Peer to peer lending can be both an active or a passive investment. On the passive side of things, all an investor has to do is create an account and set up automated investing to reduce cash drag. After that, all it often requires is a monthly check-in to make sure everything is functioning smoothly.
This investment can be very active and hands-on.
On the other hand, this investment can also be very active and hands-on. This appeals to people who feel the extra time delivers them an increased return, or even those who enjoy the game-factor of peer to peer lending, where earning a higher ROI is almost a hobby.
Typically, a hands-on approach means examining the different available credit models that can potentially increase returns, or examining different filters to try and boost returns that way. Or, perhaps it simply means backtesting the open historical data to try and understand the benefits of adding or reducing risk via loan grades.
All in all, there is a significant degree of “play” offered within this investment. Third-party API tools combined with a rich set of open data becomes a perfect cocktail for inventing new and fruitful ways to increase your returns or decrease your defaults.
The Playground of the Folio Trading Platform
One of the most interesting parts of a p2p investment has to do with the fact that they are legally defined as securities by the SEC, and one facet of a security is its ability to be bought and sold on a secondary market. The partner company for both Lending Club and Prosper’s secondary market is Folio.
The Folio trading platform is perhaps the most vibrant (and risky) arena of investors trying to increase returns. You have people trying to sell notes for profit, people trying to buy discounted notes that are behind on their payments in hopes that they become Current later on, and everything in between. Read: Investing at Lending Club through Foliofn
Today we’ll look at selling notes for profit, particularly loans that are new with an Issued status.
Folio Buyers are Hungry for Good Notes
For whatever reason, there are people on the Folio secondary market buying up notes for a premium. Perhaps they live in one of the 17 Lending Club states that do not allow regular investing. Or perhaps they simply want to put their cash to work without waiting for regular loans to issue. Whatever the case, there is a sizable population of Folio buyers looking to pick up your loans.
Placing these notes for sale on Folio is completely free.
On your side of things, placing these notes for sale on Folio is completely free. Making them available doesn’t cost you anything except the few minutes of time it takes to set everything up. Folio does charge a fee in 1% of completed sales, so it’s important to keep that in mind. But as long as you’ve covered this fee with at least +1% markup per note, you can kind of play around with things. You are free to try and sell different grades for different markups/premiums, just to see what works.
Some people try really interesting and colorful combinations in hopes to increase returns, like offering 26% interest rate G-grade notes with 10 months of completed payments for a crazy +10% markup, a tactic that actually/sporadically works. See: The Liquidity Project results.
The Market for Newly-Issued Loans
A much simpler tactic is to simply sell freshly issued loans. Every loan you fund in the primary market ties up your cash for a few weeks before it issues. But if you can immediately sell these loans for a premium on Folio, you can earn an 19% ROI on them, adding a decent boost to your overall return.
Example: let’s say I invest $25 into a D-grade loan at Lending Club. This loan will take a few weeks to issue, requiring 100% funding and verification of the borrower’s identity. But upon being issued this D-grade note is immediately available for me to sell on the Folio trading platform. Let’s say I offer this loan for sale on Folio at a 2.6% markup ($25.65) and it sells in under a week.
Effectively, I’ve earned an 19% ROI on this note. At a 2.6% markup, less 1% in Folio fees, I have earned a 1.6% in the four weeks my cash has been tied up (often less). 2.6% markup – 1% fees = 1.6% monthly return. 1.6%*12 months = 19.2% ROI.
This strategy just adds a bonus to ROI.
It won’t work all the time. Just a handful of my loans sell per month this way. But it does seem to consistently work with some degree success. I know one investor who has been boosting his overall return this way for many years. His overall return is much higher than my own, even though he has taken on less risk.
Also, be aware that this works best with riskier D-G graded loans worth $25-50. Buyers aren’t going to want to pay a huge premium if the loan itself has a really low return (like A-grades). And most buyers aren’t looking for $1,000 notes. But remember: placing notes for sale on Folio is free, so it doesn’t hurt to simply offer all your Issued loans for a steep markeup just to see what happens. I sold a B-grade loan in May for +2.6%. I also sold a few larger $75 notes this way.
What markup/discount should you choose?
This is going to be a YMMV problem (your mileage may vary). 2.6% worked for me. You may want to try higher markups, like +3 to +6%, just to see if things work. The investor I mentioned earlier actually sticks to +3% markups. On the other hand, you could try a lower markup if you invest in safer loan grades. Eg: selling A-grade loans for a +1.5% premium only earns you 0.5% after fees, 6% annually. But many A-grades only give investors 4-5% per year, so that +1.5% markup is actually a decent boost.
9 Steps to Sell Newly Issued Notes at Lending Club
This entire process might look complicated to a beginner, but it actually less than 60 seconds once you’re used to it.
Step 1: To begin, go to the Sell Notes area of the Folio trading platform by clicking on the link at the top.
Once here, you want to pull up a list of all your notes with an Issued status.
Step 2 & 3: Isolate only Issued & Current notes and click Display.
Step 4: Move your issued loans to the top by clicking on the Status header until the arrow points down.
Now it’s time to select these issued notes.
Step 5: If you have more than 15 notes with an Issued status, click the dropdown menu to have them all displayed. My account had 56 issued notes, so I set my list to display 60 notes at a time.
Step 6: Select your Issued notes. You can either select them one-by-one, or you can click the gray box to select them all and then deselect any Current notes that are at the bottom.
Step 7: Click the Sell Notes button to move to the pricing page, seen below.
Step 8: Almost there! On the pricing page, you’ll want to click the big plus button (+) until every note has the correct markup or premium. For my account, I gave these notes a 2.6% markup, seen in yellow.
Step 9: Click the blue Submit button to place your notes for sale.
Nice! All of your notes with an Issued status are officially for sale on Folio. Now you’ll need to wait for buyers to pick them up. This can take anything from a day to a week. When your notes are purchased, you’ll get an email notifying you of the sale.
If a week goes by and notes remain unsold, the listings will expire. You should get an email for each note letting you know. In response, you can simply log back onto Folio and offer them for sale again. Eventually, you should have a number of notes sell.
Here are all the notes I sold in the month of May, 2015:
It’s worth reemphasizing that 5 out of 6 of last month’s sold notes are D-G grade. Most buyers of A-grades aren’t all that interested in paying a +2.6% markup.
Conclusion: An Increased Overall Return
If you don’t really have the time to mess with this stuff, you may want to simply add a 3% markup to all your issued notes one time and see if you get any bites. If you do, the 24% return may encourage you to incorporate this into your wider p2p lending rhythm. On the other hand, if your listings expire without any sales, no big deal.
The best approach is simply to be curious and explore the secondary market for yourself. Be smart and take time to play with different pricings until you find something that works. Folio is a bit of a Wild West. Its economy changes throughout the year, so with enough time this tactic may not work at all! That said, I think you will find at least a small degree of success, adding a decent boost to your overall p2p return.
[image credit: United Soybean Board “Soybean Sprouts During Early Growth” CC-BY 2.0]