LendingClub Investing With FOLIOfn
What is LendingClub
Investing in P2P loans can be an excellent passive income source. The only work is maintaining a good mix of loans. Let's start with the basics of P2P or Peer-to-Peer Lending and peer investing for the beginners.
When most people think of loans, they think of payday loans or unsecured loans with high interest rates. Some even think borrowing from your own 401k retirement plan is a great ideal because of the low interest rates. P2P lending allows anyone with a decent financial profile get a loan with a reasonable interest rate. P2P loans are quickly becoming the best choice for refinancing credit card, debt consolidation of other existing loans and to get a better interest rate.
More and more people are learning about P2P loans and how they can be the alternative to the big bank's high interest rate loans. Loans don't need to be high risk to the lender. Peer-to-Peer lending breaks up the loan into smaller chunks so each individual loaning the money (principal) is not at risk to losing a lot of money if one of the loans doesn't pay the principal and interest back. The risk is reduced so the interest rate is lowered.
LendingClub and Prosper are two of the main competitors in the P2P lending industry that is on the rise. Both are web based brokerages (like a stock market broker) that match a single borrower with multiple lenders (individuals willing to loan money). Lending Club reports they have loaned out over $4 Billion dollars of individual investors capital in 2012, $350 Million was interest paid back to individual investors. The popularity of these types of loans and investing is growing by multiples each year because of the success on both sides of the loan process, the lender and investor.
What is FOLIOfn
Not every state in the US allows investor to invest in loans directly with LendingClub or Prosper. LendingClub is not a registered broker-dealer and can not issue loans directly to the public in some states. LendingClub has a way for individuals in Texas and a few other states to invest in loans but not directly with LendingClub. The account is setup and monitored with LendingClub but the actual searching and purchasing of the loans is done with FOLIOfn.
FOLIOfn is a broker-dealer trading platform independent of Lending Club that is registered to handle investments directly with individuals in states like Alabama, Alaska, Arizona, Arkansas, Indiana, Iowa, Massachusetts, Michigan, Nebraska, New Jersey, New Mexico, North Carolina, North Dakota, Oklahoma, Pennsylvania, Tennessee, and Texas .
Investing through the note trading platform FOLIOfn website, you don't get access to bid on new loans. You only can purchase and sell loans that have already passed the approval and funding process. This is also called the "secondary market" of loans. With FOLIOfn you are investing in established loans that have a history of payment.
When you setup your search criteria and find a loan available to purchase that meets your criteria. You buy the note. Your money goes to the lender and is removed from your account. Generally most investors only pick notes that are a maximum of $25 per note. Each month the borrower pays back the principal with interest. Once the loan is paid in full, you are ready to reinvest the principal and interest into another loan. It's just that simple.
Here is an example loan scenario: You buy a portion of a loan for $25. The original total loan amount was $10,000. However you are only purchasing a fraction of the total loan amount which is $25.. Other investors, sometimes several hundred investors all contributing $25 will take up the rest of the $10,000 loan amount.
Just to make the math easier we can assume the loan duration was for 25 months at a 5% interest rate. Every month you will receive one dollar of principle with 5% interest added as cash back into your account. Once the 25 months have completed you will have your $25 returned with the 5% interest added paid back incrementally over time, paid each month by the lender. Since the loan amount is so low, generally you will invest in hundreds of loans.
Lending Club tracks your accounts progress through the Adjusted Net Annualized Return. This is a real time measure of the calculated interest rate you can expect with the current mix of loans you've chosen. If the majority of your loans are high interest rates, you can expect the calculated sum of your Annualized Return also run high. If you experience a non-payment, this will lower your Annualized Return.
From LendingClub to FOLIOfn
Once you setup and fund your account with LendingClub you will search for notes to purchase (loans to invest in). In the LendingClub website there is a button called Trade Notes. Once you hit Trade Notes it will transfer you into the FOLIOfn website. This is only for people living in the states mentioned above. There will be a pop-up window saying you are now leaving the LendingClub website and entering the FOLIOfn site.
The FOLIOfn Trade Notes section is where you can Browse Notes using the filter selections or you can sellect to Sell Notes you already own (there is a 1% charge for notes sold). Selling notes can be a quick strategy to earn interest and a markup amount on notes you don't want to keep for a long time. What are the chances a note goes into default within the few months you own the note.
Some investors use this strategy to buy notes at a discount and then immediately sell the same notes at a markup. This has worked for me on several occasions and it can be a quick way to temporarily increase your Annualized Net Return. I generally keep all my notes for sale at a premium price above the 1% fee. I've sold notes with a 4% markup. FOLIOfn kept 1% and I kept 3%. Not a bad profit and a quick way to increase your earnings.
Let's start by looking at the Note Trading Platform settings, defaults and filter choices.
Note Search Criteria (defaults)
Aggressive Investing = High Risk Loans
You make the choice on what types of loans you want to invest in. You set the search criteria to pick loans that meet your standards. There are over 80,000 loans for sale on FOLIOfn today to choose from.
I prefer to be aggressive in my loan selection process. Here are my preferences for searching potential loans to invest in:
- I filter my search results to find interest rates running 10% and higher.
- I like to see at least a few months of payment history so I set the Remaining Payments to 1 to 55 months.
- I prefer my borrowers to have a decent credit score so I adjust the filter to only show loans with a credit score of 700 and higher.
- I don't like to invest in loans with recent lowering of the credit score so I remove the Decreasing from my filter choices and only view loans with increasing or unchanged credit scores.
- I try to keep my investments and risk to any single note to less the $50 so I'll adjust the Asking Price amount from 0 to $50
- I like the higher interest rates because I taking a more aggressive strategy, so I filter the Yield to Maturity from 10% to Any
- I hate to pay excessive markups for loans so I filter any less than 4% Markup and I leave all the discount there just in case someone is desperate to sell a good loan at a discount.
- I don't mind investing twice in the same loan. It's a little risky and it exposes you more to both loan chunks defaulting. It's the same loan so a default hits them both. I leave the filter showing all loans even loans I've already invested in.
This is my extremely aggressive filter settings with a little explanation to help you decide on your own filter settings. You should develop your own settings that reveal loans of good quality that match your risk levels.
Safe Investing = Low Risk Loans
Many investors can see the potential with investing in Peer-to-Peer Lending as a safe vehicle to maintain a steady 4% to 8% return which is far better than any bank is providing these days. No one is predicting banks will ever return to the glory days when you could get a CD Certificate of Deposit to pay you 5% interest. Today is rare to find anything near those types of return unless you want to invest in Greek bonds.
By playing it safe and choosing your loans wisely and limiting your risk per loan, you can easily make a decent return for many years to come. Reinvest the interest you're paid into new loans to compound your reward. Peer-to-Peer Lending is still in it's early stages of growing so it's popularity and growth means more loans to choose from in the future.
Warren Buffett, one of the richest men in the world said it best:
- Rule No.1: Never lose money.
- Rule No.2: Never forget rule No.1.
Saving your money and enjoying the benefits of compounding interest is the key to financial success. It works every time. Safe investing has been the bedrock of investing education for many years.
Another wise man, Albert Einstein said;
- “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”
Look at the table below and see two different styles of investing. You can take risks with your money and hopefully get a bigger reward with higher interest paid back to you. Or you can follow the wise advice of so many successful people and play it safe and build up your portfolio with great loans paying a steady payment each month with interest.
Suggested loan search criteria
From 4% to 27%
9% to 27%
4% to 10%
36 Months and/or 60 Months
Check on both
Check on 36 only
From 0 to Any
0 to Any
0 to $25
Issued, Current, In Grace, Late 16-30, Late 31-120, Never Late
Remove In Grace and Late
Remove In Grace and Late
From 1 to 60 Months
From 1 to 53 Months, I don't like new loans
Lower the max for more mature loans with a longer history of payments
Recent Credit Score:
From 600 or Less to 850
From 740 to 850
From 800 to 850
Credit Score Change:
Increasing, Decreasing or Unchanged
Remove Decreasing and Unchanged
Original Note Amount:
From $25 to Any
From $25 to Any
From $25 to Any
From $0.00 to Any
I stay at $25 max
Reduce the max your willing to loose per loan
Yield to Maturity:
From 0% to Any
10% to Any
From 0 to Any
Markup / Discount:
100% Discount to 70% Markup
100% Discount to 3% Markup
4% Discount to 10% Markup
Exclude Loans I've already invested in.
Other Peer-to-Peer Lending
Which P2P Lending Platform do you invest with?
Found a Note
I sort the results of my Note searches by the clicking at the top of the Yield to Maturity column twice. This way I sort the notes starting with the highest yield rate at the top. By using my aggressive filter settings and sorting by yield rate my best candidates will be at the top of this list.
I would do the same with the safe investing strategy except I might sort by Markup/Discount or Asking Price depending on what I was looking for. Your strategy might differ depending on your risk level. It's all up to you.
Clicking on the Current link from a single note in the Browse Notes list, you will be taken to the details of that note. You will see the Loan Performance details. This shows the history of the note, date of each payment, if any payment was late or not received, the interest rate, duration, original amount of the loan, etc.
This gives you an ideal of the loan that was setup for this borrower.
Check the borrower
After checking the details of the loan and seeing a good history of payments without late or non-payment issues, you can click on the Original Listing link. This is the details of the credit-worthiness of the borrower. This is your chance to determine if this borrower has a stable credit history and performance with enough income to pay back the complete loan amount.
I first look at the income amount, then I compare that to the original loan amount and check the debt-to-income ratio. I like to see an income of over $50,000 annually and a debt-to-income ratio below 80%. I look for any recent negative credit history or delinquencies and determine if enough time has past to recover from it. I also look at the reason for the loan. I like to see more debt consolidation and less new business venture loans.
- I set my filters on the Browse Note search only the loans that fit my criteria.
- I search each individual Loan Performance of the loan and checked the Original Listing that shows the credit-worthiness of the borrower.
I'm now ready to purchase the note. I return back to the Browse Note page and select the notes I want to purchase and hit the Add to Order button at the bottom of the screen. This takes me to a page where I can confirm my choices. It takes a day or two for the purchase to occur. I get an email once completed.
The loan amount is withdrawn from my account and the next payment on the loan from the borrower will be deposited back into my account with interest. It's just that simple.
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This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2014 Alan Lee