Let's talk about peer-to-peer lending!!

The Something Awful Forums > Discussion > Ask/Tell > Business, Finance, and Careers > Let's talk about peer-to-peer lending!!

Alereon: Feb 6, 2004; Dehumanize yourself and face to Trumpshed; College Slice

My opinion, based on both experience on Prosper.com and LendingClub, is that one of the most important factors when choosing a borrower is the quality of their narrative answers to questions. If they don't answer, don't use complete sentences, or don't write professionally, don't lend to them. It's important to remember that you don't have to choose between the notes that are available at a given time: if you don't see anything you like, just wait and something better will come along shortly.

My general strategy has worked well for me, but reflects my high risk tolerance, (potentially misplaced) confidence in my own ability to select quality borrowers, and expectations about what will happen to the economy in the next ~5 years. I only fund debt consolidation loans, because as mentioned that class VASTLY outperforms all others (think about it: how financially responsible is someone who resorts to P2P lending for a purchase that is outside their means?). Additionally, always avoid both the riskiest and least risky classes, their risk-adjusted returns are poo poo. My opinion is that if you are considering AA-rated loans, just get a CD, and if you're considering E-rated loans, just go to the casino. Each time I'm investing I generally go in $100 at a time and get one each of the middle classes, this may change as I make more loans and see how I do long-term.

When picking a loan within a risk-class, I start from the highest-interest (most risky) loans and go down the list looking for someone I feel is a better risk than their numbers would suggest. When evaluating a borrower, the first thing I look at is their employment. Do they have a stable job? Is it in a growth industry? (sorry teachers) Is it something scammy/lovely/low-friction? Does the salary they claim jibe with their job/life story? If they say they are an "Executive" making $25k a year they can gently caress right off. In fact, I would essentially never loan to anyone who claimed to be an Executive or said "Other". As I mentioned above, the narrative answers are absolutely critical, if you can't write like an educated professional on a multi-thousand dollar loan application then I don't trust you to hold a job to pay me back.

Finally, I think looking at the credit history and number of open/delinguent accounts compared to the story they tell about their financial and job history is important. If someone has what seems like an unreasonable number of accounts, I worry that they habitually skip out on unsecured loans.

E: Typos.

Alereon fucked around with this message at 02:24 on Nov 22, 2012

# ¿ Nov 22, 2012 01:38

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# ¿ Apr 24, 2024 23:43

Alereon: Feb 6, 2004; Dehumanize yourself and face to Trumpshed; College Slice

Not much right now. I was into old-Prosper (before the SEC ruined it, I have an awesome shirt!), but I was lucky in that my employment became insecure and I stopped putting money in early enough that my loans finished paying out before all the loans on the site defaulted (if you can't pay your mortgage you sure as hell can't pay your unsecured loans). I didn't feel confident enough in either my personal financial situation or the larger economy to start putting more money in until about the last six months, and right now I'm trying to spread my money between Prosper and LendingClub and establish a diverse base of loans so I can get a feel for how well my selection strategy works today.

The "conventional wisdom" seems to be that Prosper is lovely compared to LendingClub now, and it does seem to be steadily losing marketshare. That said, LendingClub takes forever to do anything as April mentioned. The only real negative point I've heard for Prosper is that collections tends to perform below standard (if at all) on delinquent loans, but frankly if a loan has gone delinquent I would assume I've lost my money. I actually haven't had a delinquent loan yet (just some scattered late payments), but I haven't made nearly as many as April so far. I do think Prosper has an unfairly bad reputation from all the people who lost money from 2008-2010 or so. I don't know how you could see that happen to the economy and not just say "welp, there goes all my money, bad luck," but apparently some people think Prosper should have squeezed some blood from those stones. All of that considered, I think LendingClub is probably the site people would have a better experience with.

Bonus tip: If you use auto-invest or anything that results in you investing in loans you have not individually approved, you are an idiot and will lose your money. In effect you're investing in what's left over after all the good loans have been funded by humans, and being able to individually evaluate borrowers is a critical aspect of risk control.

# ¿ Nov 22, 2012 02:23

Alereon: Feb 6, 2004; Dehumanize yourself and face to Trumpshed; College Slice

The Jax posted:

Long story short, it seems like a great concept up front, but it likely won't end up panning out like you want it to.

When was your experience? It's important to remember that at the end of the day this is unsecured debt, so people can just walk away from their loans. The hope is that paying off the loan is a person's best option, but if they lose their job and can't find a new one then you probably won't get your money.

# ¿ Nov 25, 2012 16:29

Alereon: Feb 6, 2004; Dehumanize yourself and face to Trumpshed; College Slice

Adar posted:

I have a five year old Prosper account I never funded; it looked promising pre-recession but my spider sense kept tingling and sure enough, everyone getting in during the early years got killed. How has LC learned from this?

The only real lesson I can think of is the same thing everyone should have known going in: you're betting on people's ability/willingness to pay back unsecured loans. This means, implicitly, that you're betting that the economic environment will make it possible/reasonable for them to pay off that loan. If people are losing their houses because they can't pay their mortgages, credit cards and P2P loans are out of luck. I just don't see how anyone who lived through this time in the US could have expected different performance. On the plus side, this was really a once-in-a-few-decades kind of recession.

# ¿ Dec 5, 2012 21:35

Alereon: Feb 6, 2004; Dehumanize yourself and face to Trumpshed; College Slice

Saint Fu posted:

My sole grade A note had a failed payment after 14 straight months of being on time. Just goes to show that the A/Bs aren't always as rock solid as they seem. (obviously tiny sample size just sayin).

Yeah that's why I don't invest in A-rated loans, the return is too low to justify the risk in my opinion. For similar reasons I don't invest in F or G-rated loans. The Lending Club loan details page has useful information I used to decide on this strategy. Here's the percentage of loans that are currently in a bad status (late/charge-off/default) by rating, along with the average interest rate and net annualized return (after defaults and such):

pre:

Bad rate | Avg %  | Net % (includes bad rate)
A: 1.21% |  7.47% |  5.71%
B: 2.05% | 11.68% |  8.90%
C: 3.27% | 14.44% | 10.23%
D: 4.24% | 17.07% | 11.78%
E: 5.23% | 19.07% | 13.03%
F: 6.44% | 21.10% | 13.53%
G: 9.83% | 21.76% | 12.21%

Based on those numbers you can see there is a relatively small increase in risk from going to A-rated to B-rated loans, but a much larger jump in returns. There's also disproportionately larger increases in risk going from E-rated to F-rated loans, and especially from F-rated to G-rated. It would obviously be a poor choice to invest in G-rated loans as the interest rates just don't justify the risk. The net annualized returns (which have the bad outcome rate "baked in") indicate that F-rated loans are about as good as E-rated loans, which would make them a great option if you think you can pick buyers that won't default (you probably can't), but given the smaller sample size and lack of compelling benefit I just don't feel it's worth the investment over E-rated loans.

Bonus Edit: Based on a quick glance, there are currently no loans at F or G-ratings that meet my search criteria to even look at, but if I found an F-rated loan I liked I might consider it.

Alereon fucked around with this message at 18:55 on Dec 9, 2012

# ¿ Dec 9, 2012 17:57

Alereon: Feb 6, 2004; Dehumanize yourself and face to Trumpshed; College Slice

kansas posted:

Am I missing something? This seems like a huge amount of work to do for such a small return... You could scale it up, but the risk is high so I'm not sure that would be a wise idea.

It's not really a lot of work at all, everything you could want to know is on one page and there are rather effective search filters. My workflow is to run my filter and open up the results in tabs, take a quick glance at each one and close any tabs that don't look good (job/credit doesn't look stable), then pick between the few remaining options that look good to me. I would say it averages about 2-3 minutes per $25 loan, and you don't have to do anything else for the 3-5 years the loan lasts.

Scaling up (in the form of investing in more $25 loans) is a good thing for your risk because it reduces the impact of a single loan defaulting and moves you closer to the net annualized return. Note that this does NOT reduce your risk from overall economic factors that make people less able to return loans in general.

# ¿ Dec 9, 2012 21:42

Alereon: Feb 6, 2004; Dehumanize yourself and face to Trumpshed; College Slice

A 25-50% excess isn't TOO outrageous, many people have other debts or obligations that they'd like to take care of in the same transaction, I'd just like to see some narrative explanation of where the money is going of it isn't obvious. That said, it does concern me when you see people asking for near the max ($35k) of unsecured debt, I prefer smaller loans with less round figures.

# ¿ Dec 30, 2012 15:51

Alereon: Feb 6, 2004; Dehumanize yourself and face to Trumpshed; College Slice

Orange_Lazarus posted:

In North Carolina they're making me go with something called Folio, I guess that's where people who have already bought notes issued on LC go to trade them? I'm guessing people are just trying to unload the loans that are in default there.

Yeah, I was just reading about this and there seems to be two classes of people selling note on Foliofn: People who are selling good notes before they go bad (exploiting ways to tell a status will change before it does, like selling notes during the grace period after a payment is due but before it becomes "Late" and the note value plummets), and people who are spooked by a late payment or other bad status and unload the note at a steep discount. The first group is specifically looking for people like you (in states that require purchases through Foliofn) and who may buy their notes before they tank. The second group you can make money off of, if you have a stomach for risk.

Jalumibnkrayal posted:

But nothing they put in a narrative is verified, and you can't ensure that they will follow through with their plan. So why bother asking? I guess if you wanted a writing sample to possibly judge intelligence? The loan category is just personal finance Darwinism: Debt consolidation loans get funded, small business/medical/wedding loans do not. This is rather ironic because I'm sure that lots of people who need debt consolidation are those that funded stupid purchases, weddings, etc with high APR credit cards. So P2P lenders look down on those who ask to borrow money for foolish purchases, yet applaud those who have already done so (debt consolidation) as moving towards fiscal responsibility. I fall prey to the same mentality, and I don't have a way to reconcile it.

Debt Consolidation/Credit Card payoff loans have always had the highest returns and lowest default rate on both Prosper.com and Lending Club. Keep in mind that we are making our money here on the difference between people's past behavior (which sets their interest rate) and their current/future behavior (which sets the chance we will get paid back). Even if someone has made poor choices in the past (they may not have, people experience bad luck and there is still a legacy of the poo poo economy), going for a debt consolidation loan now is a good choice, which should inspire confidence in their financial future.

# ¿ Dec 30, 2012 17:50

Alereon: Feb 6, 2004; Dehumanize yourself and face to Trumpshed; College Slice

I happened came upon some more evidence that 5 year loans are bad: In addition to the higher default rates for 5 year loans, loans expire 5 years after the issue date, even if the borrower has late payments or is on a payment plan. Any payments after the expiration date will not be forwarded on to lenders. This policy is common to both Prosper.com and LendingClub and is due to federal tax laws that these companies have to operate under.

# ¿ Dec 31, 2012 14:37

Alereon: Feb 6, 2004; Dehumanize yourself and face to Trumpshed; College Slice

Prosper.com sent me an e-mail that they are ceasing operations in Washington state at the end of the month, apparently they reorganized into an LLC and WA refused to approve the new entity. I was balancing between Prosper.com and LendingClub due to my history with Prosper, but it looks like the writing is on the wall.

# ¿ Jan 28, 2013 16:45

Alereon: Feb 6, 2004; Dehumanize yourself and face to Trumpshed; College Slice

JulianD posted:

How long does it typically take for a payment to be distributed to your account? The FAQ said it can take up to four business days to process, but it's been a little longer than that since my first payments were due. I have two notes I'm waiting on payment for, but the status says "Current" and "Processing...", which I took to mean the payment has been made and Lending Club is just dragging their feet on distributing the payment.

I'm not precisely sure, but remember that Monday was a Federal holiday in the US.

# ¿ Feb 20, 2013 17:29

Alereon: Feb 6, 2004; Dehumanize yourself and face to Trumpshed; College Slice

Shadowgate posted:

I have one note that is now over 30 days past due, and the person never made a single payment. That seems pretty sketchy they haven't made one payment.

Since it is unsecured debt, you will have people who don't care about their credit take out loans and then run off. Look for warning signs like public records, a large-sized loan in relation to their debt or where the reasons aren't explained very well, too many open credit lines, and lots of recent inquiries. Someone who has not-terrible credit (so something to lose) and a job that doesn't look too kindly on not paying your debt are good signs to me.

It's certainly true that someone who was motivated could probably craft listings that look legit enough, but I think (and could end up being proved wrong) that scammers aren't going to the effort to make listings that pass an inspection by someone motivated to not lose money when they can just craft one to fund through automated investments and people who aren't paying attention.

Also, goddamn, my deposit finally cleared and there's nothing above B5 to invest in

# ¿ Mar 1, 2013 22:44

Alereon: Feb 6, 2004; Dehumanize yourself and face to Trumpshed; College Slice

Shadowgate posted:

It was a D rated loan, so maybe not terribly surprising, but it was only $9k total, and for "wedding expenses". There were no public records or anything too, so probably just some rear end in a top hat that didn't care about their credit rating, especially since it was already bad.

Here's statistics showing loan performance by loan purpose, I think most people only invest in loans for credit card/debt refinancing due to the superior performance. It just makes sense since you're (in theory) directly reducing the amount they spend elsewhere rather than just letting them take on more debt.

# ¿ Mar 2, 2013 00:12

Alereon: Feb 6, 2004; Dehumanize yourself and face to Trumpshed; College Slice

These are just my opinions, but I will keep putting money into LC until I'm not confident of getting good returns. That seems sort of obvious, but in terms of default risk I mean as long as I don't think unemployment will go up significantly during the life of the note. I'm not too worried about LC themselves going out of business because it seems like it should be scalable and profitable (maybe I am an idiot), I do worry that institutional investors will get all the "good" loans and that seems like the most likely endgame.

You're definitely right that LC money isn't liquid, though if you just need your money out for personal reasons (not poo poo MARKETS CRASHING SELL SELL SELL) folio.fn may work for you. Regarding the time horizon, do keep in mind that money trickles out (including interest) and your average note age will be less than 3 years (if you only buy 3 years and steadily buy more) so you're not locked in for your full initial investment amount. On risk, I think that if a diversified LC portfolio is in trouble that probably means the economy in general is hosed so you'd have lost money with many investments with the potential for decent returns.

The way I look at it is that investing in consumer debt of any kind is essentially a bet that the economy (specifically consumer confidence and their ability/willingness to repay unsecured debt) will not implode during the repayment time of the loan. Given that people try not to default unless they can avoid it, there's also some significant lag time between things getting bad and the payments stopping. Maybe I'm over-optimistic, but I feel that by sticking to 3 year loans I can stop putting money in if I lose confidence that things are going in the right direction and just let the loans pay out before they get bad enough that too many of my borrowers lose the ability to pay. It's also important to note that my LC investments are a higher-risk part of a balanced, diversified portfolio, sweet Jesus don't put all your money into P2P loans (or any one thing).

# ¿ Jun 26, 2013 03:45

Alereon: Feb 6, 2004; Dehumanize yourself and face to Trumpshed; College Slice

sg54 posted:

Also, I didn't pay too much attention to the 70k networth thing - LC hasn't asked me to prove it. I plan on being responsible with how much I contribute and never putting more then I am willing to part with/lose.

On this point, I'm particularly curious how much verification folio.fn does, as I'm interested in trying to buy notes with a late payment at a steep discount.

# ¿ Jun 26, 2013 22:15

Alereon: Feb 6, 2004; Dehumanize yourself and face to Trumpshed; College Slice

Lending Club posted:

Investors who are residents of states other than California or Kentucky must have (a) an annual gross income of at least $70,000 and a net worth (exclusive of home, home furnishings and automobile) of at least $70,000; or (b) have a net worth of at least $250,000 (determined with the same exclusions).

FINRA regulation require that investment firms obtain a financial profile and only recommend investments that are "suitable" for a particular investor. This was designed to protect people from shady firms that would recommend the investments that make them the most money (or that were overly complex), not what's in their customers' best interests. This regulation shifts from a "buyer beware" model to a "seller beware" model, where it is the firm's responsibility to find out an investor's financial situation and not offer them investments that aren't suitable for them. The downside is that individuals who aren't already wealthy are prevented from accessing high-return investments and IPOs.

# ¿ Jul 27, 2013 22:06

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# ¿ Apr 24, 2024 23:43

Alereon: Feb 6, 2004; Dehumanize yourself and face to Trumpshed; College Slice

Briantist posted:

Even as far back as 2006 or so before the crash when I was looking at Prosper's community, there was a lot of unhappiness about the number of defaults and especially the collection efforts on defaults. Almost 0 defaults ever had any amount collected; it even seemed that there was little to no effort to collect by the 3rd party agencies chosen to do so.

If someone's credit has already been ruined because they aren't able to pay their bills why would they make any payments on unsecured debt? It's sad to say but the rational strategy is to dodge debt collectors and hope you don't get sued before the statute of limitations runs out.

# ¿ Nov 5, 2013 02:45

The Something Awful Forums > Discussion > Ask/Tell > Business, Finance, and Careers > Let's talk about peer-to-peer lending!!