Author Topic: Lending Club vs Paying Down Mortgage  (Read 5353 times)

FIreDrill

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Lending Club vs Paying Down Mortgage
« on: April 23, 2014, 05:51:07 PM »
Hey!

I have been thinking about where exactly our savings should go after we maximize our tax advantage accounts.  I was originally thinking about using the excess to accelerate paying down the house that we are about to close on but then I had the thought of putting it towards Lending Club instead.  The interest rate on our Mortgage will be at 3.25% and my Lending Club account has returned 12% the last year.  I know Lending Club is a interesting investment given the higher risk of default loans but I do like the monthly cash flow it creates.  Right now I'm considering just bumping up the LC  balance slowly and testing the waters with a larger LC portfolio.  I would expect that over time my return would decrease into the 10% range but given a LC portfolio of 120k that would create enough monthly cash flow to pay the P&I on our 211k mortgage.  My basic thought was having a LC portfolio that would create enough cash flow to pay for the mortgage although this would create a lot of unknown risk given it's P2P lending.

I doubt we would do this but wanted to see if others have thought of it.

timmoney

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Re: Lending Club vs Paying Down Mortgage
« Reply #1 on: April 23, 2014, 08:25:25 PM »
 have you considered putting the money into lending club then applying interest earned to your mortgage. you could be paying down your mortgage, albeit slowly, with "cheap" money. this would allow you to also take the monthly reimbursement of your principal that you get back from lending club and either reinvest it back into lending club or put towards another investment.
    that's what i would do but what do i know.

astadt

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Re: Lending Club vs Paying Down Mortgage
« Reply #2 on: April 23, 2014, 10:37:12 PM »
Im concerned you might end up with too much allocated to LC.

Im keeping ours to about 10% and then Im going to let it grow on its own, with some minimal additions. Yes it'll end up being a larger portion of our portfolio but still about 10% of our monthly investments.

I consider LC as a super risky but potentially great investment... but my family can afford to take the risk.

drewfromutah

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Re: Lending Club vs Paying Down Mortgage
« Reply #3 on: April 24, 2014, 11:13:13 AM »
Lending Club isn't really that risky if you're smart about it. Backtest your notes (nickelsteamroller.com) and buy a few hundred of them. You wouldn't put your whole savings in one bond, or one stock, so definitely don't put it in just a few LC notes.

I don't really understand why people consider Lending Club a super risky investment but are perfectly fine putting their life savings in an index fund which could potentially lose 50% a week before their planned retirement date. I know, that way of thinking will probably get me in trouble on this forum, but we're all friends here, right?

FWIW, 40% of my net worth is in LC. No complaints.
« Last Edit: April 24, 2014, 11:17:36 AM by drewfromutah »

FIreDrill

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Re: Lending Club vs Paying Down Mortgage
« Reply #4 on: April 24, 2014, 11:27:29 AM »
Lending Club isn't really that risky if you're smart about it. Backtest your notes (nickelsteamroller.com) and buy a few hundred of them. You wouldn't put your whole savings in one bond, or one stock, so definitely don't put it in just a few LC notes.

I don't really understand why people consider Lending Club a super risky investment but are perfectly fine putting their life savings in an index fund which could potentially lose 50% a week before their planned retirement date. I know, that way of thinking will probably get me in trouble on this forum, but we're all friends here, right?

FWIW, 40% of my net worth is in LC. No complaints.

I have back tested notes on a different site and the back test comes out with a 14% return with a loan sample of 3000.  If I did this I would only do $25 notes with no duplicate loans until it got to a point where the portfolio size made it unsustainable to use that filter.

As far as the Risk of the Stock market versus Lending Club, there are some major differences that need to be considered.  For example, If the stock market "crashes" like it did in 2009 there is nothing preventing it from have HUGE returns on the upswing like 30-50% a year.  However, with Lending Club your return is capped at say 20% max and that is a very generous assumption.  The problem with LC is that if we go through a recession and 30% of you notes default you wont see a high rebound in the future years like you would in the stock market.  Also, you wont be able to buy good notes at a discount like you would be able to buy stocks at a discount.  This is the main thing I have been pondering when thinking about going a little heavier in LC.

imbros

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Re: Lending Club vs Paying Down Mortgage
« Reply #5 on: April 24, 2014, 11:49:12 AM »
Backtesting doesn't work with LC, because LC is not stock market. I don't know how long you have been investing in LC, but I have been doing this for over 4 years and over this period LC changed a lot.  The rate of default for notes issued over the past one year is way higher than the rate for funds issued 2 or 3 years ago. I expect this rate to only go up because I think LC is now more focused on quantity rather than quality of borrowers.

Also, they recently changed the statement on their website about what happens when they go out of business. While I don't see that happening anytime soon, in the event of a crisis like the last, I am sure they would be in a serious trouble.

At any rate, if you have more than 10% of your networth is in LC, you are taking quite a bit risk.

GoldenStache

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Re: Lending Club vs Paying Down Mortgage
« Reply #6 on: April 24, 2014, 06:41:59 PM »
I would buy VDGIX instead of LC.  I have read a lot about LC and it seemed like a great thing a few years ago, but the cat is out of the bag and the scams are pouring in. 

FIreDrill

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Re: Lending Club vs Paying Down Mortgage
« Reply #7 on: April 24, 2014, 08:14:20 PM »
I would buy VDGIX instead of LC.  I have read a lot about LC and it seemed like a great thing a few years ago, but the cat is out of the bag and the scams are pouring in.

Do you mean VDIGX?  I was also thinking about doing a dividend income fund or a junk bond fund versus lending club.  God knows taxes would be easier.

GoldenStache

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Re: Lending Club vs Paying Down Mortgage
« Reply #8 on: April 24, 2014, 08:17:34 PM »
Yep.. VDIGX is the one..

Nords

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Re: Lending Club vs Paying Down Mortgage
« Reply #9 on: April 26, 2014, 08:36:51 PM »
Lending Club isn't really that risky if you're smart about it. Backtest your notes (nickelsteamroller.com) and buy a few hundred of them. You wouldn't put your whole savings in one bond, or one stock, so definitely don't put it in just a few LC notes.
I don't really understand why people consider Lending Club a super risky investment but are perfectly fine putting their life savings in an index fund which could potentially lose 50% a week before their planned retirement date. I know, that way of thinking will probably get me in trouble on this forum, but we're all friends here, right?
A "few hundred"?!?  Take a look at the statistics to help differentiate skill & diversification from luck:
http://www.hullfinancialplanning.com/should-i-invest-in-lendingclub-or-prosper/
Even 3000 loans won't cut it.

There's also the unquantified default risk, for which you're surely not being compensated:
http://financialmentor.com/investment-advice/investment-due-diligence/peer-to-peer-lending-review/9777

And finally, as another poster mentioned, there's the very real concern that LC and Prosper are both feeling the investor pressure to cut corners on the applications to pump those puppies out the door as fast as you can scoop 'em up:
http://the-military-guide.com/2013/06/06/more-problems-with-peer-to-peer-lending/

I agree that there's a lot of inefficiency, waste, & fraud in the unsecured lending industry.  However the big lenders are not just pulling those double-digit interest rates out of a hat... they must have some sort of experience and analysis to be able to generate a profit in the business, or they'd be out of business.  Maybe they know more about being adequately compensated for risking billions of dollars than we retail investors know about getting a suitable return on our thousands (or tens of thousands) of dollars.

If you're losing 50% in an index fund a week before your retirement date, then you're not properly diversified.  You wouldn't do that with your retirement assets, so I doubt that it's a valid comparison to P2P lending returns.  Unless, of course, you're overly concentrated in P2P loans just before your retirement date.

I don't think that LC is "super risky".  I just think that it has unquantified risks (especially the default rate during the next recession) for which you're not being adequately compensated.

Like all cool investments, I'd hold my allocation down to 10% of the total portfolio.  Maybe I'd even consider it part of the entertainment budget.  And unless 10% of your portfolio is  over $185K, then your returns are more likely due to luck instead of brilliant diversification.

clifp

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Re: Lending Club vs Paying Down Mortgage
« Reply #10 on: April 26, 2014, 11:16:53 PM »
I am Prosper pioneer and I feel fortunate to have only lost $250 out of $3,000 invested in Prosper loans.  Now both Prosper and Lending Club are better place for investor now than they were for me in 2006 and 2007..   Still I'd highly recommend reading Nords blog posts.. I think they are the best I've read on the web on the subject.

In particularly in order to make money with either Lending Club or Prosper, you need to be right about three things.
  • The Credit score and other info is an accurate predictor of default rates
  • You do a good job a picking loans to make
  • The companies stay in business.

Most of the discussion about Prosper and to a less extent Lending Club is around the 2nd point, which frankly is the least important IMO.
In the early days of Prosper the Experian credit scores turned to a pretty crappy indicator of default rates, things like did you have a job that paid well were the real important ones. It sounds like Lending Club has been having similar issues.

I really want to emphasis the 3rd point. Nords and I are involved in Angel investing group which invests money in startup companies.  As we have found out the hard way even companies with really good new idea, smart managers, generally go broke.    Both Prosper and Lending Club are still in the start up phase, Prosper has burn through a  hundred million or so venture capital money and has never made a profit.  Lending Club last year got $150 million investment from Google capital which is very promising. But in the 6 year Lending Club has lost $50 million, before finally eeking out $.01/share profit in 2013. I am cynically but reading the 10K (financial statements)  it looks like to me that the $.01 profit is mostly some accounting tricks so the company can go public this year.

If either company go bankrupt,then lenders will almost certainly suffer a loss of principal on the loans.  For the simple reason, that nobody else is in a position to collect payments and then distribute the payments to hundreds of lenders.


brewer12345

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Re: Lending Club vs Paying Down Mortgage
« Reply #11 on: April 27, 2014, 09:18:56 AM »
This stuff is a risky and dumb investment on its own.  You would have to crazy as a crap house rat to lever it.  I think  the junk market has gotten pretty stupid these days, but even that would be better than peer to peer.

Nords

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Re: Lending Club vs Paying Down Mortgage
« Reply #12 on: April 27, 2014, 01:32:36 PM »
Both Prosper and Lending Club are still in the start up phase, Prosper has burn through a  hundred million or so venture capital money and has never made a profit.  Lending Club last year got $150 million investment from Google capital which is very promising. But in the 6 year Lending Club has lost $50 million, before finally eeking out $.01/share profit in 2013. I am cynically but reading the 10K (financial statements)  it looks like to me that the $.01 profit is mostly some accounting tricks so the company can go public this year.
I think the scariest part of these numbers is that Prosper might actually have better management and better capitalization now. 

If either Prosper or LC "suspend operations" then third-party companies are standing by to take over processing of the loan repayments.  However I'd expect most of the borrowers to take that opportunity to stop paying their loans ("I'm not paying my loan until I know where my payments will end up!") and I strongly doubt that either Prosper or LC has ever actually walked through the mechanics of the "let's pass the payment system to a third party" scenario.  It'd be at least a month of financial muckraking and finger-pointing before everything was up & running again, and the lawsuits would drag on for a decade.

milesdividendmd

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Re: Lending Club vs Paying Down Mortgage
« Reply #13 on: April 28, 2014, 10:19:57 PM »
Lending club is interesting, but my guesss is that it will have a high correalation with stocks at the worst possible time.  When we next go into a recession, and unemployment goes up, my feeling is that default rates will skyrocket and borrowers will default en mass.

A 13 % coupon is great, but you'd have done better investing in a whole market fund last year and it would be more tax efficient.  This asset kind of reminds of mortgage backed securities in 2006-7.  I don't think you're getting paid commensurate with the risk you're taking.

In other words if you are looking for an equity like reward, why not just invest in stocks?

That being said I can see allocating <5% of your portfolio to lending club for diversification benefits if you like.  But no more.

Alexi

drewfromutah

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Re: Lending Club vs Paying Down Mortgage
« Reply #14 on: May 01, 2014, 08:51:59 PM »
Of course you can back-test notes. You can back-test anything. It is not a coincidence that I actually spent serious time back-testing my filter and I'm consistently at the top of the chart (follow the "Understanding Your Returns" link on the main LC account page to see where you are). Of course my NAR will vary based on charge-offs (to be expected) but it's quite predictable if you diversify your portfolio enough.

I understand most posters here loves the set it and forget it index funds (and I have some money in those too), but I'd prefer to do my research and see a better, more consistent return, even if I'm at risk of losing some principle. I feel like many of the index investors here started after 2008, and might still be drinking the 2013 kool-aid. Don't think a recession/depression won't ever happen again. Are you going to have the stomach to hold out and not dump your shares? Most people think they do, but actually don't.

An average of 7% a year over 30 years is great for some people, and if I were already retired with $1m equity and living off of dividends I'd take it. But I'm in my 20's and would rather take on the extra risk exposure while time is on my side.

Note: I swing and day trade for a living and it's possible that the amount of manipulation I see every day has aided my decision to shy away from "investing" in stocks long-term.