Author Topic: is anyone Leveraging debt with Lending Club?  (Read 2408 times)

CheapskateWife

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is anyone Leveraging debt with Lending Club?
« on: October 13, 2015, 10:50:13 AM »
I know that several of you have jumped off the Lending club band wagon but something came to me and I wondered if I am insane for considering it.

According to Lending Club, I'm an "A" borrower...excellent credit, pay my stuff on time.  I could get a 10,000 loan for 6% through Lending Club.

I loan out to the D, E, F folks on Lending club and am currently sitting at 19% return annualized (no charge-offs yet in our 6 month experiment but I know they are going to eventually happen).  If I turned around and invested that 10K in other Lending Club notes, I could potentially MAKE 8-13% using OTHER PEOPLE's money.

Am I smoking crack...is this just too risky to consider?

ingrownstudentloans

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Re: is anyone Leveraging debt with Lending Club?
« Reply #1 on: October 13, 2015, 11:17:20 AM »
Following because I have thought about it many times.

beltim

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Re: is anyone Leveraging debt with Lending Club?
« Reply #2 on: October 13, 2015, 11:22:53 AM »
They actually offered a program a few years ago that reduced your interest rate if you did exactly this.  I thought about it hard then, but decided it was too risky - the 6% you owe is guaranteed, but the D,E,F loans are pretty risky and have high enough default rates that you won't get anywhere near 19% annualized.

I'm going to quote myself here:
Lending Club notes are also probably more economically sensitive than other investments.  Notes issued in 2007, for example, did not even pay back full principal, leading to a net loss for investors.  And the notes issued in 2008 returned an annualized 2.28%.  The returns have gone up each year as 1) Lending Club raised interest rates to more accurately reflect the risk of default; and 2) The economy improved and more people paid back their loans.

The universe of all "completed" Lending Club notes (that is, those whose original terms are up) has yielded an annualized return of 6.45%. 
 https://www.lendingclub.com/info/demand-and-credit-profile.action

Borrowing at 6% and getting a 6.45% return doesn't seem like a good risk/reward ratio to me.

CheapskateWife

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Re: is anyone Leveraging debt with Lending Club?
« Reply #3 on: October 13, 2015, 11:31:50 AM »
Thanks Beltim,

That link gets you to an interesting chart where you can play with the time frames and see the net returns over time.  Which brings up an excellent point. 

For now, when all my notes are current, things are looking SWEET! There is a huge risk here, and the law of averages seems to dictate that I will have very little in the way of actual returns. 

If you look at the chart that shows that Net returns over time; performance is highest in the 1st 6 months of the 36 month term and then tapers off down to 5%.  For the 60 month notes though, the net returns bottom out at 8%. My leveraging game would have to consider these trends.

Wondering if my auto-investing strategy should shift to 60M loans exclusively.
« Last Edit: October 13, 2015, 11:51:50 AM by CheapskateWife »

FLBiker

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Re: is anyone Leveraging debt with Lending Club?
« Reply #4 on: October 13, 2015, 11:51:27 AM »
I'm a lender, but I wouldn't borrow to lend.  I use some filters to loan to DEFG loans and my return is ~8.5%.  Not worth the risk if I was borrowing at 6%.

Also, my rate has been falling -- I was over 10% the first couple of years.  I just have a little bit of money in there, but I'm still considering pulling it out.

Thegoblinchief

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Re: is anyone Leveraging debt with Lending Club?
« Reply #5 on: October 13, 2015, 12:07:47 PM »
This is a terrible idea. Plenty of stocks out there pay dividends equal or greater than a decent interest rate arbitrage for a small fraction of the risk you're taking on here.

Investment income also has a much more favorable tax treatment than interest.

beltim

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Re: is anyone Leveraging debt with Lending Club?
« Reply #6 on: October 13, 2015, 12:11:11 PM »
I think the math works out that your weighted average age of notes doesn't hit 18 months until after 3 years.  After 3 years, your original notes are gone (if they've paid on time), but if you reinvest you have notes from 0 to 35 months old, but that's weighted towards younger notes if your returns are positive.  So you shouldn't expect to see "average" returns until you've been invested for at least a few years.

CheapskateWife

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Leveraging debt with Lending Club?...Nevermind, that's a terrible idea.
« Reply #7 on: October 13, 2015, 12:16:06 PM »
Thanks Goblin Chief!

Beltim got me there fast but you pointed out something I hadn't considered, that the interest is taxed as income, where investment income is treated much more favorably. 

Might execute a full sale of my existing portfolio at the 6 month mark, and reinvest the proceeds in fresh shiny notes.