I remember what it’s like to discover peer to peer lending. This thing is realized to be new and promising, and suddenly you cannot wait to get started. But then reality sets in: there are not enough available loans. How frustrating! You did all the right work of opening a Lending Club or Prosper account, funding it with some trial money. However, when you log into the platform, you discover that few loans are available for investment.
What options do you have? In today’s post, we will examine seven strategies you can use to find more loans when few seem to exist.
2013: The Year P2P Lending Became Cool
Back in the early days of peer to peer lending (like, February) investors could choose from a thousand available loans on Lending Club’s website. For years the main funding for loans came from retail investors, basically people around the country who were investing their own individual cash. These lenders were sometimes unwilling to fund riskier borrowers because they had better options available. As a result, some loans took a week or more to find enough willing investors, and some loans would even fail to get funded at all. See the screenshot below from February 6, 2013: 1162 loans were available on the platform.
Now everything has changed. Lending Club and Prosper continue to rise in popularity, earning outside investments (from Google) and positive coverage in the press (see Prosper on Fox Business). Since September 2011, every Lending Club loan has been fully funded, and most get funded within 24 hours. To boot, the Lending Club and Prosper loans that earn the best interest (the riskier low-grade loans) are often snapped up in minutes. This change is the result of peer to peer lending’s flood of institutional investors (hedge funds, money managers, etc). Years of positive returns coupled with recent positive press have given these well-funded institutions the confidence they needed to get involved.
Three ways big-dollar institutional investors make it harder for the rest of us:
- Institutions fund 25% of Lending Club’s loans through the Whole Loan program before they are made available to retail investors like you and me. We never even see these loans.
- The remaining 75% of Lending Club’s loans that are added to our Browse Notes screen are being snapped up via API by institutions. Prosper does this too. Basically this means that institutions are automatically placing orders through high speed server requests the moment these loans become available.
- Despite a funding limit of 50-75% per loan (IE: an institution could fund $7,500 of a $10,000 loan), these institutional investors have millions of dollars available to them, far more than the average retail investor. This means institutions purchase notes as large as $26,000, leaving a much smaller percentage of each loan available for lenders like us.
Fewer Available Loans for Retail Investors
Where does this leave the average investor like you and me? As seen in the chart below, the number of available loans changes throughout the day. The average investor, casually logging into the Lending Club website, will typically find between 50 and 100 loans to choose from:
Within 50-100 loans, perhaps just a handful are the higher interest D-G grade loans (currently just 2 loans out of 79!). How should the average investor adjust to this problem?
Seven Solid Ways We Can Find More Loans
Here are seven different ways we can find more loans, ordered by how much time they take.
#1. Invest in Whatever Loans are Available
Even though the “best” loans are snapped up by institutions using an API, the remaining loans can still be decent investments. We need to remember that Lending Club and Prosper give underwriting approval to every single loan on the platform. We can trust the underwriting and invest in whatever loans are available. This may result in earning a lower return than more active investors, but if we remain diversified it is still possible to earn a great return.
As seen in Lending Club’s chart above, the vast majority of investors who have a diversified account of at least 400 notes earn a positive return, and this includes investors who simply go with whatever loans are available. Even if you only invest in 100 notes, diversification makes a huge difference.
#2. Log in at 6am, 10am, 2pm, and 6pm PST
As seen in the graphic above about Lending Club’s loan availability, new loans are added daily at 6am, 10am, 2pm, and 6pm PST. In contrast, Prosper adds loans at 9am and 5pm (noon on weekends). For investors who log in during these times, there are far more available loans to choose, including many D-G grade loans. This can be a bit of work for people, as it means they have to set an alarm or keep their eye on the clock, but it can be rewarding for those who figure out a system to do it.
#3. Simplify your Filters
When I first started investing in peer to peer loans, I would often use filters with (too?) many qualifiers. For example, here is a filter I might have used in 2012:
- $2000-$35,000 Loans
- E-G Grade
- Purpose: Only Debt Consolidation/Credit Cards
- $60,000 income/year
- 10+ Years of Employment
- Max 20% Debt-to-Income Ratio
- 5+ Open Credit Lines
- 10+ Total Credit Lines
- No Inquiries
- No Public Records
- Max 95% Credit Utilization
- Exclude CA & FL
A filter like this had twelve attributes, meaning it cut down the available loan pool in twelve different ways. Oh, how times have changed. If I would try to use this same filter today, I would maybe find a single loan per month.
To adjust, we can simplify the filters we use. We can choose to compromise. This may mean earning a lower return, but some simple filtering can still give us a chance to beat the average. For instance, we could filter the 79 currently available notes with a simple filter like this:
- C-G Grade Loans
- No Business Loans
- $4000/month income
This simple 3-attribute filter would give me five solid notes out of the 79 available loans, and definitely many more if I logged in at 10am. Historically, it performs at almost 11% on the NickelSteamroller Return Forecaster tool:
Disclaimer: we need to remember that these filtering tools are notorious for being unpredictable. Not only are they pulling this data from loans that are still being repaid (many will default), but Lending Club’s underwriting has almost certainly changed since this data starts in 2009. That said, this tool is a decent place to begin.
#4. Use Multiple Filters to Find More Loans
If you typically have invested with just a single filter, you should try to expand into others. One way to do this is to take whatever filter you currently use and split it into two performing filters. This is a bit more complicated, and it is outlined fully in the fourth part of my series on filtering: Splitting the Filter to Find More Loans.
Multiple filters are necessary for any serious investor. In short, remember that whenever we use a filter to isolate better loans, we are almost certainly removing some good with the bad. To combat this, we can use multiple filters to pull apart the available loan pool in different ways, helping us to find more loans than if we just used a single filter on its own.
#5. Buy Notes on the Foliofn Secondary Market
NewJerseyGuy gave a really great suggestion in the comments section after this post was published: Foliofn. For those brand new to Lending Club, a secondary market exists where people are buying and selling their notes to each other. The graphic below shows how there are 53,000 notes available today for purchase on Foliofn. Now that’s some availability.
You can access the secondary market through Lending Club’s Trading Account link. Many lenders have had success this way, but many have also been frustrated by it. In short, the Foliofn interface is really rough at both Lending Club and Prosper. It might be good enough for some, but many serious Foliofn investors have found success by using Interest Radar instead, a site that can deeply filter the secondary market for solid deals on notes.
#6. Open an Account on a Different Platform
Many people wonder why I have accounts at both Lending Club and Prosper, considering they offer a similar service. Well, now one of the benefits is clearly seen: access to additional loans. Have you been having a tough time finding loans on Lending Club? Open an account at Prosper. Loans scarce at Prosper? Open an account at Lending Club.
Not only do you suddenly get access to another entire population of borrowers, but you also further diversify your peer to peer lending investment (read: Diversify Your Account Like a Pro). Additionally, I feel the lessons I have learned on one platform have helped with my lending process on the other. In summary, the benefits are tremendous.
#7. Automate Investing with Third-Party Tools
There are a number of different ways we can automate our investing at Lending Club and Prosper. Interest Radar, BlueVestment, and Lending Robot are options for investors that allow automatic investing. I shy away from these sites because they do not stick to the Lending Club API; they also scrape Lending Club’s PHP, and this is a bit insecure for me (especially any auto-sell feature). But many within the Interest Radar community continue to use it and celebrate its returns.
I use an automated API myself, and the benefits are great. Instead of watching the clock or setting an alarm for 10am/2pm/6pm (I sleep past 6am), the system runs my filters and automatically invests for me.
Lending Club’s Scott Sanborn indicated to me in May (read the interview) that Lending Club hopes to have an in-house automated investment option soon, but he said it would be finished in the summer. Now that the summer is almost over, so I am curious how much longer it will take. Even if Lending Club’s automated investing option launches, I am doubtful if it will be able to compete with the institutions. Fast servers using an API seem like they will continue to have an edge for the foreseeable future. For instance, Prosper has had a good automated investing option (called Automated Quick Invest) for almost two years, but this tool is slow in comparison to a quick API. My own Automated Quick Invest setup with Prosper was losing out to institutions until I got in the API game myself.
Investing Large Amounts vs. Reinvesting Returns
These seven strategies are going to depend on how many loans you need to find. For instance, if you are investing a big sum of money at once, like opening an IRA with $5000, you may need to work harder in order to get it all invested in 200 notes, or at least until the initial chunk is in. Otherwise, that cash is sitting idle in your account earning no interest.
In contrast, you may be able to work a bit less if you are simply reinvesting your returns. If you simply need to find a loan or two to invest in per week, then your needs will be less.
Fewer Available Loans is the New Normal (and that’s OK)
In my opinion, this scarcity is here to stay. Institutional investors will continue to get privileged access to loans, if not from the platforms themselves then through having faster servers. It seems like retail investors like us will have to continue to struggle for access to the best loans.
That said, peer to peer lending continues to give us a healthy 6-8% return if we simply go with the flow and invest in whatever loans are available (see point #1 above). Additionally, it is still very possible to beat this average by doing just a little extra work. Institutional investors will continue to be a big factor in peer to peer lending, but just a little effort can allow us to go toe-to-toe against these big guys.
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[image credit: Andrew Malone “Metal Detector” CC-BY 2.0]