any given filter.

Second, you should pay attention to the impact of taxation. If investing via a taxable account you should keep in mind that you can only deduct $3,000 in total losses every year (losses can carry forward to future years) but you will pay taxes on all your interest earned. For this reason, I keep the lower risk investments in my taxable accounts to minimize my losses.

Lending Club Main – Super Simple High Income Low Risk

Loan Grades: A, B, C
Income >= $7,500 per month
Inquiries = 0 (no credit inquiries in the past six months)

Lending Club Roth IRA – Joint Applications

Loan Grades: B, C, D, E
Joint Application (means the loan has a co-borrower)

Lending Club Traditional IRA – Moderate Income

Loan Grades: C, D, E, F, G
Income >= 3,000 and < $7,500 per month
Inquiries = 0
Debt to Income ratio <= 20
Home Ownership: Mortgage

Lending Club Roth IRA 2 – Super Simple High Income High Risk

Loan Grades: D, E, F, G
Income >= $7,500 per month
Inquiries = 0

Lending Club Traditional IRA 2 – 1-2 Inquiries

Loan Grades: B, C, D, E
Income >= $7,500 per month
Inquires = 1 or 2
Loan Purpose = Credit-card or Debt-consolidation
Home Ownership: Mortgage
Public Records = 0
States: All excluding Nevada
Debt to Income Ratio< 20

Prosper Main (2 Filters)

  1. High Income

Prosper Rating: AA, A, B, C, D
Income Range: $75,000 – $99,999, $100,000+
Inquiries = 0

  1. Previous Borrowers

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

Prosper 2

Prosper Rating: E, HR
Income Range: $100,000+
Inquiries = 0

Prosper Roth IRA

Managed by NSR Invest – Balanced Strategy (proprietary credit model)

More Thoughts on Filtering

I realize most people are not like me – I have eight accounts between the two platforms. I like to make my filters mutually exclusive between accounts, for the most part, so I am not investing in the same loan in multiple accounts.

As I said above we simply don’t know which loan grades are going to perform best in coming years. If and when we have another recession it is quite possible that A-grade loans will be the best performers in that situation. Or the economy could keep chugging along nicely and we may find that E-grade loans are the best performers in today’s vintages. Which is why I like to invest across all loan grades.

You can see that in most of my accounts I favor high income and zero credit inquiries. This is because both of those filters have consistently given a slight increase in returns for many years. If you want to explore filtering for yourself you should head on over to NSR Platform. There, you can run inquiries against the full history of Lending Club and Prosper data and see for yourself what has worked in the past.

Let me know what you think. I am happy to hear from other investors who have different strategies and also happy to answer any questions investors have.

Full disclosure: NSR Invest and NSR Platform are sister properties of Lend Academy.

Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech.

LendIt Fintech conducts three conferences a year for the leading fintech markets of the USA, Europe, and Latin America. LendIt also provides cutting-edge content all year long via audio, video, and written channels.

Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.

Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.

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Katy Vaux
Katy Vaux
Apr. 5, 2017 3:43 pm

I started off my Lending Club account like a scared rabbit: 60/40 A&B grade notes. Sold my LC shares the day of the IPO just in case (netted $2500, beginner’s luck!) Two years in, I began adding C grade notes–and selling my A grades (for tiny profits) on the trading platform to buy C Grade notes up to 30% of my portfolio.

Then–6 months before the cascade of defaults began–I started with D’s & E’s. Wham!! After making 8.25% to 8.80% for 3 years, my return is down to 7.35%. When I noted that all the A grade notes (the ones that I didn’t sell on Folio because their FICO’s were lower) dutifully paid off in full, guess what I am buying again: A GRADE NOTES–in addition to maintaining 55% to 60% in B grade notes.

I manually invest with what I call “Dan” filters, based on comments by a man named Dan on a Lend Academy article. If the note is a little shy of “Dan,” and it still looks promising, it goes into my “Kate” portfolio (designed in part from Peter Renton’s filters.) Oddly enough, the less perfect “Kate” notes have outperformed the “Dan’s” both in greater early pay-offs and fewer defaults. (Equal percentages of total notes and equal relative percentages of the note grades–A, B, C, D, E; equal aging of notes.) Another surprise is that the notes I bought on Folio (generally higher risk grade–NO A’s, fewer B’s) have a lower default rate than the notes purchased on Lending Club’s platform. I’d make more of this except that the ratio of LC (1000) to Folio (300) blurs distinctions; also the Folio notes (purchased at 8-10 mo’s age) skip the early defaulters.

I’m staying conservative until the uptrend in the economy is clearer and until the excessive defaults I have waiting in the wings get through the system. 7.35% to 8.00% is enough return for a novice like me.

Homero Garza
Homero Garza
Apr. 5, 2017 6:05 pm

What do you think the of the new Lending Club: Offering Hardship Plans for Borrowers and Protecting Returns for Investors

Grant
Grant
Apr. 6, 2017 7:32 am

Interesting. How does it work?

Grant
Grant
Apr. 6, 2017 7:38 am

Follow up question…what is going on with Prosper’s website? It is has become increasingly difficult to navigate and now appears to force you to use the scroll down format for reviewing and selecting available notes….very cumbersome and slow. Too, just noticed today an unusual number of new loans, from March 3rd were already flagged as being in default…about 7 out of 10 new notes purchased on that date. I read in the Wall Street Journal that Prosper is having problems and laid off a large number of their staff. Is it time to begin stepping away from further investments in this company? Any thoughts…opinions? Thanks, Grant

rawraw
rawraw
Apr. 8, 2017 8:49 am

Seems like a risky proposition of diversifying across loans just because they exist. This is putting a lot of trust in the platforms who do not share your incentives. I personally think people should always have minimum acceptable credit metrics, regardless of grade or diversification.

Brenda Probasco
Brenda Probasco
Apr. 8, 2017 11:39 am

Prosper has made their investor website unusable in the past week. With almost 50K locked up I am searching for ways to get my money out fast.

Saved searches no longer work and I am forced to a beta site. Am considering legal action.

Not ready for primetime…will report to regulatory agencies in my state and at the federal level.

The service folks at the contact us number giving me the run-around all week on how things will be fixed on Friday…site is different on Saturday but still unusable.

I can’t be the only investor horrified enough to want OUT.

Brenda Probasco
609-647-2421

John Patrick
Apr. 14, 2017 6:19 am

Three kinds of investment strategies for investors is not enough in my point of view, please do your post with the more strategic plans on investment for the investors. Thanks for your current post, expecting more about this topic.

John Patrick
Apr. 19, 2017 6:16 am
Reply to  Peter Renton

Hi Peter, thanks for the reply. I am expecting something in general apart form your own strategy.

Randy
Randy
Apr. 18, 2017 10:07 pm

Hi Peter – I notice your list of states to avoid is now down to just Nevada. Has something changed to make you more optimistic about borrowers in other states?

Also, if I decide to filter more this year and this results in fewer available loans, would it make sense to loan larger amounts, say $100 instead of $25, or would this be exchanging one risk for another? Thanks.

Randy
Randy
Apr. 21, 2017 10:15 pm
Reply to  Peter Renton

Thanks, Peter!

Cedric Gerald
Cedric Gerald
Jun. 5, 2017 11:50 am

Hi..I’m New to p2p lending…reading all the comments above was very enlightening…what advice can anyone give a new investor like myself on the risk level and also grades , filters to keep my losses at a minimum….also at this point is it safe to invest with prosper considering recent problems with the company compared to lending club?

Grant
Grant
Jun. 11, 2017 12:47 pm

Hi Peter, by chance have you interviewed the new Prosper CEO? Interested to know what the message is from their new leadership. In particular, what might be in store for the retail investors who seem to have become the red haired step child.

Thanks…..

Omnicient One
Omnicient One
Jun. 28, 2017 8:44 pm

I am averaging 219% with p2p lending and that no typo either. Too bad I won’t work for anyone any bank or investment firm would love to hire me for sure. Keep digging and maybe one day you will figure out how to beat them at their own game that was intended to enslave the majority. Until them you will never know true freedom. Goodluck !!

Jerry
Jerry
Jul. 5, 2017 7:51 pm

So I’ve invested with prosper going on 2 years now. My strategy was focused on D-HR notes the first year with strict criteria, my annualized return was only 13.3%, once I switched to an even mix from B-HR, and only 5% in A notes I have a 17.3 annualized net return and a 16.9 % seasoned return. But it’s the search criteria that really matters. I took criteria from several different blogs and tweaked it to get what I have now. So the moral of the story is do your research and maybe start with a few hundred dollars to get your feet wet. Keep.up.the good work on the blog.

Jeffrey
Jeffrey
Aug. 16, 2017 6:24 pm

Thanks for your great information. How can you tell if the borrower has previously borrowed from Prosper in the past?

Jason
Jason
Aug. 17, 2017 6:42 am

I started several months ago with a traditional lending club account. Since then, I’ve come to the conclusion that the trading account with proper filters is the way to go and I can’t see anything that would draw me back to the traditional other than growing my account to the point where it’s too large to manually invest.

I do have one question regarding the trading platform. How is it that an average performing note will often have 20 and sometimes 30 listings for sale when there are no red flags signalling that note is in trouble? What are the sellers seeing that the buyer cannot? Seems sketchy.

Peter Opatz
Peter Opatz
Oct. 16, 2017 11:29 am

Hi, what’s your thoughts about Prosper now posting losses to some investors accounts? For the first time I lost money in September and defaults keep coming in.

Peter Opatz
Peter Opatz
Oct. 18, 2017 9:03 am

Thank you for answering my question.

John
John
Feb. 9, 2018 6:43 pm

Hi Peter,

Tell me, is it possible to sell one of my IRA’s from lets say Fidelity and use that cash to put into a Lending Club IRA, and then use that money to invest in more notes?

Thanks,

John
John
Feb. 10, 2018 3:55 pm
Reply to  Peter Renton

Thank you Peter,
And your saying I can use those funds after transfered and use them to purchase notes?

John
John
Feb. 10, 2018 4:12 pm
Reply to  Peter Renton

Great, Thank you sir, I appreciate all of your help.