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:
- Do it manually – login on a regular basis and browse the available loans to make your investment.
- Automated platform tools – both Lending Club and Prosper allow investors to setup automated investing.
- 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)
- High Income
Prosper Rating: AA, A, B, C, D
Income Range: $75,000 – $99,999, $100,000+
Inquiries = 0
- 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.
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.
Hi Katy,
Thanks for sharing. You echo the experience of many investors, including myself, who start off conservative and more to higher risk loans when they get more comfortable. That worked until 2015 and now, as you say, we need to wait for those loans to work their way through the system.
What do you think the of the new Lending Club: Offering Hardship Plans for Borrowers and Protecting Returns for Investors
Hi Homero,
I am in favor of this move. I would rather receive something when a borrower endures a hardship than having the loan default. Time will tell if these loans end up returning to a current status or end up defaulting. If it is the latter then I think LC will experience pushback from investors.
Interesting. How does it work?
Hi Grant,
On May 4 Lending Club will begin offering hardship plans for borrowers. This is where they will switch to making interest only payments on their loan for a short time until they get their finances back on track. It has been running in beta for a while and they will be rolling it out to their borrower base in a few weeks. Here are the details from a Lending Club email:
At Lending Club, we are committed to improving experiences for both borrowers and investors. We’re excited to announce that after a beta test, we will begin offering hardship plans to borrowers effective May 4, 2017. Hardship plans allow borrowers to temporarily make interest-only payments to accommodate an unexpected life event. As part of this change we are also making additional data fields related to these plans available for investors.
Lending Club continuously looks to put lending industry best practices to work. Hardship plans are commonly offered to borrowers in the lending industry because they allow borrowers time to adjust to a life event (like a medical emergency, temporary job loss, unexpected car or home repairs, death in the family, or other events). Hardship plans are in accordance with commercially reasonable efforts to service and collect on loans, as well as with our prospectus, which provides us flexibility to work with a borrower to structure a new payment plan if needed.
Our hardship plan program specifically targets borrowers who are more likely to return to repaying their loan. Under the plan, borrowers are allowed to temporarily make interest-only payments for a period of 3 months to accommodate an unexpected life event. After 3 months, regular payment terms and obligations resume. Only borrowers who fulfill specific characteristics (such as a demonstrated history of repayment) and who claim a hardship will be offered plans. Importantly, borrowers’ loans must be either current or between 1 and 30 days past due to qualify for a hardship plan.
We believe the hardship program will work to protect investor returns as borrowers whose loans may otherwise progress to charge-off status have the opportunity to make interim payments and some portion may revert to current status.
Finally, we are adding 15 new data attributes of borrowers who utilize hardship plans to investor reports and the API. The fields will only apply for hardship plans offered as of May 4, 2017 and going forward. You can find more information on these new data fields here.
Offering hardship plans is both consistent with our values – doing the right thing by borrowers while they’re getting back on their feet – and helps to protect investor returns. We will potentially look to expand to different types of hardship plans in the future as we gain further insight into borrower behavior and continue to listen to customer feedback.
Please feel free to reach out with any questions – we welcome your feedback.
Best regards,
The Lending Club Team
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
Hi Grant,
Prosper have been having some issues with their website lately. It appears to be fixed for now. As for their viability as a company I am still very comfortable investing there, their loans have performed better than Lending Club over the past two years.
I am going to be interviewing the new Prosper CEO on my podcast shortly and that will help provide a clearer picture of where they are at today. Stay tuned.
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.
Rawraw, I do think the platforms incentives are aligned with investors. We saw what happened in the institutional market when Lending Club and Prosper defaults spiked in 2015 – they exited in droves and the platforms struggled to fill loans. Across the board, the loans have to perform or the platforms will go out of business.
And I am comfortable with my minimum requirements – even just filtering on income and inquiries removes the vast majority of loans from consideration.
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
Hi Brenda, Prosper has made a few updates recently and I have noticed problems with their website as well. That is why I like to use the automated tools either from Prosper or NSR Invest so I don’t have to deal with the website.
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.
Hi John, I would be happy to delve into this in more detail but I am unclear exactly what you are asking. Can you please be more specific?
Hi Peter, thanks for the reply. I am expecting something in general apart form your own strategy.
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, Nevada was the only state that consistently underperformed the average every year on my filters. Other states like CA and FL have improved significantly since the financial crisis.
As for amounts my rule of thumb is to stick with $25 notes until you have an account of at least $10,000. I wouldn’t go to $100 notes until the account is > $40,000.
Thanks, Peter!
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?
Hi Cedric,
While I can’t formally provide investment advice I can tell you what I would do if I was starting out. I like my Lending Club Main – Super Simple High Income Low Risk as a starting point. It provides a nice diversification as well as lower risk way of getting started.
I think Prosper is still a good second option and I continue to invest there myself but as a new investor I would start with Lending Club and go from there.
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…..
Hi Grant,
Yes, I interviewed the new Prosper CEO on my podcast just a few weeks ago. You can listen or read the transcript here:
https://www.lendacademy.com/podcast-98-david-kimball-prosper/
We did talk about the retail investor and they still sound like they value investors like us. But I agree not much has been done for us in years.
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 !!
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.
Thanks for sharing Jerry – those are some solid returns.
Thanks for your great information. How can you tell if the borrower has previously borrowed from Prosper in the past?
Prosper no longer show you this on the Listing screen but you can set Additional Filters and search for Total Loans >= 1 and this will show you those borrowers who have previously borrowed at Prosper.
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.
Most of the notes for sale on the trading platform are not because of some issue with the loan. Most are there because the note holder needs the cash and wants to sell. That is why many people focus on the trading platform, bargains can be had when people decide they want out.
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.
Both Prosper and Lending Club have had higher losses lately due to some overly aggressive underwriting in the last half of 2015 and the first half of 2016. Many of the these vintages are at peak defaults right now and like you, I have also experienced some negative months at both companies. I share my thoughts when I do my quarterly returns:
https://www.lendacademy.com/my-returns-at-lending-club-and-prosper/
Thank you for answering my question.
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,
Yes, there is a process to transfer an existing IRA to Lending Club. Here is a help page with more info:
https://help.lendingclub.com/hc/en-us/articles/216108127-What-is-the-process-to-do-an-IRA-Transfer-
First you need to open a Lending Club IRA which you can do here:
https://www.lendacademy.com/LendingClubInvest
Thank you Peter,
And your saying I can use those funds after transfered and use them to purchase notes?
That is correct. You have to liquidate your Fidelity IRA and then transfer that exact amount of cash into Lending Club. You will then be able to purchase notes with that cash.
Great, Thank you sir, I appreciate all of your help.