Use BTCJam and Lending Club. LC is amazing and I am happy with my returns. BTC seems like a scam as the reputation of borrowers means very little in their willingness to repay. I've seen many people build their reputation in order to borrow more and then bounce.
snapclass - although this happened a lot in the past, we are now curating the platform much more and also our repayment rates are in the 85% area. If you diversify well and go for A/B rated borrowers you can definitely make very positive returns.
We are now doing around USD 1M per month, are growing the number of borrowers rapidly - which allows for more diversification and better returns (on average)
Hi flavio87 big fan of BTCJam here - have to agree, you guys are doing a much better job on filtering out people - the idea of having borrowers pose with their passport was great. 85% seems to fit my own observations so far, maybe close to 90% depending on your level of scrutiny. Keep up the great work!
I always wondered why big banks didn't get into the business that Lending Club started. I figured that it was due to inefficiencies in the consumer credit model that made it such that "high risk" borrowers were ineligible for secured loans and that LC found a better way to accurately measure that risk. Who knew it came down to accounting?
Banks are actually all about "peer-to-peer" loans, where do you think their massive funds come from? You deposit money, the bank lends it out. In reality it's a bit more complicated than that but that's the essence of banking.
> I always wondered why big banks didn't get into the business that Lending Club started.
LC didn't start it, it followed a number of other generally similar "peer-to-peer" lending services (Prosper.com is the first US one I'm aware of -- about two years before LC -- and ISTR there was at least one UK one about the same time as Prosper).
And banks don't get into it because it would involve risking the resources on a new business whose success outcome would be driving customers to account choices where the bank keeps less of the income from lending.
If the quasi-peer-to-peer-model becomes popular, banks will grudgingly get into it because then the choice will be between giving up all of the money to competitors rather than giving some of it up to investors in quasi-P2P loans, but they'd rather not stamp their imprimatur on the model while it still might fail to become a significant factor in how people invest and seek loans.
Zopa was the UK one. It launched before Prosper and is a really interesting case study for why you should launch first in the US and not your random smaller home market. As a result they were late to launch in the US and as a consequence lost the larger market, which is why lending club is IPOing first. One major reason they had to withdraw from the US was because they had an existing (working) operation in the UK they couldn't take regulatory risk: the other US operations launched with an illegal model and later got shut down while they restructured, Zopa tried to launch a legal, but less attractive to users, model and failed to gain traction as a result. Really interesting startup case study!
I've taken out two loans with Lending Club over the last 3 or 4 years. Each time I've compared the rate with my bank (Citi) and others, and each time LC has been competitively cheaper.
Citi advertises "Get a fixed rate ranging from 8.99% APR to 20.74% APR." and my rate with LC has been typically 7.86% APR (forget exact decimal place figure). The 8.99% rate with Citi assumes they give me the best rate - not guaranteed.
Its fast, friendly, and I can repay early at no penalty.
Ultimately, their sustainability will depend on the cost at which they can raise funds. Banks can raise funds cheaply through deposits (and many other sources like wholesale funding which may be at a higher cost), which they lend out at slightly higher interest rates than they pay their depositors. Given that LC is not a depository institution, the only way I see them providing lower interest rates is they have figured out a cheaper source of funding - or burning investor money to do this which is not sustainable and the big banks will defeat them eventually. The moment you start taking deposits, you will be regulated like any other institution and they need to compete with other banks on the same terms. Another aspect is that banks are in the business of risk management, so it is probable that LC has figured out a better way to manage their risks than existing institutions - again, this is something where existing institutions have enough resources to catch up easily.
I'm a private buyer on Lending Club, their automated investing feature breaks up your deposit into chunks of $25, so a $1,000 gets allocated into 40 loans. Expected returns are listed on that page.
> Given that LC is not a depository institution, the only way I see them providing lower interest rates is they have figured out a cheaper source of funding...
Yes, the source of funding is private investors, both retail and institutional, many of whom are chasing yield.
When the market shifts and investors are forced to reprice risk, lending $10,000 at 13% to someone who has a credit score of 660-665, 55% revolving credit utilization and a gross income of under $2,000/month might be a lot less appealing.
Ok so they are operating at lowest end of the prime range (at least, in your example) - assuming > 660 is prime, 620-660 Alt-A and below 620 as subprime. How do I reconcile the rate quoted by you with the parent comment that I replied to? (13% is comparable to a standard bank and does not appear much cheaper)
You're missing the point, which is that in the search for yield, investors are mispricing risk. I would venture a guess that the vast majority of people who own a note tied to the loan of the aforementioned borrower either couldn't tell you what a similar borrower would have paid for the same loan in, say, 2005, or they don't care what a similar borrower would have paid for the same loan historically. They care more about the current interest rate in relation to other yield-producing instruments than they do about the actual risk they're buying and how that risk has historically been priced.
One additional thing to note: there are tons of investors (retail and institutional) snapping up junk in this market, but there are also many savvy people in the debt markets who are playing it cool because they know that you make money by pricing risk appropriately, not by buying the instrument with the most appealing yield.
I agree with your point on mispricing risk - I build credit risk models for a living, though not for US banks and have limited understanding of the US market.
On a broader note, even the sub-prime business was highly profitable and attractive to investors till the GFC. Only time will tell if these companies have a sustainable business model.
> Given that LC is not a depository institution, the only way I see them providing lower interest rates is they have figured out a cheaper source of funding - or burning investor money to do this which is not sustainable and the big banks will defeat them eventually.
LC is peer to peer lending. I have $47k invested in LC notes. They save money by having fewer brick & mortar offices and mainly relying on credit score to assess borrowers.
If they mainly rely on credit scores, how will they remain competitive with lenders that have more information about the borrower, or has the resources to develop a business relationship with the borrower? Everybody else has access to credit scores too, you know.
it might be that credit scores are cheap enough (or rather, finding more information is expensive enough) that they're the local maximum in terms of possible profit from the transaction.
I assume you have a high risk appetite. If there is a downturn situation and lot of loans given out by LC default, then they may suffer heavy losses and go out of business. Given that they are not regulated, there is no guarantee on deposits by the Fed so you won't get any money back.
Well, for now -- if the higher yields of Prosper/LC-style quasi-P2P loan investments draw investors out of savings accounts into that model, then there'll be a pretty big exodus out of the kind of stable depository accounts that banks most rely on.
But then these lending firms will ultimately be put under the same regulation as banks - requiring them to hold capital against unexpected losses, comply with consumer protection laws, etc - so they will have to compete against depository institutions on an equal footing.
> But then these lending firms will ultimately be put under the same regulation as banks
Why would they be? The regulations you refer to aren't about banks-as-lenders, they are about banks-as-depository-institutions which provide the service of absorbing default risk between capital providers (depositors) and borrowers. If given an alternative which provides the capital providers with a service which handles management of the details of lending without absorbing default risk (and without charging a premium for absorbing default risk) becomes popular as an alternative to depository accounts for long-term savings (rather than keeping liquidity as one would in a checking account), why would those alternatives be subject to regulations whose only purpose is to make sure that banks actually do perform the function of absorbing default risk for which they are charging depository customers?
Those regulations only make sense in the context of a depository institution.
> Given that LC is not a depository institution, the only way I see them providing lower interest rates is they have figured out a cheaper source of funding
They eliminate the rather substantial regulatory compliance costs of running a depository institution, because they aren't a depository institution. This means they can use the reduced costs to either (1) increase returns to the providers of lending capital (investors in LC Notes), (2) decrease interest rates to borrowers, (3) increase returns to investors in LC-as-a-company rather than its Notes, (4) do some combination of the prior three.
> Lending Club is not a bank. So it's not subject to banking regulation, which means that it can do a core function of banking much more efficiently than an actual bank can.
Are the various banking regulatory agencies in agreement with that? (FDIC, Federal Reserve, Comptroller of the Currency, Thrift Supervision, as well as the various and sundry states)
Well, LC doesn't do deposits, so it is not doing partial reserve banking. I suppose there could be extra regulation attached to what they do, but I don't think it is much different than a message board that connects buyers and lenders at its core.
While LC is not a bank -- and not subject to banking regulations -- its not at all a "message board that connects buyers to lenders". While it initially was something like that (and still has some superficial resemblance to it), lending is a tightly regulated industry, and there'd be a very narrow market if it it tried to actually be that, rather than being the lender itself and selling notes tied to its loans (essentially, a key part of the service LC is providing is dealing with the regulatory compliance with regard to lending.) This is the same model as is used by other superficially "peer-to-peer" lending services (e.g., Prosper.com)
I don't know about federal regulations, but state regulations have made things difficult. I can't use lending club here in Ohio, and a few other states don't allow it either.
> But all of the things that make banks scary don't apply. A run on Lending Club is not possible; nobody can pull their money out of notes or certificates. And if a lot of loans go bad, that will hurt the investors in those notes, but Lending Club as an entity won't be insolvent or even have any losses at all.
This is true, but one should recognize that for Lending Club to sustain itself over time, it must be able to acquire borrowers and sell notes. There are a number of events that could put a dent in both supply and demand.
On the demand side, if and when there is a recession, defaults will almost certainly rise and it's likely fewer investors (retail and institutional) will be eager to take on new credit risk. If and when interest rates rise, funding these loans may become a lot less appealing. One must also assume that at least some borrowers, particularly those who are heavily indebted, are themselves vulnerable to interest rate increases, so I wouldn't be surprised to see rising rates negatively affect the repayment performance of certain types of portfolios.
> There's another point that's a flip side of this one, which is: Equity-funded banks are great at lending. Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks.
Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks, because yield-chasing investors are currently willing to misprice risk. What happens when the music stops?
> Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks, because yield-chasing investors are currently willing to misprice risk. What happens when the music stops?
Very much this— I've been a lending club 'lender' for a number of years now, and for the last 9 months or so have had a very hard time obtaining practically any notes.
People are hyper eagerly funding notes which my models suggest have very poor risk adjusted performance. (And, if anything, I'm concerned that my models are too conservative— since they're based on historic LC data and lending club has been reaching out to less and less credit worthy lendees).
As a result I'm slowly reducing my amount in lending club as notes return funds and I'm unable to invest it effectively. It was neat in the beginning, but it's a pain to report taxes on, and the decreasing risk adjusted returns make it much less attractive than it used to be.
> It was neat in the beginning, but it's a pain to report taxes on, and the decreasing risk adjusted returns make it much less attractive than it used to be.
The taxes are the biggest issue right now I think. There's no faculty in US tax code for reporting earnings on this kind of investment. If I heard right, I think some people lost all of their returns in 2012 due to written-off notes? I believe all of my returns (over the past four years) were taxed at my normal income rate. People have just been guessing at how to report their earnings in TurboTax. Haven't heard of any audits thus far...
Also, as far as risk-adjusted returns go, it still beats equities, right?
> There's no faculty in US tax code for reporting earnings on this kind of investment.
That's not true.
> Also, as far as risk-adjusted returns go, it still beats equities, right?
The S&P 500 was around 1,140 at the beginning of January 2010. It's now above 2,000.
If you had bought SPY in January 2010, you'd be sitting on a gain of around 75% not including dividends. SPY is highly liquid (more than 80 million shares trade hands on any given day) and optionable, so you can exit your position quickly if necessary and easily hedge your position if desired.
Needless to say, comparing the S&P 500 to a pure debt instrument is like comparing apples to oranges, but if your goal is to maximize risk-adjusted returns, you have to compare asset classes.
Obviously, this isn't 2010. The market today is a lot harder to navigate. On the whole, equities look expensive and with a shift in interest rate policy almost certainly coming, the debt markets are tricky. As Sam Zell recently said, "This is the first time I ever remember where having cash isn't such a terrible thing."
Lending Club will not have trouble raising capital or finding borrowers because it is a lower-cost operation than banks. As such, it can reduce the spread between the yield 'investors' earn and interest rates borrowers pay, making it more attractive to both. The growth of their total loan activity bears that out: 5 Billion in total loans over the last 5 years. 1 Billion of that in the last quarter.
The key to their business is in their ability to accurately forecast the default rate of borrowers. The more they can predict the performance of the loans, the more 'fixed' the income seems to investors and the more attractive it is. They do predict default rates for loans and inform investors what those rates are for each loan. Over time, I'd expect their statisticians and big-data analysts will be able to refine the models to be highly accurate.
I've been experimenting with LC as an investor for about a year and a half. So far, my loans are performing about 1% better than Lending Club forecast they would. I attribute that to an improving economy.
Presumably because there were 5 defaults when 5.94 were predicted. On the other hand, if any of those 120 loans are still outstanding, then they could still default later.
Can you invest in Lending Club if you don't live in the US? It doesn't mention anything in the terms of use but they ask what state you live in when you sign up. Can I just put a friend's state or something?
I ditched BofA, signed up with a credit union, and enjoyed fantastic service since. If you don't want to risk these guys in case they get screwed over by regulators, talk to your local CU!
I really liked the observation that in exchange for your deposit (investment in a note) not being liquid (secondary market notwithstanding), Lending Club is able to match the maturity of their assets and liabilities, thus eliminating this portion of risk from themselves. Theoretically, this could be one of the causes for the lower rates borrowers can obtain and the higher returns that investors get. (Obviously a portion of the higher returns come from the lack of liquidity offered by the notes)
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[ 0.20 ms ] story [ 105 ms ] threadWe are now doing around USD 1M per month, are growing the number of borrowers rapidly - which allows for more diversification and better returns (on average)
https://www.wellsfargo.com/personal_credit/
http://www.eloan.com/personal-loans
https://www.discover.com/personal-loans/
My guess is that they constitute such a small revenue stream for the banks, that banks skip on marketing and execution.
But would be the bank's role in a peer-to-peer transaction? Pure servicer?
LC didn't start it, it followed a number of other generally similar "peer-to-peer" lending services (Prosper.com is the first US one I'm aware of -- about two years before LC -- and ISTR there was at least one UK one about the same time as Prosper).
And banks don't get into it because it would involve risking the resources on a new business whose success outcome would be driving customers to account choices where the bank keeps less of the income from lending.
If the quasi-peer-to-peer-model becomes popular, banks will grudgingly get into it because then the choice will be between giving up all of the money to competitors rather than giving some of it up to investors in quasi-P2P loans, but they'd rather not stamp their imprimatur on the model while it still might fail to become a significant factor in how people invest and seek loans.
Citi advertises "Get a fixed rate ranging from 8.99% APR to 20.74% APR." and my rate with LC has been typically 7.86% APR (forget exact decimal place figure). The 8.99% rate with Citi assumes they give me the best rate - not guaranteed.
Its fast, friendly, and I can repay early at no penalty.
Extremely satisfied.
https://www.lendingclub.com/public/steady-returns.action
I'm a private buyer on Lending Club, their automated investing feature breaks up your deposit into chunks of $25, so a $1,000 gets allocated into 40 loans. Expected returns are listed on that page.
Yes, the source of funding is private investors, both retail and institutional, many of whom are chasing yield.
When the market shifts and investors are forced to reprice risk, lending $10,000 at 13% to someone who has a credit score of 660-665, 55% revolving credit utilization and a gross income of under $2,000/month might be a lot less appealing.
One additional thing to note: there are tons of investors (retail and institutional) snapping up junk in this market, but there are also many savvy people in the debt markets who are playing it cool because they know that you make money by pricing risk appropriately, not by buying the instrument with the most appealing yield.
On a broader note, even the sub-prime business was highly profitable and attractive to investors till the GFC. Only time will tell if these companies have a sustainable business model.
LC is peer to peer lending. I have $47k invested in LC notes. They save money by having fewer brick & mortar offices and mainly relying on credit score to assess borrowers.
Well, for now -- if the higher yields of Prosper/LC-style quasi-P2P loan investments draw investors out of savings accounts into that model, then there'll be a pretty big exodus out of the kind of stable depository accounts that banks most rely on.
Why would they be? The regulations you refer to aren't about banks-as-lenders, they are about banks-as-depository-institutions which provide the service of absorbing default risk between capital providers (depositors) and borrowers. If given an alternative which provides the capital providers with a service which handles management of the details of lending without absorbing default risk (and without charging a premium for absorbing default risk) becomes popular as an alternative to depository accounts for long-term savings (rather than keeping liquidity as one would in a checking account), why would those alternatives be subject to regulations whose only purpose is to make sure that banks actually do perform the function of absorbing default risk for which they are charging depository customers?
Those regulations only make sense in the context of a depository institution.
They eliminate the rather substantial regulatory compliance costs of running a depository institution, because they aren't a depository institution. This means they can use the reduced costs to either (1) increase returns to the providers of lending capital (investors in LC Notes), (2) decrease interest rates to borrowers, (3) increase returns to investors in LC-as-a-company rather than its Notes, (4) do some combination of the prior three.
Are the various banking regulatory agencies in agreement with that? (FDIC, Federal Reserve, Comptroller of the Currency, Thrift Supervision, as well as the various and sundry states)
Here is more about that: http://www.lendacademy.com/why-some-states-dont-allow-p2p-le...
This is true, but one should recognize that for Lending Club to sustain itself over time, it must be able to acquire borrowers and sell notes. There are a number of events that could put a dent in both supply and demand.
On the demand side, if and when there is a recession, defaults will almost certainly rise and it's likely fewer investors (retail and institutional) will be eager to take on new credit risk. If and when interest rates rise, funding these loans may become a lot less appealing. One must also assume that at least some borrowers, particularly those who are heavily indebted, are themselves vulnerable to interest rate increases, so I wouldn't be surprised to see rising rates negatively affect the repayment performance of certain types of portfolios.
> There's another point that's a flip side of this one, which is: Equity-funded banks are great at lending. Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks.
Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks, because yield-chasing investors are currently willing to misprice risk. What happens when the music stops?
Very much this— I've been a lending club 'lender' for a number of years now, and for the last 9 months or so have had a very hard time obtaining practically any notes.
People are hyper eagerly funding notes which my models suggest have very poor risk adjusted performance. (And, if anything, I'm concerned that my models are too conservative— since they're based on historic LC data and lending club has been reaching out to less and less credit worthy lendees).
As a result I'm slowly reducing my amount in lending club as notes return funds and I'm unable to invest it effectively. It was neat in the beginning, but it's a pain to report taxes on, and the decreasing risk adjusted returns make it much less attractive than it used to be.
The taxes are the biggest issue right now I think. There's no faculty in US tax code for reporting earnings on this kind of investment. If I heard right, I think some people lost all of their returns in 2012 due to written-off notes? I believe all of my returns (over the past four years) were taxed at my normal income rate. People have just been guessing at how to report their earnings in TurboTax. Haven't heard of any audits thus far...
Also, as far as risk-adjusted returns go, it still beats equities, right?
That's not true.
> Also, as far as risk-adjusted returns go, it still beats equities, right?
The S&P 500 was around 1,140 at the beginning of January 2010. It's now above 2,000.
If you had bought SPY in January 2010, you'd be sitting on a gain of around 75% not including dividends. SPY is highly liquid (more than 80 million shares trade hands on any given day) and optionable, so you can exit your position quickly if necessary and easily hedge your position if desired.
Needless to say, comparing the S&P 500 to a pure debt instrument is like comparing apples to oranges, but if your goal is to maximize risk-adjusted returns, you have to compare asset classes.
Obviously, this isn't 2010. The market today is a lot harder to navigate. On the whole, equities look expensive and with a shift in interest rate policy almost certainly coming, the debt markets are tricky. As Sam Zell recently said, "This is the first time I ever remember where having cash isn't such a terrible thing."
The key to their business is in their ability to accurately forecast the default rate of borrowers. The more they can predict the performance of the loans, the more 'fixed' the income seems to investors and the more attractive it is. They do predict default rates for loans and inform investors what those rates are for each loan. Over time, I'd expect their statisticians and big-data analysts will be able to refine the models to be highly accurate.
I've been experimenting with LC as an investor for about a year and a half. So far, my loans are performing about 1% better than Lending Club forecast they would. I attribute that to an improving economy.
Probably just statistical variation.
(I don't understand your numbers though. Forecast return was higher than actual?)
In other words if you have 5 defaults, you're doing better by the smallest possible margin :)
No. And not if you live in certain parts of the US, either. And, in the states where it is available, there are additional restrictions.
http://blog.lendingclub.com/is-lending-club-available-in-my-...
http://kb.lendingclub.com/investor/articles/Investor/What-ar...
I ditched BofA, signed up with a credit union, and enjoyed fantastic service since. If you don't want to risk these guys in case they get screwed over by regulators, talk to your local CU!