One Year of Lending Club: The (Getting) Ins and (Getting) Outs of Lending Club

Well now, I was hoping to be further along before this post than I am. I intentionally (this time it really was) did not post last most. I considered it my quiet period as I was liquidating.

My one year experiment with Lending Club has led me to the following for those who do not live in a "funding state":

1. It is easy and quick to get going in Lending Club, although I would recommend buying in slowly to get the best performance
2. It is easy and very slow to get out of Lending Club (sold 150 Notes over two months)
3. Learn how to find Pre-Grace Period status of Notes
4. Don't hold on to Grace Period Notes and hold no hope for Late Notes (it's just better that way)
5. There are three very different markets: A/B, C/D, E/F/G. I focused on E/F/G most of the time. My conclusions may not hold as well for the other two markets.
6. Both High Yield To Maturity and Low Markup buying techniques work well
7. Lending Club's Net Annualized Return is only valuable to compare against other investors and to track historical changes, the number itself is pretty much meaningless

So yes, I am really liquidating my Lending Club account (just about finished now). This was an experiment with my play money and it is now time for me to pull all my cash together to buy my mother-in-law a house. I will invest in Lending Club again when all this house thing settles out.

I also wanted to be able to report on what it is like to get your money out of Lending Club (a concern for many). You can do it. It will take time. I am selling them off at about 2 to 3 Notes a day on average.  I offer my Notes for sale at either 16% Cash-on-Cash-Return or a specific Markup, which ever leads to a lower price. I started with a 3.9% markup, and dropped it to 3.4%, 2.9%, 2.4%, 1.9%, 1.4% and now 0.9% markup. When I noticed that I was not selling 2 to 3 Notes a day, I would lower my Markup by 0.5%. I am not selling any of my Notes at a loss (except any Grace Period Notes, but those are becoming rare as my portfolio shrinks). 

It is weird not going in and buying Notes anymore.

This has been a terrific experience. I have really enjoyed working with the P2P lending community, especially Peter Renton of Social Lending Network. There is so much great information out there to learn.

If you run across this post and are considering Lending Club as an investment, might I make a few suggestions:

1. Read all you can. My blog, Social Lending Network (BTW Peter has a course you can buy that should give you plenty of information), etc.
2. Start investing right away. Don't wait until you have all the details.
3. Start small. As you gain experience (and make mistakes) your educational process will accelerate. You will not learn enough from reading alone, and you want your mistakes to be with a small portfolio.
4. Make mistakes, but try not to make my mistakes (or Peter Renton's, etc. learn from us). Don't be afraid to make mistakes.
5. Share what you learn. Start a blog (free at blogger.com) and share what you are learning. Link to great sources of information you've found.
6. Get involved. The P2P lending community has several great leaders in it. Follow their twitter accounts. Read their blogs. Circle them on Google+. Comment. Share. Be part of the discussion.

This is not goodbye, but until next time. I've had a great time. I look forward to coming back and investing in Lending Club.

Signing off for now.

- Marc

Ten Months on Lending Club, Brutal Reality Hits

I missed a month on reporting how my Lending Club experience was going. I could say I was extremely busy (I was) but it was probably more coming to grips with brutal reality. Right after I posted on my Eight Month Results, my NAR dropped to 6.0%. I think that was the result of my Defaults finally all going to Charge Off status.

I'm slowly climbing my way out of those Charge Offs. I've learned how to avoid them by avoiding any Note that even smells of a Late payment. I check the Loan Performance page for every Note that is Processing payment (sort my Notes by Payment Due Date and open each in a new Tab in Chrome). I don't buy Notes that are more than 20 days since last payment (saves me having to look at the Loan Performance page).

My portfolio has also changed quite a bit, not so much from trying to avoid Defaults, but due to a shift in strategy caused by using Lending Club Chrome Extension. Until I can bake into the Sale Price my risk factors (feature yet to be added), I don't buy as risky of Notes. Instead I look for discounted Notes. It turns out that the most discounted Notes tend to be Grades D, E and F (although F not quite as much).

When I buy Notes, I look for Notes that meet the following criteria:

• have a Yield to Maturity of 16+%
• no more than $25 Outstanding Principal
• no more than 20 Days Since Payment
• I don't already own a Note of that Loan

I then get the most steeply discounted (or least marked up) Notes that meet that criteria. The Chrome Extension makes this really easy to filter for (even if there is a lot of clicking "Next").

Once I have my Notes, I immediately offer them up for a price that gives me (after taxes and fees) 18% annualized gain, unless the Note is in pre-Grace Period or Grace Period, in which case I discount it to sell. I was offering my Notes at 16%, but they were selling too quickly. At 18% I tend to offer my Notes at 1.5% to 3% markup (depending on what kind of Discount/Markup I had).

I divide my Notes into two main Portfolios (four actually, but most Notes are in two). My newly acquired Notes that have not made more than one payment (I call them Buttercup) grew tremendously when I offered my Notes to get 16% annualized return. Since raising my expected annualized return to 18%, the two portfolios have balanced out and are now about half each.

My Buttercup portfolio is mainly split between D and E Notes. It looks like before the D Notes hit their second payment, they have a 50/50 chance of selling at those discounts.

The other half of my portfolio (Wesley) contains Notes that have made at least two payments. These are mainly F Notes, followed by D and E Notes. I'm happy to see that the higher yield Notes are sticking around longer (they don't sell). To recover from those Charge Offs, I need an accelerated return, like the 19.41% Wesley brings in.


So in two months I raised my NAR from 6.0% to 9.36%. I've heard rumblings that NAR is pretty much meaningless. I think it is an easy way to measure the direction you are going in, but I agree it has no real world value. I wanted to find a better overall metric for myself. I settled on Annualized Cash on Cash Return. The way I calculate it is treat my account as a closed box bank account. If I put my deposits in a bank (and taking into account withdrawals) what APR would that account have to have the balance I have now.

The cash equivalent balance I have right now is an interesting thing to figure out. You can start with your Account Total (on your main Account page), but that doesn't take into account Notes you've purchased today (I tend to have a half dozen to two dozen purchases pending). The cash for those was transferred from Lending Club to FolioFN to purchase the Notes, but FolioFN hasn't reported the Notes back to Lending Club yet. So I add in the purchase price of pending purchase Notes.

This CCR calculation really opened my eyes as to how bad the NAR calculation is. My annualized CCR after ten months is -2.45%. If I were to sell my Notes for their Outstanding Principal + Accrued Interest and cashed out my account, I would have less money than I put in. Now 8 Charge Offs and dumping a bunch In Grace Period Notes to clean out your portfolio can have a devastating affect, but I was not expecting that. Now that I have a way to track my CCR, I'll be watching that. It does get better daily, so I like the direction it's heading in. What scares me is what it would have looked like two months ago.

So bottom line is I am digging myself out from the Late Notes that went to Default and clearing out a bunch of In Grace Period Notes at steep discounts. Things are getting better (noted by the NAR rising and the daily improvement in my CCR). I've got two months until my one year anniversary. We'll see what kind of CCR I can come up with in the meantime.

Lending Club Chrome Extension: Buying FolioFN Notes

(See Other Posts about Lending Club Extension)

Version 0.3 of the Lending Club Extension has been released (see what changed). I am getting feedback that we need more detailed information about how to use it.

Install Note Browser Filter 

(click on this link in Google Chrome)

The first step is to click on the link above and go through the installation process (you may need to click a button at the bottom of this page saying you trust me, you do trust me don't you?). After you have installed the extension, you will see a Lending Club icon in your browser window. Clicking on this will bring up a settings window. If it feels a bit cramped, you can get a bigger page with the settings by clicking on the wrench (spanner) in the upper right corner (shown in the image here) and selecting Tools -> Extensions. 

In the extensions list you'll see Lending Club FolioFN Note Filter (I need to change that name). The image below shows what it looks like (except it will be version 0.3 and it won't say (Unpacked)).

If you click the Options link you'll get the same options you would get by clicking the Lending Club icon at the top of the window, but you'll have more space to look at things like Help.

There are two main features that this extension helps you with,  Buying Notes and Selling Notes. 

Buying Notes (or Note Filters)

When buying Notes on the FolioFN platform, you'll see a table that looks something like the above. When the Lending Club extension is working, the table will have green rows (if not, there will be blue rows). There are some limited, though helpful, filters already available on FolioFN, seen in the box before the table. I usually choose the Never Late checkbox and uncheck the rest and leave everything else as is. Once you search with the FolioFN filters, then it's time to pull in the extension filters.

Clicking on the Lending Club icon at the top of the window will reveal a window with the extensions filters. They mostly match the column headers (and in the same order) as seen in the Browser Notes list above.

Some values have a Min/Max, for instance Days Since Payment. Let's say that you want Notes that are about to make a payment, but not so close that it is processing just yet. You would enter a Min of 18 and a Max of 24 (I've seen some Notes start processing 25 days after the last payment).

Any Notes that have Days Since Payment at 18 through 24 will be left untouched. If the Days Since Payment falls outside that range, the extension will look at the Out Of Range Color box to decide what to do.

Clicking on the popup menu next to the Out Of Range Color box for Days Since Payment will reveal options for actions to take. By default (empty box) the filter is disabled, meaning it will do nothing if it is outside the range. You can Hide Notes that are outside the range (you won't even see them). This will fill in the Out Of Range Color with six 0's (000000).

The rest of the options for Out Of Range Color are actually colors. These set the background to the selected color. The value that is filled in the Out Of Range Color box is of the format RRGGBB for the Red, Green and Blue value in web format (two digit hexadecimal values). Don't worry, you don't have to know what any of that means, you can just select from the menu the background color you want. The numbers and letters in the boxes are for those who want absolute control over the colors. Feel free to play around with them (6 characters either 0-9 or A-F).

There are four items that do not have a Min/Max, Duplicate Loan, Loan Owned, Note Owned and Imperfect Status.

Duplicate Loan

The second time (or more) a Loan Number is seen on a page, the Out Of Range Color will be applied. This helps prevent purchasing multiple Notes from the same Loan.

Loan Owned

If you own a Note from this Loan (either this Note or another Note) the Out Of Range Color will be applied. The is another help to prevent buying Notes from Loans you already own.

Note Owned

These are the Notes you actually own. Lending Club replaces the checkbox with a little blue circle so you can't select them anyway. If you select Hide Note (000000) for the Out Of Range Color then this noise will be removed from the table (you can't buy it anyway).

Imperfect Status

There are two statuses that are considered perfect, Current and Issued, anything else is considered Imperfect. This allows you to highlight or remove Notes that are In Grace Period or Late.

The selections above are what I use when I am hunting for Notes to buy. I remove all chances (well, nearly all) that I will buy two Notes from the same Loan (Duplicate Loan, Loan Owned, Note Owned). I don't care if Term is 36 or 60 months, so I leave that alone. I only want Perfect Status, so I hide all Imperfect Statuses. I don't want to buy Notes that are processing a payment, so I highlight in Light Red any Notes 25 days or more since the Last Payment (this helps filter out people selling Notes in Pre-Grace Period). I always want a Yield To Maturity of at least 16%.

What settings do you use? Are you having any problems or something is not quite clear? Have a suggestion to improve the extension? Leave a post below and I'll see what I can do.

Lending Club Chrome Extension Version 0.3

(See Other Posts about Lending Club Extension)

It's taken longer than I expected (partly because I got sucked into Empire Avenue, ticker MARCPAGE). Then Peter Renton (of Social Lending Network fame) pointed out that the extension doesn't work well when selling Notes that have been Funded as opposed to Purchased on FolioFN. As I am in a state that I cannot fund Notes, I wasn't sure exactly how to handle this. With Peter's help we've come up with a pretty nice solution.


Install Note Browser Filter 
(click on this link in Google Chrome)



First, a little background. When selling or repricing Notes, the extension will add two extra columns, one for Annualized Return and one for Markup. The Annualized Return is the return you would get if that Note was sold between now and the Order Expiration Date for the given price, taking into account how long the Note has been held. In other words, if you put the money into a bank account with an APR of the Annualized Return, and left it in there for the same period of time as you held the Note, you would get your Asking Price when you withdrew the money.

In order to do this calculation, the extension needs to know when you acquired the Note. If you purchased the Note this month via FolioFN, it will get this information from the My Account page (just visiting this page will get these dates). If you purchased the Note in a previous month, you can find the purchase date in the Trading Statements at the bottom of the FolioFN My Account page (change Showing Notes to All). again simply loading these pages once the extension will store off the purchase dates for the calculation.

However, if you did not purchase a Note from FolioFN, I now get the acquired date from the Loan Performance page (just about every Note on any page has a link to this page, see the Current links in the images below). Loading the Loan Performance page will store off the Issue Date for use in the calculation.

In version 0.2 there was a bug where if we could not find the purchase date, the two extra columns would be added, but they would be left blank. Now we will fill in the Markup right away (we can calculate that from the data on the page). While loading the acquisition date we now let you know what we are doing.  Once we have finished our search for the acquisition date, we simple state "Purchase Date?" to let you know that the extension has not seen any page that lists the Issue Date nor the Purchase Date. At the point you can go to the My Account page and then the appropriate (or all) Trading Statement(s).

If an Issue Date is found but not a Purchase Date then the Annualized Return will be blue to let you know that it hasn't seen evidence that you purchased it, so it is assuming you funded the Note (plus an extra row will be added to the top of the table letting you know what blue means).

Lending Club Chrome Extension Version 0.2

(See Other Posts about Lending Club Extension)

After using it myself for almost a week, I'm proud to announce version 0.2 is available for install (see Alright, I'm Ready To Share for original announcement).

Install Note Browser Filter 
(click on this link in Google Chrome)


So let's start in with some of the changes. Next to the Out of Range Color boxes there is now a popup that allows you to choose from preselected colors, hide the matching Note or disable that filter altogether.


I've found this handy when I want to temporarily disable a filter and then reenable it, specifically when I have change left over in my account, I don't expect to get 16% Yield to Maturity on $12 Notes.

You'll notice there are a few more links. These each open a section on this page. Opening the Preferences section allows you to set your Short Term Tax Rate (with a link off to a site where you can look it up), your Minimum Preferred Gain and the discount you want to give on Grace Period and Late Notes (in my experience all Late Notes are the same, hard to sell). Why would the extension need to know this information? Glad you asked.

Now when you Sell or Reprice Notes, two new columns are added giving you the Annualized Return and the Markup. As you modify the values, those columns also update with the new values. The Annualized Return is based on the date you bought the Note (more about that later, see Caveat below) the Order Expiration Date (at the top of the table) the Asking Price, the Payments To Date, the Maintenance Fees, the Sell Fee and estimated Taxes (see Can Someone Check My Math? for details on the calculation).

As an example of what happens when you change the values, the snapshot of the table below is identical to the table above except I pressed the Principal + Interest button at the top of the table. Notice all the Markups went to zero and the returns were adjusted accordingly.

Another cool feature is that if any of the Asking Price fields are every empty (deleted) they will be filled in with the value that will give you your Minimum Preferred Gain from the Preferences. For the Sell Notes page, this will automatically fill in every Asking Price (since they start out blank) with a value that will give you your Minimum Preferred Gain (or Discount based on Grace Period or Late of the Note). When Repricing Notes, just delete the value in the Asking Price box and it will fill it back in with the appropriate value. This feature alone saves so much time. When you have 80 Notes you want to put up for sale, determining what you want the sales price to be and then entering it in can be mind numbing.

Caveat

In order for the Annualized Return (or the Asking Price) to be calculated, the extension has to "see" the purchase date on one of FolioFN's web pages. If you visit FolioFN's My Account and the Note shows up there as purchased (this month) then it will have seen the purchase date. However, if you purchased the Note in a previous month, you'll need to go to the bottom of the My Account page and look at the Trading Statement for the month that you purchased the Note and then change the Showing Notes to All.

All you have to do is view these pages after installing the extension. It will remember the purchase dates of all the Notes it sees. What I did to get things kicked off is open each Trading Statement in a new tab and then went to each tab and changed Showing Notes to All. Then I closed all the tabs. Do that once and the extension will remember all the purchase dates.

Feedback and Donate

I've added to other links, Feedback and Donate. The Donate link just gives an Amazon.com affiliate link you can use to show your support for the extension (or alternately PayPal information). I've spent all the time I really need to for my needs on this. I'll be using the donations as a gauge of how much time I'll spend adding requested features and improving the extension.

The Feedback link will send you back to this blog. For suggestions, problems, questions, etc. just leave comments on this blog.

I hope this helps make FolioFN a more usable part of the Lending Club experience (especially for those of us that FolioFN is the main part of Lending Club we can use). Let me know what you think.

Eight Months on Lending Club

(See other Monthly Status Updates)

Already another month. My NAR keeps dropping like a rock as Lending Club is coming to terms with those Late Notes that will never pay as they move them to Default and Charge Off. I had almost a dozen Notes that went Late. One completely paid the Note off. One came back into payments (and then I was able to sell the Note). I think I sold another couple.

Even though the graph looks depressing, I am optimistic. I have realized what I have done wrong, and how to prevent future Late Notes (which nearly inevitably lead to Defaults and Charge Offs). Since the first wave I have only had one more Note go Late.

As I peruse the other P2P Lending Blogs (see several excellent ones to the right) it seems that 12% NAR is considered pretty good. It's definitely better than than the Stock Market (see Why You Should Invest in the Stock Market) but my target is 16% or higher, mainly to offset the effects of real inflation (see Not All Inflations Are Created Equal). I'm confident I can get back to 16%.

Once I learned the ropes of Lending Club, I wanted to make sure that the time I was spending on investing was not offsetting my gains (unless your time is worthless, you need to consider this). Now that I have the Chrome Browser extension (see Alright, I'm Ready To Share), I feel like I have finally been able to bring down my time spent to a reasonable amount. Before I used this extension, I was only looking at Lending Club 3 days a week to cut down on the time I spent investing. Selling Notes used to be my biggest time consumption, and that was manually entering dozens (even more when I went to 3 days a week from 6) of sell prices from my spreadsheet. Now my extension enters them all for me (coming in version 0.2).

I'm back to 5 to 6 days a week, but it is a 5 minute checkup as opposed to 10 to 15 minutes. And the time spent will not grow dramatically as I scale up my portfolio. I was having a hard time seeing 400 let alone 800 Note portfolio before. Now I can easily see it.

I've now sold 3 times the number of Notes I currently hold (churn). My Notes held average $24.88 and I've held them on average for 2 1/2 months. The Notes I've sold I've held for just over 3 weeks. My median return on sold Notes is 28.8% annualized, or 38.2% days weighted annualized (the longer the Notes been held, the more weight it is given in the average).


The average rate for my Notes held is over 21%. This is a snapshot. I tend to sell off higher Interest Rate Notes, so my held Notes is a little lower, but we'll get to that later.




Almost all my Notes are 60 month Notes. I prefer it this way. I try to buy Notes with a lot of Principal left, which means that the payments are mainly Interest. 60 month Notes have even more Interest since the Principal is spread out over a longer period.



This is a natural side effect of how I choose Notes. I look for Notes with good Yields, and 60 beats out 36 just about every time.





Overall Composition

I always get concerned when I look at this chart. I really don't like holding G Grade Notes, but I have more G Grade than E Grade (I'd rather the reverse). I do like to see that the majority of my Notes are F Grade (in my opinion best Risk/Return balance).

The D and B Grade Notes are the stragglers when I have less than $25 left to invest, then I go find a good Yield Note with less Principal and these can often be lower Grade Notes.

The nice thing about having portfolios is that you can analyze your Note in different segments (see How I Use Lending Club Portfolios). You'll recall I had separated out my fairly newly purchased Notes from those that I had received at least 2 payments from (my Buttercups and Wesleys, respectively). This helps me see how my buy and sell strategy plays out. I buy irrespective of the Note's information just on it's raw Yield or Discount. It could be a Note that has a plunging credit score, lives in Florida, leveraged to the hilt, only on the job for a month, high debt-to-income G Grade Note, and I'd still buy it because it has a good Yield to Maturity.

However, when I sell is when I look at the details of the Notes. That G Grade Note will get sold for near 16% annualized return markup. While the Notes I would rather keep, the F Grade 10+ year employed, home owner, from Oklahoma, get a higher, closer to 32% annualized return markup. So let's see how that affects my portfolios.


Buttercup

The Buttercup portfolio are the Notes I've recently purchased (and haven't gone bad in any way). As you can see, it skews highly towards the G Grade Notes. This is a symptom of buying Notes based solely on Yield To Maturity.

If you compare this graph to the overall composition graph, you'll notice that I sell many of the G Grade Notes before they reach a second payment.










Wesley

My Wesley portfolio are the Notes that I've held for at least two payments and have not started missing payments. This is what I like to see in my portfolio. Overwhelmingly F Grade Notes, followed by E Grade and a few G Grade Notes (and a smackling of smaller Grade Notes).

Notice I still have an over 20% Weighted Average Rate, but I am more heavily invested in F Grade Notes, which have a lower Default Rate than G Grade, and have a higher average Yield (see Low Risk, High Return Lending Club Strategy).



Strategy Change

I have three buying strategies I use. The first is Newly Issued High Yield to Maturity 60 Month Notes (see the bottom of Seven Months In And Things Are Slowing Down). The second is High Yield to Maturity only. The third is Highly Discounted over 16% Yield to Maturity.

I used the second strategy the most heavily for the longest and have been using all three lately. However, until I get my extension to add risk factors to selling prices, I'm probably going to have to focus on the third strategy (Highly Discounted). Many of the seasoned veterans use this method (although not necessarily limiting it to above 16% Yield to Maturity) and have called into question the High Yield to Maturity model. Without my risk based selling prices, I think I'm going to have to agree with them. Plus Now I have a tool that allows my to visually see Discount vs. Yield to Maturity (see Discounted Notes on Lending Club's FolioFN).

Conclusion

So the effects of the Late Notes from the end of last year are finally starting to show in my Net Annualized Return. We'll see when I actually hit bottom on that. As long as I can prevent future Late Notes (which eventually lead to Defaults and Charge Offs), which so far has been pretty successful and will only get better with the Chrome Browser extension, I think I can climb back up to 16%.

I'm excited about the time savings I am getting from using the Chrome Browser extension. It makes the process so much more fun (less tedious) and cuts my time spent "investing" dramatically. It cuts the time down so much, I feel like I still need to do something when I'm done, 5 minutes is not very long.

Discounted Notes on Lending Club's FolioFN

On Peter Renton's blog post Changes Today to the Lending Club Trading Platform on SocialLending.net, user @stilltrackin noted that discounted Notes seemed to be harder to find as of February 2012. After I started using my Chrome browser extension I added discounted Notes to my buying strategy. I hadn't been buying discounted Notes for around 6 months and noticed that they seemed to be a bit thin.

When I view Notes, I filter out Notes with principal less than $15 or more than $25, Notes from the same Loan and Notes with less than 16% Yield to Maturity. With those filters, in 1,300 of the most discounted Notes (22 pages at 60 each), I only found 42 that met that criteria and were marked up less than 3%. There seemed to be a pattern so I threw the values into a spreadsheet and came up with this graph, which shows Yield to Maturity on the Y-axis and the discount on the X-axis.

Remember that this is a selection of what I consider premium Notes (see the criteria I mentioned above). It is interesting that there are a handful of Notes right around par and then nothing until around 2%. It is possible that someone is rapidly snatching up everything under 2% markup. 

Now let's look at the Notes from 14% to 16% Yield to Maturity. There are 59 Notes in the same 1,300 or so Notes that have this Yield to Maturity. In this range there is nothing below 1% available. The distribution looks very different than the 16%+ distribution. I stopped at 14% because the number of Notes starts getting larger the smaller Yield to Maturity you get.

If you stack the two graphs you can start to see a boundary of Discount for each Yield to Maturity. I think this is the balance between two Lending Club investment philosophies, Yield to Maturity vs Discount. 19% Y2M Notes seem to sell well at a markup of 2% or less because both types of investors are looking for them (has a low Discount and a high Yield to Maturity). It seems 15% is the low end for markups as high as 2%. I would need more data to be sure (note the three near-zero markup 18.5% Y2M Notes).

This will be one of the things I will start tracking and posting about. When I have more time, I'll delve more into the lower Yield to Maturity Notes.

What are your thoughts?

Update 03/13/2012 @ 12:17pm Central

So I pulled data from the top 1,200 discounted Notes with Yield to Maturity of 6%+. The data is in the graph above. There are a little over 600 Notes from unique Loans that have never been Late, over 6% Yield to Maturity and under 3% markup. The blank spots to the left of the graph probably indicate good markups for quick sales, as there is little competition in that area.

What conclusions do you draw from the chart above?

Can Someone Check My Math?

(See Other Posts about Lending Club Extension)

In my last post I announced the first release of a Lending Club Chrome Browser plugin I am writing. I am using it myself and making several improvements. One of the improvements is when you offer a Note for sale it will calculate the annualized return range for a given sales price (range because it could be sold any day from today to up to 7 days later). When I was converting my calculation from my Python script, I noticed I was not happy with the original calculation.

I'd really like to have your feedback on the calculation, and have a math check on it.

In precalculus I learned from Ms. Delores Dean that the basic formula when dealing with compounding interest, or rates of return, is:

A = P (R + 1) ^T

which reads Amount equals Principal times Interest Rate increased by One raised to Time in years. I also wanted to add in Tax, Fees and Payments made. So my final formula was:

S + P (1 - M) - T (S + P (1 - M) - I - FS) - FS = I (G + 1)^Y

The variables are as follows:

• S - Sales Price
• P - Payments Made
• T - Tax Rate (ie 0.395)
• I - Initial Investment
• F - Fee Rate (ie 0.01) on Sale
• G - Annualized Gain
• Y - Years Held
• M - Maintenance Fee Rate

If you love a simple math problem that requires algebra, please stop reading here and solve for S. If you love a math problem that requires algebra and a little precalculus, please stop reading here and solve for G.

Now an explanation of the equation above. So the actual amount of money you are left with (A in the first equation) is the Sales Price plus Payments Received minus Tax you'll have to pay minus Sales Fee. The Tax would be your Tax Rate (for a conservative estimate of your tax, I recommend using your short term capital gains rate) multiplied by the sum of your Sales Price and Payments Received minus your Initial Investment minus your Fees Paid. And of course the Fee Paid is Fee Rate times Sales Price.

Of note, I assume that the Payments Made needs to be reduced by the Maintenance Fees Paid. Lending Club states that this is 1%, but remember that it is rounded up, usually $0.01 for $25 Notes. I found that the lowest regular payment I've had this month is $0.61, which the fee ended up being 1.64%. So to be conservative, I put the Maintenance Fee (M) at 2% (or 0.02). Some Notes do not have a Maintenance Fee, but to be conservative (and keep things simple) we'll assume there always is one.

Let me know in the comments if there is a problem with this formula or how I am thinking about it.

Now that you've had some time to work through the math, did you get:

G = e^{log_e( (S + P (1 - M) - T (S + P (1 - M) - I - FS)) / I ) / Y} - 1

and

S = (I (G + 1)^Y - T (I - P (1 - M)) - P (1 - M)) / (1 - T - F + TF)

Let me know in the comments if you got something different.

Now the formula needs to be converted to JavaScript to actually be used in the Chrome Extension. Here is the JavaScript I had for S:

Math.pow(Math.E, Math.log( (salesPrice + (1.0 - maintenanceRate) * payments - taxRate * (salesPrice + (1.0 - maintenanceRate) * payments - investment - feeRate * salesPrice) - feeRate * salesPrice) / investment ) / years) - 1

and for G:

(investment * Math.pow(1.0 + annualGain, years) - taxRate * (investment - (1.0 - maintenanceRate) * payments) - (1.0 - maintenanceRate) * payments) / (1.0 - taxRate - feeRate + taxRate*feeRate)

Anyone see any problems with the JavaScript? Again, please leave a comment.

This is what I am looking at adding to the Sell Notes page using the Chrome Extension. It will add an Annualized Return column and calculate the return if it were sold as soon as possible up to the date selected for the expiration.

This is not a photoshopped image, this is a screen grab from version 0.2 of the extension.

Currently version 0.1 is available, and lets you filter the Browse Notes on FolioFN. When version 0.2 is ready, I'll post again with a list of the enhancements I have made, as well as the assumptions that go into it. I still have a few glitches to work out, but I am excited about 0.2.

Now with 0.2 I can completely ditch my old Python script that used Apple Events to scrape the web pages of Safari to see what I was seeing and calculate these things. Version 0.2 of the Chrome Extension will even one-up the script with a neat little feature that will save me so much time in selling Notes (I'll reveal that in the next post when I release it).

So if you'll do me a favor (and yourself if you plan on using or trying my Chrome Extension version 0.2) and look over my math. I'd really like this to be peer reviewed before I release it.

In the mean time, I'm really having fun using this. I spend so much less time on the FolioFN site and will have fewer human errors.

If I haven't mentioned it yet, please leave me some feedback on the math above.

Thanks.

Alright, I'm Ready To Share

(See Other Posts about Lending Club Extension)

I've been documenting my Lending Club experiece and have been mentioning a script that I use. This script only worked on Mac machines with the Safari browser. I have since started using Google's Chrome browser, and only launched Safari for doing Lending Club business. So to do my Lending Club business in Chrome, I have started writing a Chrome Extension that helps me decide on loans to buy.

This extension is in beta and I make no assurances as to how well it works.

Install Note Browser Filter (click on this link in Google Chrome)

(Note: A slight majority, almost 1/3 of the visitors of this blog are running Chrome, followed by another almost third for FireFox. Also about 2/3 of the visitors are on Windows. I'm hoping this solution works for a majority of the visitors to this site.)

After clicking the install link, there may be a button at the botton of the window asking you to confirm you want to install the extension. Click the "Continue" button and then the "Install" button to install the extension.

This extension will add a button to your toolbar (the red square with the green dollar sign). Clicking this button will reveal extra filters you can apply to the Browse Notes page on FolioFN. You can highlight rows that are out of the acceptable range with whatever color you want. If you specify 000000 as the color, the row will be removed.

For instance, I have it remove duplicate Loans (only the first instance is shown), Loans I already own a Note in, Loans that have Imperfect Status (not Issued or Current), had less than $15 Outstanding Principal or more than $25 Outstanding Principal, Notes that have less the $0.20 of Accrued Interest, Notes that have a Markup of over 10% or Notes that have a Yield to Maturity under 16%.

I also highlight 36 Month Notes in red, Loans that have less than 20 Day Since Payment in orange and Loans with less than 25 Remaining Payments in yellow.

So you sort your Notes the way you always have, and after about 5 seconds it will filter out or highlight the rows for you.

Below is a screen shot of the tool in use. I did not edit this image. Notice it says it is showing Notes 1 - 60, but only 8 Notes are actually showing. Alternating unfiltered rows have green and white backgrounds (to let you know the extension is running, FolioFN uses alternating blue and white backgrounds).

Feel free to leave comments here or email me if you have suggestions or defect reports. I plan on using this on a regular basis, so this is not just something I am throwing out there. I will also be adding features like auto-fill for the Sell Notes page and determining more stats about your performance.

How I Use Lending Club Portfolios

In my January post Six Months and I'm Reaching A State of Peace, I stated:

I feel like I'm emerging from the Fire Swamp, and now it's time for Prince Humperdinck, I mean Tax season. (Maybe I will name my portfolio Buttercup).

Well, I took that suggestion and segmented my Notes into Princess Bride themed Portfolios.

The Humperdinks are the Late, Default and Charged Off Notes. These are the Notes that you know you don't want around but you probably can't get rid of them. The Rugen Portfolio holds the pre-Grace Period and Grace Period Notes. These are insidious Notes that don't sound all that bad, but can lead to more Humperdinks.

Then we have the Buttercup Portfolio. These are the newly acquired Notes that have no or one payment. They have not proven themselves. Then there is the Wesley Portfolio. These are the Notes that have never had payment problems and have payed me at least twice.


This segmentation helps me avoid looking at Humperdink Notes (Late or Charged Off) while paying attention to the insidious Rugen Notes (Pre-Grace Period or Grace Period). And I can look through my good Notes (Buttercup and Wesley) for Pre-Grace Period Notes by sorting by Payment Due Date and look at the Notes for Collection Logs at the bottom.

Seven Months In And Things Are Slowing Down

(See other Monthly Status Updates)

Seven months have passed and I am now starting to feel the results of the Late Notes that are now Charged Off in my Net Annualized Return. 16.36% is still in the neighborhood of my target 16%. I still have six Late Notes that I am steeply discounting, but it appears that they rarely sell.

I've received enough interest to offset the complete loss of the Charged Off and remaining Late Notes assuming they are all worthless. The total interest I've received amounts to 6% of the money I deposited. Now we are on to start growing again (back to the beginning).

I've sold 2.7 times as many Notes as I currently hold (of course using the proceeds to buy more Notes). My median annualized return on Notes sold is 32%. If you weight the annualized return by days held (the longer held the more weight you give to it's annualized return) my Notes Sold have an average of 58%. This sounds great, but the raw gain, Cash Received (Sale + Payments) vs Cash Paid, is 1.9%. This has probably been impacted most by by selling off of Grace Period and pre-Grace Period Notes at a discount and buying a bunch of pre-Grace Period Notes at a premium before realizing they were pre-Grace Period.

When ranking the risk of my Notes (which I use to determine asking price when selling, 16% - 32%), I weighted most heavily (5 times the weight of the least weighted):

• Accounts Now Delinquent
• Delinquencies in Last 2 Years
• Delinquent Amount
• State (Bad: SC, OH, CA and FL Good: WY, ME, with other rated in between)
• Inquiries in the Last 6 Months
• Months Since Last Delinquency
• Status of the Note (Issued, Current, Fully Paid, Grace Period, etc)
• Public Records on File
• Revolving Line Utilization. I am adding to that 

I am now increasing the weight of the Grade of the Note to the same level (was weighted the least, now weighted 5 times higher). I have an uncomfortable number of G Grade Notes. I would rather sell those than hold on to them.

Lending Club has also been making some changes, or rather FolioFN, specifically to the way Browse Notes works. On the positive side they got rid of the confusing checkboxes for Rate and replaced it with a Range. Much better.

On the downside, they now no longer include Issue Notes when viewing Never Late. This makes me sad. I really like Issued Notes, and now they are hard to find. Well, they are hard to find the way I was looking for Notes.

I now choose Notes by looking at everything. I sort first by Yield to Maturity (click once to sort ascending) and then I sort by Remaining Payments (click twice to sort descending). This gives me newly issued Notes with the highest Yield to Maturity. I then look for the Accrued Interest over $0.50, meaning the Note will soon (hopefully) make a payment. This way I get the first payment (which is mostly interest) and hold it just a short period of time before I get that interest. Then if it sells, I get a (mostly) interest only payment, get my Principal back and a premium in a small period of time.

I am not buying exclusively Issued Notes, as there are some great deals in the rest of the Notes. Those I just chose Never Late only and sort by Yield to Maturity. I'm not sure how much of a mix between Issued and Current Notes I'm going to buy. I'll still need to play with that.

Bottom line is that I have taken some lumps (and still waiting for 6 more Notes to be Charged Off) and am still at my minimum target. I look forward to clawing my way back up above 18%.

Six Months and I'm Reaching A State of Peace

(See other Monthly Status Updates)

So I've gone from flying high to 14 Late Notes (one is now in Default). I was able to sell one of the Late Notes pretty early on. One of the Notes came current (and immediately sold, now that it was not Late and steeply discounted). I don't expect to sell any of the Late Notes I am currently holding before they go into Default. I have steeply discounted them, but it appears that Late Notes just don't sell, especially this Late.

I did have one Note finally go into Default (Charge Off). However, I did get some money from collections ... and then the collection fee ate that recovery up.

I went through and looked at the Notes that were Late and noticed something ... I had three Notes from one Loan that went Late! Three Notes! Not just one or two, Three! I went through my list of Notes and sorted by Loan number. I got pretty good at looking at the last digit to see quickly where I had Notes from the same Loan. I culled out another half dozen from back in the day before I watched for duplicate Notes.

So, lessons learned. First, check the Note before you buy it to make sure they haven't already failed a payment (apparently they still show up as never late). Second, make sure you do not have more than one Note from the same Loan (or Notes worth more than $25). Third, treat Grace Period as the plague. Grace Period sells, but Late does not (only 7% of my Late Notes sold while Late).

As far as returns, Lending Club is still reporting my NAR above 20% (although I am considering those Late Notes as Charged Off already. I've sold more than twice as many Notes as I currently hold, so about every three months I cycle through Notes. Of the Notes I hold, they are worth an average of $24.88. I've held them for almost two months on average. Of the Notes I've sold, I've held them for an average of 19 days (almost three weeks). My median annualized return on Notes sold is 33%, however I like to use a Days Weighted Average (the longer I hold it the more it is weighted) which is 72%.

I feel like I'm emerging from the Fire Swamp, and now it's time for Prince Humperdinck, I mean Tax season. (Maybe I will name my portfolio Buttercup).

Low Risk, High Return Lending Club Strategy (For Some States)

While I love the great state of Texas, I am disappointed in their regulation of citizens investing in Lending Club. There are many states that prevent their citizens from funding Lending Club Notes, and unfortunately I live in one of them. At the end of this post, I have a summary of a strategy I think will give huge returns for those in states who can fund notes, with really low risk.

Lending Club is offering a No Maintenance Fee for the life of loans over $20,000. The added bonus is that loans of that amount have the highest return, in general.

So for those who live in a state that allow them to fund notes, if you focus on funding notes in the $20,000+ range, not only do you get an average return of 10.29% (as opposed to 7.42% to 9.9% for lower amounts), but you get a 1% boost from not having the maintenance fee.

Now if you funded a $25 share of the loan to minimize risk exposure, the maintenance fee could be as high as 1.7%, because it is 1% of your payment, rounded up. Since $25 shares payments can be as low as $0.60 (possibly lower) that would be $0.01, rounded up to the nearest penny, which is about 1.7%.

To get the best returns with the least risk, fund notes in the Grade E and Grade F range. While these Notes have higher theoretical risk, there are ways to mitigate those risks we'll talk about later. Grade G Notes can go way too low of a return, while not getting much better high range than Grade F (as well as the average return is worse).

To continue to maximize your return, you can fund 60 month Notes (versus 36 month Notes). Lending Club gives a higher risk value to 60 month Notes, which translates into higher interest rates, 2.05% to 4.5% higher (see interest rate factors). True, the longer term Notes have more risk, but again there is a way to mitigate that risk.

So now we get to the risk mitigation, the FolioFN trading platform. This is where those who are in states that can fund Notes can help (and benefit from) those in states that do not allow us to fund Notes.

There seem to be two major camps of loan buyers. Michael at Nickel Steamroller focuses on highest Discount. This approach looks for the steepest Discounts or lowest Markup on Notes as opposed to highest Yield to Maturity. This approach appears to get you the most for your money.

The second approach is looking for the highest Yield to Maturity. This approach assumes that if the Note is held until it matures, and it does not default, you'll get the highest return. Of course, with Grade E and Grade F notes at 60 months, that seems like a bit of a stretch.

Yield to Maturity seems to be a very popular method of choosing Notes (hence the Nickel Steamroller post warning against it). It is the approach I use to maximize my return. I've heard many people wonder why people would buy a newly funded $25 Note for $26.50. The three reasons I can think of are (a) they are looking for the Note to be held to term and not default, (b) they are looking to sell the Note to an (a) at a slightly higher premium or (c) a combination of (a) and (b).

I am a (c). I buy mainly Grade F Notes with a smattering of Grade E and Grade G (yes, I know G is a lot riskier with lower return). I tend to also buy some mature Grade C and Grade D on occasion when I have under $20 available to buy Notes. I also buy mostly 60 month Notes. Both the Grade and the term of the Notes I buy is not really a conscious decision, but a byproduct of buying the highest Yield to Maturity Notes.

Strategy

So to maximize potential return, here is my recommendation for those who can Fund Notes:

Buying Criteria

1. $20,000+ Loans
2. $25 Notes
3. Grade F Notes (22%+ Interest)
4. 60 Month Term

Selling

Upon Funding, sell the Note at a 5% Markup. You'll get an immediate 5%, assuming it takes a month from the time you pledge the money for Funding to the time you get the money back from the sale. Annualized that would be more than 50% return. This cuts your risk because no Note will ever default because you sell them before their first payment.

For example, say you Fund 4 Grade F 22% 60 month $20,000 Loan Notes, spending $100 (4 x $25). You offer each Note at $26.25 (of the current top 60 Yield to Maturity Notes, 6 of the 14 $25 Notes are offered at over $26.25). Your funds (after FolioFN takes their 1%) are at $103.92. If that took 30 days, and then you reinvested the $100 in the same way, after 7 months you'd have $127.44. Then you start funding 5 Notes with the same criteria. In 5 more months, you'd have $152.09. For the year, you'd have over 50% return.

Caveats

This strategy is based on current market conditions. If too many people flood the market with high Yield to Maturity Notes, you'll have to reduce your Markup to get your Notes sold. I in no way guarantee that this strategy will work as described as the market place can change dramatically based on a number of conditions.

This is a win-win for those in states that can Fund Notes and those in states that cannot. It gives us in non-Funding states a nice stream of Notes to buy. It gives a nice low risk, high return for those in states that can Fund.