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Transplant Athlete
Tuesday, August 24, 2010
  Lending Club Part 1

Update: Now that Lending Club has raised their loan limit, these numbers have all changed. So, please don't rely on these results. You can follow the methodology to perform your own analysis on the new data.

I've been meaning to write about my experiences with Lending Club for a long time now. I'm not an affiliate, so I don't have anything to gain financially by writing this. Recently, I saw a blog post over at Frugal Dad titled "Investing With Lending Club: Six Secrets to Higher Yields".

Six Secrets...Those are powerful words... If you were looking for those six secrets to higher yields, you'd be disappointed.

I guess the best place to begin is Lending Club's prospectus. They publish a new one every couple of months. Read it very carefully. There's a table in there that describes the historical default percentage by loan grade. It's on page 56 of the current version. Back when I started and Lending club was only putting out 3 year loans, E3 loans had a very low default rate, a rate that was in the same range as a couple of the B grade loans. So, I initially only invested in E3 loans. I got the high interest rate and the default rate of a B grade loan.

Things got mucked up a bit when LC started doing 5 year loans. A loan that would have been in the D level got bumped up to an E level if the borrower opted for a 5 year loan. Someone who would have been an E3 at a 3 year loan is now bumped up a couple grades as a 5 year loan.

Still, there's important information in that table. FOR EXAMPLE: A G1 loan has a 10.46% default rate while a G2 has a 32.52% default rate. A G1 loan carries an interest rate of 20.16% and a G2 carries an interest rate of 20.53% but is much more likely to default. For the highest yield at the lowest risk, you choose the G1. If a 10.46% default rate scares you, drop down to the E grade loans and choose the highest yield with the lowest default risk. If that scares you, you keep working your way down the alphabet until you find a default rate you can live with.

The usual disclaimers apply: Your Mileage May Vary, Past performance is no guarantee of future performance, this is not a solicitation, consult a professional, etc. I should also add, that this table changes, so it's not a perfect indicator.

The table also shows percent prepaid, which is also important. Early payment lowers your return. First of all, it is work searching through listings, asking questions and deciding on which loans you want to fund. It is very time consuming. When loans are paid back early, you lose out on interest, you now have to find a new loan to invest in, and you lose interest while that money is not invested.

When you commit funding to a loan, you have a period of anywhere from 1 to 13 days where the money is not earning interest. If two loans pay back within the first payment, you have just lost approximately a month of interest between them and their replacements.

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I've gone through kidney failure twice. The first time in 2000, my mother donated a kidney; and again in 2008, I'm on dialysis waiting for a breakthrough in immuno-suppression medicines before seeking a new kidney.

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