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Ten Years of Investing in Marketplace Lending

I look back at my ten years of involvement in marketplace lending and share the major changes I have seen in the last decade

July 3, 2019 By Peter Renton 9 Comments

Views: 1,787

This month marks ten years since I made my first investment in what was then called peer to peer lending. In July, 2009 I transferred $500 in to LendingClub to give it a try. Little did I know that first small investment would end up changing my life.

I had first read about peer to peer lending back in 2008 and I was immediately intrigued. I discovered Prosper but when I tried to open an account there they were in a quiet period. So I went looking for an alternative platform and found LendingClub. Within a few months I added $10,000 to that initial $500 investment. Then, I became so enamored with the whole idea of peer to peer lending that I was soon rolling over 401(k) accounts for my wife and I, as well as telling all my friends about it.

It was just over a year later that I decided to start blogging about this industry. Back then no one was writing about it and I really believed the industry had so much potential. So, I started the blog that would become Lend Academy back in November, 2010. The more I learned about peer to peer lending the more convinced I became that it had tremendous potential.

In 2013 as the industry was getting ready to take off I started LendIt, along with my fellow co-founders. It was the first ever conference focused on online lending and the one day event sold out. Then came the go-go years of 2014 and 2015 where dozens of new platforms got under way and venture capital was flowing into the space. The industry had its biggest setback in 2016 with the LendingClub crisis but the strong platforms endured and industry moved to focus on profitability.

Now, as I look back on the last 10 years I see so much has changed. The industry is now known as marketplace lending (thanks to Charles Moldow of Foundation Capital) and it has driven a resurgence in consumer lending and small business lending.

Ten Ways Marketplace Lending Has Changed Since 2009

1. Scale [Read more…]

Filed Under: Peer to Peer Lending Tagged With: bank partnerships, fintech, institutional investing, Lending Club, Prosper, Returns, securitization

Views: 1,787

New LendingClub Account Performance – Q1 2019

We share the fourth update on a LendingClub account which was opened in 2018.

May 14, 2019 By Ryan Lichtenwald 4 Comments

Views: 1,813

In April 2018, LendingClub provided us with $5,000 to open a brand new account. Since then we have been chronicling the status of the account on a quarterly basis. Below are links to the full series of blog posts in chronological order:

  • How to Open Up a New LendingClub Account in 2018
  • Setting Up LendingClub’s Automated Investing Tool
  • New LendingClub Account Performance – Q2 2018
  • New LendingClub Account Performance – Q3 2018
  • New LendingClub Account Performance – Q4 2018

No More E-Grade Loans at LendingClub

Before we get into the performance of the account I’d like to discuss a few changes that LendingClub has made since our last update. Probably the most significant news was that as of May 7, 2019 LendingClub stopped offering new grade E notes except those corresponding to certain previously qualified or approved loans. Beginning July 1, 2019 no grade E Notes will be available to investors. Long time readers will remember the days when E grade loans produced high returns, often over 10% annualized for investors. This changed in recent years as defaults increased, particularly around the higher grade loans. Most investors saw their returns begin to fall in mid-2016 or even before that.

Last year, LendingClub decided to stop offering F & G grade loans to investors so it is no surprise that they continue to focus on more prime consumers, especially when you consider that banks make up a majority of their investor base. LendingClub also included this statement in a recent blog post:

We view this change as a natural evolution of our dynamic platform that seeks to match consumer demand with investor risk appetite. Grade E loans have historically accounted for a small percentage of volume on the platform.

What’s also interesting is that last week during LendingClub’s Q1 2019 earnings call which we covered here, CEO Scott Sanborn discussed the possibility of partnering with institutional investors on expanding the credit box to riskier borrowers. The way this might work is that LendingClub would host an alternative credit model instead of their own, for instance a model targeting thin file borrowers. Then investors could invest in loans originated by this third party with LendingClub only facilitating these transactions. But that is probably some time away from happening.

In LendingClub’s Q1 2019 platform update published to their blog, they discussed that lenders as a group continue to tighten credit. They also shared news about new tools they are testing such as the ability to detect borrowers who are more likely to default earlier in the loan cycle. LendingClub made no interest rate changes in the quarter, but are continuing to selectively tighten certain higher risk segments, while simultaneously growing lower risk segments.

Update on New LendingClub Account

Digging into the account’s performance it is worth reiterating that investors don’t have a clear picture of returns until the account is seasoned, which is about 18 months weighted average age. This is demonstrated in the image below as stated returns continue to decrease with age and stabilize around the 18 month mark.

The capital in my account had not been fully deployed at the end of the first quarter of 2018. In our next quarterly report we will share returns using XIRR which will start to give us an idea of where returns will fall.

As of May 14, 2019

When I first created this account I used LendingClub’s Automated Investing which suggested the allocation below. You’ll note the small allocation to E grade loans which will eventually fall to 0% as loans start getting paid off.

As of May 14, 2019

Conclusion

It will be interesting to see where the returns on this account end up falling. With little changes to interest rates recently, LendingClub is still an attractive investment in my opinion with returns around 6-7%. For comparison, interest rates on 5 year CDs are now around 3%. One thing that surely attracted investors who found LendingClub before 2015 was the potential to earn 10%. With the removal of E, F and G grade loans this is something that would be nearly impossible to achieve today. Clearly LendingClub has made it clear the types of borrowers they want to focus on.

Filed Under: Peer to Peer Lending Tagged With: account, lendingclub, Performance, Returns

Views: 1,813

New LendingClub Account Performance – Q3 2018

We share the second update on a LendingClub account which was opened in 2018.

November 1, 2018 By Ryan Lichtenwald Leave a Comment

Views: 930

In April 2018, LendingClub provided us with $5,000 to open a brand new account. Since then we have been chronicling the status of the account on a quarterly basis. Below are links to the full series of blog posts in chronological order:

  • How to Open Up a New LendingClub Account in 2018
  • Setting Up LendingClub’s Automated Investing Tool
  • New LendingClub Account Performance – Q2 2018

Last quarter we discussed that any reported returns from screenshots of the account should be taken with a grain of salt. Once this account becomes seasoned around the 18 month mark we will begin to provide returns using the XIRR calculation.

Note that the account currently has a weighted average age of 6.5 months. The below chart depicts a gradual decrease of adjusted annualized return until returns finally settle. With this account I took a balanced allocation to loan grades which has resulted in a weighted average interest rate of 12.76%. All notes are purchased through LendingClub’s automated investment feature. Returns are likely to fall in the middle of the road as you can see other investors have experienced as evidenced by the red dots below.

[Read more…]

Filed Under: Peer to Peer Lending Tagged With: account, lendingclub, Performance, Returns

Views: 930

Lending Club Announces Launch of Next Generation Credit Model

Lending Club outlines what's new in their fifth generation credit model in an email to investors.

September 11, 2017 By Ryan Lichtenwald 6 Comments

Views: 315

Today, Lending Club announced a new credit model in an email to investors. According to the email, this is the most advanced and predictive credit model ever used on the Lending Club platform. This is Lending Club’s fifth generation model that began to go in effect on September 8, 2017 and will roll out to all borrowers in the coming days. While Lending Club historically has made improvements to their credit models, the new model caught our eye for a few reasons.

The company outlines that the model further leverages machine learning along with the 10 years of data on 1.5 million borrowers they have accumulated. The new model is 24% better at differentiating the likelihood of a borrower charging off compared to the fourth generation model. It also includes more data points, and uses new custom attributes that Lending Club states are predictive in assessing risk. Lending Club provided the two below examples for these custom attributes:

  • Instead of using aggregates, the new model uses very granular views of credit data which discern individual borrower actions vs. a simple aggregate (e.g. a borrower’s credit card balance per credit card vs. his total credit card balance).
  • The model makes more extensive use of trended data, which provides insight into a borrower’s credit behavior over time rather than a snapshot into a borrower’s credit behavior at a point in time. Dozens of new custom variables like these improve the model’s predictive power and are proprietary to Lending Club.

It also appears that Lending Club is continuing to tighten their credit criteria for higher risk borrowers with a shift to higher quality loans:

We expect loan volume to shift toward higher quality grades (grades A and B) because some borrowers will qualify for lower interest rates under the new model, and other higher-risk borrowers, who may have received an offer previously, will be screened out.

Lending Club has made a lot of changes to both credit criteria and interest rates over the last couple of years. We shared the trend of increasing interest rates in a blog post earlier this year. Following poor loan performance that started late 2015, the company began increasing interest rates. They also publicly announced that they identified pockets of loans that were underperforming last year. Lending Club is now tightening credit even more with the reduction of higher-risk borrowers.

LendingClub also noted that they are seeing lower delinquency rates across grades and terms in the existing loan portfolio than in the second and third quarters of 2016. This is good news for investors.

In a blog post, Lending Club provided updated projected returns based on the changes. Returns range from 4-9% and expected charge-offs platform wide have decreased from 6.2% to 6.0%.

Conclusion

One of the main advantages that Lending Club has over their competitors is the amount of data that their 10 year history provides. It appears they have taken a closer look at their underwriting models which now is leveraging machine learning even more. We’ll have to wait and see whether these recent changes provide a meaningful increase in returns for investors. It will also be interesting to see how the platform mix changes and how originations are affected in the coming quarters.

Filed Under: Peer to Peer Lending Tagged With: Credit Model, interest rates, Lending Club, Machine Learning, Returns

Views: 315

P2P Lending Posts Positive Returns Compared to Many Asset Classes

The one-year returns for most of the major asset classes have been negative, but not p2p lending.

September 16, 2015 By Ryan Lichtenwald 10 Comments

Views: 40

Interest rates, the stock market and the effects of China on our economy have been all over the headlines as of late. August in particular was a bad month for the stock market, but what about other asset classes? Just last week we happened upon a tweet by Cullen Roche stating:

This is kind of amazing. Every single major asset class has negative 1 year returns.

It was accompanied by the below image, which shows tickers for all of the major asset classes including stocks, bonds, REITs, commodities and US TIPS. The returns of each of these for the year ending September 11th was negative.

Comparing-P2PLending-AssetClasses

[Read more…]

Filed Under: Peer to Peer Lending Tagged With: asset classes, Lending Club, Prosper, Returns, stock market

Views: 40

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ABOUT LENDIT FINTECH NEWS

LendIt Fintech News, Powered by Lend Academy, has been bringing you all the news and information about fintech and online lending since 2010 when it was founded by Peter Renton. We not only have the industry’s most active news site, but also the largest investor forum and the first and most popular podcast.

We are a team of fintech enthusiasts who have been covering the industry for many years. With a deep knowledge of online lending, digital banking, blockchain, artificial intelligence and more our team covers the daily news and writes in-depth editorials.

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