Free Updates

Exclusive content to your inbox for FREE!

How I am Investing in Lending Club and Prosper in 2012

by Peter Renton on February 9, 2012

One of the things I love about p2p lending is the transparency. By this I mean that anyone can download the entire loan history of Lending Club and Prosper and analyze the data for themselves. I am trying to bring a level of transparency to my own operations on this blog by giving you an inside look at my investments.

Last month I provided a snapshot of all my p2p lending accounts and today I will continue along on that journey by revealing exactly how I am investing in Lending Club and Prosper today. I first detailed my investment criteria nine months ago in a post that described how I was investing with Lending Club and Prosper back then. I gave you two strategies each for both companies and today I am going to expand on that.

No More Conservative Lending Strategies

The biggest change in my investing in the last nine months is that I have ditched the conservative lending strategy at Lending Club. In my main Lending Club account I had been focusing on B- and C-grade loans for quite some time. But I decided that was simply leaving money on the table so late last year I switched course and decided to focus purely on loans grades of D and below at Lending Club on all my accounts (except for my Lending Club PRIME account).

Now, this created something of challenge. As I detailed in my last post I want to invest in multiple p2p lending accounts without investing in the same note twice. So, after spending way too much time on Lendstats exploring hundreds of combinations of selection criteria I came up with these sets of filters that provide no duplication of notes. I have provided a link below each filter to the Lendstats page that shows the returns one might expect when running these filters. If you don’t know what some of these fields mean you should learn more about credit reports (just google “understand credit report” and you will find plenty of articles).

Lending Club Filter 1 – High Income

Loan Grade: D, E, F, G
Inquiries = 0
DTI% <= 23%
Open credit line >= 8
Public records = 0
Monthly income >= $7,500
Loan purpose: All except other, small business and vacation
States – exclude CA
Link to Lending Club Filter 1 on Lendstats

Lending Club Filter 2 – Medium Income

Loan Grade: D, E, F, G
Inquiries = 0
DTI% <= 25%
Open credit line >= 8
2 Yr Deliquencies = 0
Public records = 0
Monthly income >= $3,000 and < $7,500
Loan purpose: All except other, small business and vacation
States – exclude CA, GA and TX
Link to Lending Club Filter 2 on Lendstats

Lending Club Filter 3 – Inquiries 1+

Loan Grade: E, F, G
Inquiries >= 1
2 Yr Deliquencies = 0
Public records = 0
Monthly income >= $7,000
Loan purpose: All except small business
States – exclude CA
Link to Lending Club Filter 3 on Lendstats

You can see that the main difference between Filter 1 and Filter 2 is the stated monthly income. I use that field to ensure that there is no overlap between loans when I am investing in multiple accounts. You will also notice that both filter 1 and filter 2 use inquiries = 0 as a criteria so this opens up the door to use Inquiries of one or more for Filter 3. Because all three filters don’t invest in loans originated in California I could easily setup a fourth unique filter for loans just issued in that state. I haven’t done this mainly because there are not enough loans that meet my criteria.

One point I should make is that if you use the Lending Club website to invest then you will not be able to use these filters as is. The filtering capabilities on their website are not flexible enough to allow for this kind of precision and some fields such as monthly income are not even available. So what I do is download the spreadsheet of all available loans from the Browse Notes page – there is a small Download All link in the bottom right of the screen. Then I can do the filtering in Excel and invest from there.

Prosper Filter 1 – Previous Borrower 0-1 Inquiries

Loan Grade D, E, HR
Payments on previous loans >= 12
Number of late payments  <= 9%
Allow credit score drop up to 100 points
Inquiries <= 1
Current delinquencies <= 1
Link to Prosper filter 1 on Lendstats

Prosper Filter 2 – Previous Borrower 2-5 Inquiries

Loan Grade D, E, HR
Payments on previous loans >= 10
Number of late payments  <= 10%
Allow credit score drop up to 100 points
Inquiries >= 2 and <= 5
Current delinquencies <= 1
Link to Prosper filter 2 on Lendstats

Prosper Filter 3 – New Borrower 0 Inquiries

Loan Grade D, E, HR
Payments on previous loans = 0
Inquiries = 0
Current delinquencies = 0
Open credit lines >= 10
Debt-to-income ratio <= 75%
Link to Prosper filter 3 on Lendstats

Prosper Filter 4 – New Borrower 1-2 Inquiries

Loan Grade D, E, HR
Payments on previous loans = 0
Inquiries >= 1 and <=2
Current delinquencies = 0
Delinquencies in last 7 years = 0
Bankcard utilization <= 95%
Open credit lines >= 10
Debt-to-income ratio <= 75%
Public records last 10 years = 0
Employment status: exclude Unemployed, Not Available
Link to Prosper filter 4 on Lendstats

The bulk of my new investments on Prosper go towards repeat borrowers. I have found repeat borrowers to be an excellent group of borrowers and you can see by clicking on the Lendstats link with each filter that they provide excellent returns.

Long time readers will know my love of the Number of Inquiries filter so you might be surprised by Filter 2 where I go with number of inquiries between 2 and 5 (I have long maintained that inquiries = 0 is one the best filters you can have). But I let the Lendstats ROI numbers be my guide here. And even though a previous borrower has two or more inquiries on their credit report with the additional filters in place here you can still generate an excellent ROI.

Now, I don’t want to be one dimensional and ignore new borrowers, so filters 3 and 4 provide a way to invest in new borrowers that is also likely to produce a good return. Again I am using number of inquiries as the way to separate the note selections to avoid duplication.

So, there you have it. These are the criteria I am using to invest today. It makes investing with multiple accounts a breeze or you can just as easily use these criteria on one account. Feel free to use these filters yourself if you like. Or you can always critique them and provide your own suggestions in the comments.

Like what you read?
Then please join over 1,000 people who receive exclusive weekly p2p lending tips, and get a FREE COPY of my ebook, Understanding Peer to Peer Lending. Just enter your name and email below:

{ 69 comments… read them below or add one }

Dan B February 20, 2012 at 12:12 am

Bryce…………that’s a bit over 3% PER ANNUM currently, The historical average is a bit higher. So it does add up to 22%, give or take.

Reply

Bryce M February 20, 2012 at 12:26 am

That doesn’t make any sense to me. How does 3% per annum add up to 22%? I do not believe this is how they are defining it, but if you can show me a formal definition I’d enjoy seeing it.

Reply

Dan B February 20, 2012 at 12:33 am

Who apart from you is suggesting that the 3% figure is a static number since inception?. A bit over 3% per annum CURRENTLY is what I said. Historically it has been higher than that figure. So I don’t see a massive problem with the arithmetic. And I used my fingers & toes to help me add :)

Reply

Bryce M. February 20, 2012 at 12:55 am

I suppose that could be possible, but it will require that the ultimate chargeoff rate be in the 9% range for 36 mo term loans. That would be quite the improvement and I do not expect that level of improvement based on their stricter criteria. But hey, could be! And my returns would be very appreciative. The main point is that there shouldn’t be this level of ambiguity, especially on a board devoted to the topic!

LOL that is enough to show it’s a quirky marketingese term, and I would still like to see how they are defining it carefully. In some ways I don’t care though, because I just model charge off and that’s the thing one should strive to avoid.

Reply

Dan B February 20, 2012 at 1:01 am

Don’t get me wrong. I think the charge off numbers will end up higher as well. I’m not 100% sure but I think the charge off numbers for the first 3 full years was north of 16%. Also keep in mind that about half of LC loans are now 5 year loans which may or may not have the same payment patterns as the 3 yr. ones.

Yes, I agree there’s no shortage of marketing spin going around.

Reply

Bryce M. February 20, 2012 at 1:06 am

Yeah. It’s a real bummer that there is no 5-year data. I’m a long term guy and would love the higher rates if it makes sense. But for now I’m on a strictly 3 year diet.

The charge off rate for all 3 year notes that have had their time elapse is around 22%. Best wishes all. Time for bed.

Reply

Peter Renton February 20, 2012 at 11:21 pm

Interesting discussion gentlemen. Let me throw a curve ball at you. I have seen this 3% default rate being thrown around now for over a year. And it is simple to justify.

I don’t know exactly what Lending Club mean when they say a 3% default rate but it could mean that 3% of the unpaid principal (we are not talking about number of loans) is written off each year. This to me is more likely to be the number, and frankly it is more meaningful than number of loans. Because, as I have stated many times, a default in month 24 is very different from a default in month 2.

@Chris, I will work on getting an official definition of “default” from Lending Club. It seems to me that loans stay in this mode for a couple of weeks or more before charging off. Prosper only has one category for these kinds of loans.

Reply

Dan B February 21, 2012 at 12:41 am

Peter…………I’m unclear as to what you’re asking or suggesting.

I’ve been hearing that 3% number for years as well………..but I’ve never believed it.

On the subject of late loans, defaults etc., when you get a chance, please ask Lending Club what percentage of their 5 year loans are currently on some type of “payment plan”. The answer to that question is just a curiosity today, but I guarantee you that in a couple of years the importance of that question & answer will become apparent…………& Lending Club investors are not going to be amused.

Reply

Peter Renton February 21, 2012 at 3:55 am

@Dan, I wrote that last comment in a hurry as I was on a train and about to go into a tunnel and lose my internet connection.

Anyway, what I am saying is that I am sure Lending Club can justify the 3% number backed up by solid data. I have been keeping track of the data in the Loan Details page in Lending Club’s statistics area for about eight months now. Exactly six months ago Lending Club’s total loan portfolio stood at around $338 million. In the last six months there have been $5.45 million in defaults – an annual rate of $10.9 million. When you divide that number into the total loans outstanding from six months ago you get 3.2%. Bingo, a 3% annual default rate.

I am not saying this number has much relevance because such a large percentage of the loan portfolio on LC is always so new, I am just saying this is one way you can get to the 3% annual default rate number.

As for your five year note question it seems to me that LC are very quick to put borrowers on a payment plan and once on that plan borrowers tend to just stay on it or default. I agree, though, I think investors should pay close attention to those five year loans – they are still an unknown animal at this young stage.

Reply

Manny K April 3, 2012 at 9:45 am

I don’t understand how a definition for “default” isn’t out there yet. Seems criminal.

Reply

Peter Renton April 4, 2012 at 9:49 pm

@Manny, I agree that Lending Club and Prosper should be much more forthcoming in their “default rate” claims. And having no standard makes it more difficult.

Reply

Manny K April 5, 2012 at 8:45 am

Hi Peter,
I’m new to the P2P lending model, late to the game. I’m doing research on it mostly out of curiosity. I do get the feeling that some version or another will ultimately be successful. Lending money is not rocket science and banks have a very poor rep among the masses. It may be ignorant and jealous and myopic but many believe banks are evil. It goes in cycles and has been strong lately.

Still, some of the impressions of savvy investors I’ve read about P2P are quite damning. I think that removing the Q&A is problematic. Can we really automate a large-scale system of this thing? Are poor credit scores and hounding collection agencies really enough to keep borrowers from defaulting? The old way, the bank way, put at least a little personal pressure on the borrower: “Jim, I’m funding you because I believe in you. Even though you have nothing. Don’t let me down.”
An algorithm can’t do that.

Reply

Simon April 21, 2012 at 8:28 pm

How come you allow delinquencies in your first LC filter set?

Reply

Peter Renton April 23, 2012 at 1:02 am

@Manny, Yes I believe we can automate p2p lending. Banks for had automated underwriting on credit cards for decades and it is one of the most profitable areas of their business. Lending Club and Prosper are merely applying that model to p2p lending. As for poor credit scores and agencies being enough to keep borrowers from defaulting? It seems to be so far. Remember that most people are honest and the vast majority of scam artists don’t make it through underwriting.

@Simon, Everything I do is based on the results that I see on Lendstats. For my first LC filter allowing delinquencies actually improves the ROI – it is counterintuitive I know but I let the numbers guide my decisions.

Reply

Simon April 23, 2012 at 2:04 am

Dang dude. Thats commitment.

Reply

Financial Advice for Young Professionals May 12, 2012 at 6:00 pm

There’s really no reason to go for those higher grade loans when you can use the filters you’ve described. Great to see you’ve had some success with a decent chunk of money!

Reply

Peter Renton May 13, 2012 at 5:07 pm

The one thing about the A, B and C loans is that on the whole these are more creditworthy borrowers. If we end up having another bad recession I expect that these borrowers will hold up better than those with grades D and below. But I am willing to take that chance.

Reply

Leave a Comment

Notify me of followup comments via e-mail. You can also subscribe without commenting.

Previous post:

Next post: