Monday, November 21, 2011

How do I choose loans?

I just received an email from Peter Renton, of fame, asking me a few questions about my use of FolioFN. I figured I would answer them in a blog post.

How do you choose the loans?

I first started choosing notes to buy based in several criteria. I would scrutinize the notes, read over the application, really make sure I was buying a solid note. However, that was when I was going to hold every note until completion.

I always believe that if something is not dear to you (no note is really dear to me) it has a price that it can be sold for. For instance, on, I have a Make Me Move price. I'm not in the market to sell my house, but if someone were to offer that much, I'd be willing to move. The same thing with my notes. My personal rule is that every note should be up for sale, even if no one will bite. The reason is simple, if someone does bite, they take the risk away from me and give me my return.

As I saw how easy and fast you can sell notes, I decided to change my strategy to be in the business of buying just about any note, but sell my favorites at a premium and the less desirables for minimum returns.

So, for the technical aspects of buying notes:

1. Use FolioFN Note Browser to filter only notes that were Never Late and are Now Current.

2. Then click on the Yield to Maturity column twice (sorts by Yield with the highest first).

3. This is when my hand written tool comes in. I have a custom Python script that runs while I'm on Lending Club's site (and FolioFN) that scrapes the web pages I am viewing and puts together account information and displays more meaning information. For instance, it will show me notes that I currently own another note from the same loan (or a purchase is pending), or notes that are larger than a $25 slice of the loan.

When I'm down to too little cash to buy a new, high yield note (generally less than $20), I then sort by asking price and look for the best Yield to Maturity for the money I have left. This can be a bit tedious if I have more than $15, as there aren't many positive yield notes in the under $5, but for each dollar added, it appears the number of notes grows exponentially, so you have to wade through more pages to find the best return.

How do you find the interface?

I find the FolioFN interface lacking. This is sad because the state I live in does not allow me to fund loans directly, which means much of the nice data and interface from Lending Club does very little for me. Here is my wish list for FolioFN's note browser:

  • Download all notes for sale in a format that a spreadsheet can import (making many of the following unnecessary)
  • Filter out notes from loans for which you already own a note (or a purchase is pending)
  • Filter out notes by asking price (ie notes asking $12 or less)

Selling notes on FolioFN is about as good as it can be, although the two step process of selecting which notes to put up for sale is a bit annoying. I like the one-button that sets all to principal + interest and then the button repeated so you can do that for just an individual note.

I do wish the sale window was more than one week. I'd love to have my notes for sale for a month, maybe two. The problem you would run into is what to do when you get a payment. Reduce the asking price by the payment amount? Reduce it by the principal only? I'd like both those options.

While I would like these tools built into the FolioFN website, not having them gives me a slight edge. With my custom tool, I get at a lot of these features (however, not the long term sales) via my custom Python script.


  1. Any chance you'll share your Python script?

  2. If you email me, I can send it to you. I am hesitant to post it as it feels like it is held together with duct tape and bubble gum. It requires Mac OS X and Safari. There are little quirks I work around and things I'm going to get to.

    Even after that, if you still want it, feel free to email me.

  3. I have enjoyed reading your blog. So what types of notes exactly are you purchasing? Highest interest or largest discount? And what kind of mark up are you setting to sell?

    I am just curious. It seems like a lot of work to buy and sell $25 notes as the profit would not be all that much in dollar terms.

    Thanks for sharing.

  4. c.j.,

    Excellent questions.

    I am buying notes that meet the following requirements:

    1. Have never been late and are current
    2. Are $25 shares of the loan
    3. I do not own another note in the loan
    4. Highest Yield to Maturity (sort by the last column in FolioFN Browse Notes)

    As far as selling them, the notes that are current I sell them for an annualized return (taking into account payments so far, purchase price, selling fee, taxes, etc.) of 16% to 32%. Since it is annualized, it may be a very small amount over what I paid for it if I just bought it. I have a formula that calculates the risk of each loan I hold (taking into account credit, reason, state, amount, etc.) and the higher risk loans are put up for 16% annualized return while the notes with the lowest risk (at least according to my formula) are put up for 32% annualized.

    For notes that are in the Grace Period I am now offering those at Principal + Interest rounded down to the nearest dollar. Notes that are 16-30 days late I offer at 75% of Principal + Interest, rounded down to the nearest dollar. Notes that are 31-120 days late I offer at 50% of Principal + Interest, rounded down to the nearest dollar. The asking price for each of these three is then reduced by $0.10 per day.

    I'm still developing my strategy for Grace Period and Late notes. We'll see how it evolves.

    It was a lot of work to buy and sell $25 notes. That is why I developed a tool that allows me to spend less than 10 minutes a day to do my buys and sells. I am more concerned with the time I spend right now.

  5. My strategy is:

    1. Have never been late and are current
    2. Any size share of the loan
    3. Combination of max discount and credit score change. (Eyeballed - nothing calculates this directly)

    Selling blemished notes is painful, and I usually prefer to hold notes to maturity.

  6. driftdiver,

    Seems like we have very similar strategies. How long have you been running this strategy and how are your returns so far?

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  8. This post (and this blog in general) were featured in Peter Renton's article at: