Liquidating Lending Club

Hi everyone. Norm coming to you live from Ridinkulous Headquarters from a new (to me) laptop and a newly configured WordPress. These things, along writing so intermittently, are throwing me for a loop, so excuse me if I sound a little hoarse.

Things have been chugging along here as usual. Since I last wrote at the beginning of the year, Marge and I have been to the other side of the world. We spent two weeks in Malaysia, Singapore, and Hong Kong around Chinese New Year. Just imagine, me stuck in business class while Marge flies in an empty first class cabin with a Cathay Pacific purser and chef all to herself for fourteen hours. Yes, only one first class seat was available as bookable with points, and I gave it to her. Aren’t I so nice? Will I ever do a full write-up on this trip? I hope so. People, including me, want to know how much this stuff costs!

Other than that, Marge has been choreographing her first modern dance, and I entered a mac & cheese cooking competition. The choreography is new and is going well, but just as we lost competing in the mac & cheese contest four years running, I lost again this year. But it was fine with me, because we still get free tickets to the event for competing.

What I really want to let you know about was a new financial move I decided to make.

I’m done with Lending Club

As I’ve written about before, I got on the Lending Club bandwagon early. April 2011 to be exact. It is a peer-to-peer lending site that had high aspirations of removing the banks from the deposits/lending structure in order to bring people lower borrowing rates and higher savings rates. I signed on as a lender because it seemed promising and people were getting good returns on their investments, plus I agreed with their noble goal of giving more financial power to people instead of banks.

Account as of June 2016

It went really well for years. I invested in hundreds of loans in $25 increments to reduce my exposure to failure. And there weren’t many failures in the beginning. Even though I was lending to people at fairly high interest rates (think 13-20%) I filtered for people with good jobs borrowing with good intentions (credit card debt consolidation, not weddings or vacations). So for years, my account was actually earning around 12%, including defaults.

I was such a Lending Club supporter online, they sent me merch

But defaults are a funny thing. These are all three or five year loans. Nobody really defaults in the first year, but as the loans get older, the chances to default increase. So as you’re getting paybacks from the first year, you invest in new loans, and as your older loans start defaulting, your new loans are paying and making up for it… mostly. Unless you keep putting new money into new loans forever, the real shock of defaults will eventually hit you.

I had about $15,000 invested when I really started to notice, “Hey, there’s a lot of defaults happening.” This is probably three or four years in. So I stopped putting in new money, and lo and behold, those returns really started dropping. Instead of re-investing the payments in more loans, I started withdrawing the payments.

It took about two or three years after I stopped putting in new money, but those returns eventually went negative on a month-to-month basis as all of the loans in there were getting old. But those early returns were so strong, I’d still have to estimate my overall return to be around 6%, maybe 5% once all is said and done. So good returns, but not nearly enough for all of the work involved.

A month or two ago, with about $2,000 left invested in loans, and having to do the annoying tax calculations again, I decided to do a final liquidation and be done with it all. One of the drawbacks of Lending Club is that you can’t liquidate quickly. You either wait to be paid back, or try to sell the loans individually on the Lending Club market, which is what I finally did.

The Lending Club market is a funny place. You list your loans with an asking price, usually a few percent less than the principal and interest accrued. There are people who will buy them up. Since my account was usually taking a loss each month, I figured I might as well list everything at a 4% discount, because that would probably still put me ahead of where I would be waiting for payments and getting more defaults. I probably should’ve taken advantage of this a year ago.

March 2019

If they aren’t selling quickly enough, you can reprice all them down simultaneously, which I’ve been doing, until they finally sell. So I’ve basically taken 5% loss and gotten almost all of my cash back now, instead of waiting it out and hopefully taking less of a loss, but very likely taking more of a loss. After taking out the cash, I put it in either stocks or our money market mutual fund.

So what do I think about peer-to-peer lending after eight years with Lending Club? Despite it being really fucking new and probably pretty risky in 2011, it still feels like a very new space today. The idealism of the early days is gone, and most of the loan funding today is provided by banks instead of individuals, which I suppose might be necessary considering the size you have to be to make any money in this kind of business.

Their loan issuance amounts keep increasing, and now they’re offering something called CLUB Certificates which are securities backed by prime personal loans. The industry is still trying to find its place in the landscape, so it will be interesting to see where it is in a few years. I wouldn’t rule out investing in peer-to-peer lending again in the future.

Any other Lending Club quitters out there?

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