Updated: Super Simple High Return Filter Strategies For Lending Club And Prosper

Even the average returns from p2p investing are appealing to many investors, especially in a low interest rate environment. However, one of the great things about investing in peer to peer lending is the availability of historical data. If you’re a self directed investor there are a few simple filters that could potentially outperform average returns over time. In this post, we’ll outline simple filters for both Lending Club and Prosper.

We are backtesting data on each platform using the beta version of NSR Platform’s new code base (version 3.0), which will officially launch in the first quarter of 2016. These filters are an update from our 2012 post and take into consideration recent loan performance. It’s important to note that Lending Club and Prosper adjusts interest rates over time so while these strategies have performed well in the past, this may not be the case in the future.

Simple Lending Club Filter Strategy

To start, take a look at the below chart which outlines the average returns from Lending Club.

Lending Club Average Returns
This chart includes all loans that were issued 18 months or more before the last day of the most recently completed quarter (Q3 2015).

Since we are targeting higher returns, we’ll focus on the higher loan grades: C, D, E. Grades F and G have higher returns, though the risk trade-off is too high for this exercise.

  • Grade: C,D,E
  • Inquiries in the last 6 months = 0
  • Loan Purpose: Debt Consolidation, Credit Card Refinance
  • Optional: Home Ownership: Mortgage or Own
  • Optional: Annual Income over $45,000

According to the NSR back-testing tool, loans that were originated before January 1, 2014 generated an ROI of 10.00% using this strategy. Over the same period, grades C, D and E with no additional filters generated an ROI of 8.08%. Looking at data from 2014 and 2015 these simple filters generate an ROI of 10.20%. This compares to an ROI of 8.65% without additional filters. This shows that this strategy continues to provide alpha even in recent years. Note that returns shown for 2014 and 2015 are likely overstated since these loans have not yet seasoned.

Lending Club Filters
Lending Club Filters
Lending Club Filter Strategy
Lending Club Filter Results

Simple Prosper Filter Strategy

Below are Prosper’s average returns by loan grade. Keep in mind that their loan grades appear similar to Lending Club’s, but the interest rates differ.

Prosper_Average_Returns
Historical performance of originations from July 15, 2009 through May 31, 2012.

For our simple filters with Prosper, we’ll focus on grades C through HR, which include loans that carry the highest interest rate — and the highest risk — with Prosper.

  • Prosper Rating: C,D,E,HR
  • Inquiries in the last 6 months = 0
  • Listing Category: Debt Consolidation, Other, Home Improvement
  • Optional: Is Homeowner = Yes
  • Optional: Income Range > $25,000

According to the NSR back-testing tool, loans that were originated before January 1, 2014 generated an ROI of 11.92% using this strategy. These results are on around 6,000 loans due to the date restriction, but Prosper has had significantly more volume in 2014 and 2015. The total count of loans now meeting this criteria since 2009 is over 23,000 loans. Over the same period, grades C, D and E with no additional filters generated an ROI of 10.48%. Looking at data for 2014 and 2015, these simple filters generated an ROI of 9.88%. Without additional filters, the ROI is 8.15%. Again, we see that these filter criteria continue to produce alpha.

Prosper Filters
Prosper Filters
Prosper Filter Strategy
Prosper Filter Results

Conclusion

While investors can continue to add filters to incrementally increase returns, these simple filters provide a base with substantial loan volume. Investors should ensure that with whichever filters they select that their cash is always invested, as cash drag will have a negative effect on returns. NSR Invest offers limited free backtesting using their online tools at NSR Platform. If you sign up as a Self-Directed user, you get unlimited back-testing. NSR Invest also offers proprietary credit algorithms through a “Fully Managed” service for 0.6% per year.

Full Disclosure: NSR Invest is majority owned by Cardinal Rose Group LLC, a company that also owns Lend Academy and LendIt.

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Ray
Ray
Jan. 28, 2016 7:23 am

Are we looking at 3 year notes, 5 year notes, or a combination of both?

Ryan Lichtenwald
Ryan Lichtenwald
Jan. 28, 2016 8:43 am
Reply to  Ray

These filter strategies include both 36 and 60 month notes.

Ray
Ray
Jan. 29, 2016 8:10 am

Thanks Ryan!

Alex Mook
Alex Mook
Feb. 7, 2016 9:25 am

Hi Ryan,

Great article. I am interested in the “Simple Lending Club Filter Strategy” you mention. As far as other criteria, what do you do with derogatories, FICO score,etc? Do you keep them at the defaults?

Also, verified income seems like a good criteria, but seems to greatly limit the amount of notes available to the lender.

thanks,
Alex

Ryan Lichtenwald
Ryan Lichtenwald
Feb. 8, 2016 8:55 am
Reply to  Alex Mook

Hi Alex,

All other filter criteria not mentioned are left at their defaults. The best thing to do is to backtest each filter you are considering on NSR to see how much of an impact each filter makes. I’ve found the ones above have typically increased returns while still keeping volume quite high. You are right that some filter criteria will greatly reduce the loan volume, so there is certainly a balance.

Rob L
Rob L
Feb. 1, 2016 3:13 pm

At least for LC you don’t need to have access to the new NSR version 3.0 code base to test these filters yourself. The back testing feature of the current web site yields identical results.

Ryan Lichtenwald
Ryan Lichtenwald
Feb. 1, 2016 3:18 pm
Reply to  Rob L

Absolutely, we decided to include screenshots from the beta since screenshots from the current version would be out of date shortly once the new version rolls out to the public. You can accomplish the same filtering above on the current version of NSR, the user experience is just a little different.

Lars M
Lars M
Mar. 28, 2016 11:38 am

I have had the Simple Prosper Filter on for 1 week now and have purchased Zero Loans! Is this normal for it to take that long? Am I doing something wrong?

Ryan Lichtenwald
Ryan Lichtenwald
Mar. 28, 2016 1:48 pm
Reply to  Lars M

Hi Lars, what are you using to automate your investments? If it is a third party you will first want to make sure that your account is active and setup correctly. If that’s not the issue it could be related to loan volume and you may need to temporarily loosen your criteria to stay invested.

Lars M
Lars M
Mar. 28, 2016 2:00 pm

No I am directly on Prosper with this criteria saved as a Quick Invest. Thanks!

Ryan Lichtenwald
Ryan Lichtenwald
Mar. 28, 2016 2:09 pm
Reply to  Lars M

You may find that you have a better chance of purchasing loans with a third party as opposed to Automated Quick Invest with Prosper.

Dave Weidner
Dave Weidner
May. 3, 2016 3:03 pm

Hi Ryan,

Prosper has their own proprietary rating called Estimated Return, which is a function of Estimated Yield and Estimated Loss. The site says that the “Estimated Loss Rate is the estimated principal loss on charge-offs based on the historical performance of Prosper loans for borrowers with similar characteristics.”

I have had my best performance using just that single criteria (Estimated Return), and ignoring all other filters. I have it set at a minimum of 9%, and for the past year, my returns have been about 14%, and I have had an ample number of matches to keep up with my cash available. I invest $25 into each loan, and I have several hundred loans.

Do you see a downside to this strategy?

Thanks,

Dave

Ryan Lichtenwald
Ryan Lichtenwald
May. 4, 2016 7:20 am
Reply to  Dave Weidner

Since Prosper has the most data on each borrower, they are in the best position to price risk – so generally speaking this should be a good measure of return. However, the estimated return assumes that Prosper’s underwriting is without flaw and also scales risk at a greater rate than return once you get into the higher return areas. For example, if you use a 0.09 Estimated Return, there is a 12% loss rate. So long as you’re comfortable with this level of risk that’s fine. If the economy sees a downturn, it should be expected that this loss rate becomes 2-4X higher. You may find it beneficial to see a breakdown of the returns with estimated return along with several other filters using NSR to see how it has played out over time.

fritz
Dec. 1, 2016 3:53 pm

Is there another place to run analytics on Prosper’s data, now that NSR requires you to have a paid account with them in order to properly use their analytics engine?

Also, will you be publishing an updated strategy, considering that this posting is almost a year old, and it seems things have been changing with Prosper and LC’s returns?

Ryan Lichtenwald
Ryan Lichtenwald
Dec. 1, 2016 4:15 pm
Reply to  fritz

I am not aware of any free analytical tools. We will do an update to this post next year once we have Lending Club and Prosper Q4 data. I imagine a lot of the criteria will be similar, but we’ll have a closer look at how some of the recent vintages are trending.

Martin
Martin
Mar. 27, 2017 8:45 am

Hi Ryan,

Do you have any update to Lending Club filters since December 2016?

Ryan Lichtenwald
Ryan Lichtenwald
Mar. 28, 2017 7:10 am
Reply to  Martin

Hi Martin, this week Peter will be doing his post on how he is investing in Prosper and Lending Club which will include some of the filters he uses. We may revisit this post with the most recent data from each company.

Dan
Dan
May. 7, 2017 12:42 pm

why can’t I save my investment filters? I can choose them and I can apply them. However, no save button appears. No matter what I try

Ryan
Ryan
May. 14, 2019 8:02 am

Where do you see a Homeowner filter? I see a filter for Mortgage, but that’s different.