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Investing on Lending Club – Whiteboard #6

Lending Club has made it easy to log into their site and invest in peer to peer loans. In today’s video, we examine the complete investment process at Lending Club from top to bottom, highlighting the two different ways to pick loans – both letting Lending Club find loans for us and while also filtering the available loans ourselves.

Video Transcription

Now that you have had a chance to kind of get a feel for Lending Club’s website, it’s time that we move on to part two of our introduction: investing in some real loans. So we will do that today in our second screencast. Enjoy.

[Begin screencast]

On the main account screen, we can invest in some loans by clicking either the Invest or Browse Notes link. The Invest link has Lending Club find notes for us, whereas the Browse Notes link is where we are going to find loans for ourselves. So today we will invest $150 in each option. So let’s start by clicking the Invest link at the top of the screen.

Lending Club’s ‘Invest’ Option

This will bring up a screen that shows three different colored buttons. Each of these buttons will result in Lending Club choosing, automatically, a number of loans for our investment. Now, the percentage you see on each button is the average interest rate of each button’s loans. So the blue button finds the safer loans with the least amount of risk, the green button finds loans with medium risk, and the orange button finds loans with higher risk.

Today we will invest using $25 notes. Now, if you are investing a larger amount of money, perhaps $10,000, then you could double your note size to $50, since your account would still be diversified in 200 notes (200X$50=$10,000). Or if had $20,000, you could invest with $100 notes. And so on. But for many, it is wise to stick with $25 notes, the minimum, so let’s do that today.

Clicking the low-risk blue button will result in the platform choosing twelve notes for me:

  • Five of these are the safer A-grade loans
  • Four B-grade loans
  • Two C-grade loans
  • And one of the riskier D-grade loan

The green button adds a little more risk by:

  • Lowering the number of A-grade loans to one
  • It also has four B-grade loans
  • Four C-grade loans
  •  Two D-grade loans
  • And even one of the riskier F-grade loans

The orange button adds yet more risk, giving me:

  • Three mid-risk C-grade loans
  • Five D-grade loans
  • Two E-grade loans
  • One F-grade loan
  • And even one of the riskiest G-grade loans

You can see how the projected return and default rate go up and down as we take on more risk. There is also this “More Options” button that replaces the buttons with a slider. I can click on the slider and move it left and right for a more fine-tuned degree of risk. But I am not going to do that today. Instead, I am going to go back and click the orange button, the one for higher risk, and show what it looks like to actually invest in these notes (it’s important to note that your own risk tolerance may be different than mine).

Having clicked the Continue button, Lending Club has brought me to the View Order screen. The box on the left shows a breakdown of what risk-grades in this portfolio, like we saw earlier. The box on the right shows the average interest rate these borrowers will pay on these loans, as well as the expected charge off rate, or the amount of my investment that is estimated to be lost to borrowers not paying their loans back. Minus the service charge, this summary estimates this my total return will be around 10.45%.

Now, it is important to note that this expected return is only accurate for diversified accounts. If I invested in just six notes and one charges off, then my default rate would be a lot higher, like 16%. In contrast, if I had a portfolio of 200 notes with this level of risk, Lending Club says it is a reasonable expectation that this would return 10.5%, which is pretty great.

I can also look lower on the page to find the interest rate of each loan, its grade, its amount (meaning, how much the loan is for), its term (36 or 60 months), its title that the borrower has written, its purpose (with most of these loans going towards consolidating debt), and how much funding it has received.

I am actually going to remove six notes to cut this order in half, investing the other half in the second part of this video.

Now that everything is ready, I can click the Continue button to view my Order Summary. Clicking Place Order invests $25 in each of these six loans. On this confirmation screen, I will place these new notes in my 2014Q1 portfolio (which we will talk about more in the next video). And then we are going now to click on Browse Notes to invest in notes manually, so let’s do that.

Lending Club’s ‘Browse Notes’ Option

Now this is the other way to invest, the Browse Notes link. This is the more active method of investing, so instead of Lending Club choosing notes for us, we can sort through the hundreds of available loans and select some ourselves. Looking closely at the upper right, we can see that there are 627 loans available for investment. We can kind of sort this list by clicking on its rates or clicking on the amount of the loan.

If we want to look at the details of a loan, we can simply click on a loan. For instance, this loan here is by somebody in Bristow, Virginia who makes $16,667 a month and has been employed for ten years. Looking further down, we can see a breakdown of this credit history, for instance, we can see that they have applied for credit one time in the past 6 months, meaning how many times they have applied for credit, which is really good that it is low.

Knowing what all these credit factors means takes a bit of learning, something we will return back to another time. For now let’s close the loan and go back to the list. Now, it would take way too much time to review all these loans one by one, so Lending Club actually allows us to filter the available loans for specific factors using this section on the left.

So let’s say I want to focus on higher risk loans. I would go down to the Interest Rate setting and check only the boxes for D-G grade notes. Suddenly, the number of available loans drops from (what was it?)  627 to 143, a much more manageable number.

Now there are a large number of settings we can choose from the left there, particularly the credit factors can get really confusing. Knowing how to filter peer to peer loans is a skill you can get better at with time, and is probably the most complicated part of investing on Lending Club. We will cover this more in another video.

For now, let’s add a some simple filters today, starting with one that makes sense. People who earn more income per year are going to be better at paying their loans back, so we are going to make a minimum income a month of $5000, somebody who makes $60,000 per year. Now we have lowered the amount of loans to 103.

I’m going to add a few more filters here that I personally like:

  • Excluding bankruptcies
  • Excluding small business loans
  • Lowering inquiries to zero (meaning the number of times a person has looked around for credit in the past six months — generally I try to avoid people who shop around for credit because they are more likely to default)

Alright! Now we are down to fourteen loans. I am actually going to save this filter for future use. After I save it, I can use it anytime I log back into the website. So for this I am actually going to call it Video Example. Oh, Lending Club says I have already used that one, so I am just going to call this one Video Example 2.

It says it has been saved successfully, and I am just going to go back to the Account Screen.

So if I were a typical investor at Lending Club, I could invest in just a few simple clicks. First I would click on the Browse Notes link, then I would open up my saved filter. Here is my number of notes to invest in, the ones that have passed my filters, and I am simply going to select six of them that I enjoy. Now, considering there is a whole number of notes here, let me just increase the monthly income until it comes down to something like six.

Let’s try $6500: now we have got seven loans. Let’s click it up one more. Oops, four, that’s too small, so we are going to put it at $6500 and just select six of these.

Adding it to my order, I’ll see the Order Summary page now. Hit Continue because I have kind of reviewed these using filters. And simply hitting Place Order invests another $150 in loans, and I am again going to assign this to my quarterly portfolio.

[End screencast]

So there you have it, investing on Lending Club. Stay tuned for our next video, where we will be looking at account maintenance.

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{ 2 comments… add one }

  • Tyler January 31, 2014, 5:11 AM

    Great video!! Thanks so much Simon. I’m a lending club newbie and this really helps.

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