Net Worth Update:
|Student Loan A||0||Investments||17,588.71|
|Student Loan B||0||Cash||3,896.23|
|Student Loan C||0|
Lending money to strangers?!
Yeah, that’s essentially what I’m going to be doing at lending club. My $5,500 check just cleared (after about 10 days) and I’m all set and ready to invest. To be honest, the process to set up a Roth IRA at lending club was a bit of a headache. The online part was fine, but there was no way to do an ACH transfer from my bank account to them, so I had to mail in a check. As a result, it took me 10 days after my check was sent to actually get my money into my account. However, I did at least get my money into my Roth IRA!
So, now that I’ve got my money in lending club, its time to invest!
Investing @ Lending Club
Here’s what the lending club HMI (web-interface) looks like, for manual investing:
Manual investing is where I hand pick the loans I want to invest in. If you want to get higher returns, I’d recommend going with manual investing. Anyways, the interface is basically a list of all their loans along with some filters at the side. They’ve got a lot of filters, but the ones that I am planning on using are as follows:
Lending club offers 6 different grades of notes, A-G. Loan rated A are of the highest credit quality, and loans rated G are of the lowest quality. Because I want high risk, high return, I am going to completely ignore loans rated A and B, and only focus on loans rated C, D, E and G. In addition, I’m not going to consider any loan that offers less than 13% interest. I want to earn 10% per year with lending club, so I’ll need to shoot high, (after all, the my actual return will be less than the numbers on the screen due to the people defaulting).
Minimum years of employment:
In order to pay off debt, you need to have income! That’s why I only want to lend to strangers who have jobs. Typically, I see anyone who has had employment for 2 years or less as having more risk. The main reason I have this belief is because nearly every single bank asks you for 2 years worth of tax returns when you apply for a mortgage. It may not be exactly logical, but I do think that having a longer employment history makes you a “safer bet”. Thus, I’m going to filter out anyone who has 2 years or less employment experience.
The last filter I’m going to use is number of delinquencies. A delinquency is essentially a late payment on some sort of debt. I don’t want to lend money to anyone who makes late payments because I want to receive my monthly payments on time!
0 Inquiries in the past 6 months
An inquiry is a “hard pull” on your credit score. Basically, a borrower gives an institution permission to check their credit score and do a hard pull. I don’t want to lend to people who let other people check their credit score frequently, as this means that they are looking to obtain some sort of financing or debt. I want my borrowers to pay off my loans, not other peoples loans. In relationship terms, I don’t want my borrowers to cheat on me with other lenders, kind of how you wouldn’t want your significant other to cheat on you with someone else.
And that’s it!
Those are the 4 filters I plan on using are it. In this case, I think simplicity is the best option, mostly because the more filters I put, the less people I can invest in. I want to get fully invested quickly so I can get my returns.
However, I do need a baseline to compare
I cannot compare the effectiveness of my filters without a control group. So, in order to do that, I got a little plan.
Spliting my investment
I plan on splitting my lending club investment into two different portfolio’s each containing $2750 worth of notes. The first portfolio will have notes selected only from my filters. The second portfolio will have notes of the same grade as the first, but without any of my filters. Thus, after a year or so, I’ll be able to tell if my filters are any good.
My Asset Allocation + Reinvestment Plans
As you can see, I’ve focused mostly on the grades C-G in order to get higher returns on my investment. My current plan involves reinvesting all of my proceeds into F & G notes in order to balance out my overall portfolio between the 5 grades. This is really risky (considering that F+G notes have a 12-13% default rate), but I don’t actually need this money for anything else right now and I feel comfortable accepting that risk in order to achieve 10+% returns.
At any rate, I have just started to mess around with LendingClub, and as a result do not actually have any data to share. Hopefully, in a few months, I’ll have enough data to create a nice post and comment about the performance of my notes, and as to whether or not LendingClub is a worthwhile experience. So as to better the future for that post, I have but one wish to my LendingClub borrowers: please pay me back, (or not, after all, you can steal my money by simply defaulting + ruining your credit scores).