Investing with Lending Club is my another investment vehicle. With Lending club you can become a bank and lend your money to another borrower and you can gain quite a nice interest by doing so. Even though Lending Club screens every applicant (and they deny circa 90% of all submitted applications) time to time you will be facing notes which are late or default. How to avoid defaulting notes?
When I started investing with Lending Club and my portfolio was small I almost had no late notes. When the portfolio grew to a larger amount I was seeing a lot of notes in grace period, late 16-30 days and late 31-120 days. Fortunately none of my notes got into default. I was thinking that my screening filter would eliminate all risky notes, nevertheless I could experience notes graded as A or B getting late. It was quite surprising for me as well as frustrating. I remember, once I was so frustrated that I was even thinking to drop Lending Club investment at all. I didn’t want to deal with irresponsible people, who claimed how great borrowers they were and then they defaulted after the second payment.
Apparently even the best filter ever won’t protect you from such borrowers, so I had to develop a method how to lower the risk even more. I know it won’t protect you 100%, but this system can eliminate those notes, which are showing a sign of troubles and may default in the future.
I took a notebook and started recording all my notes which were in grace period or late. Every week on Friday I open my account, go to “notes” and browse through them. Those which are in Grace period I record the note ID in my notebook. Next week I do the same and check the status of recorded notes and add new notes (if any). If a note slips into “late” status I sell such note on the secondary market (FolioFn). I wait if the note gets into “current” status and then sell it. This ensures I can get as much money back as possible then when selling the note while it is still in “late” status. Mostly by doing so I can get back all what I invested in this note and sometimes a few cents more – better then waiting whether the note defaults or not.
If the note slips into “31-120 late” status during my “waiting period”, I sell it at all cost and I am willing to take the loss (usually 4 – 5 dollars discount, but in overall portfolio it is a very little loss). When selling the note in late status I usually have to discount the price.
Next condition which sends a note to my “black list” is a sudden drop of borrowers credit score. That is a sign of borrowers default with another lender and that may spread to Lending Club quickly. If I see that a borrower’s original score was in 700+ level and it suddenly dropped to 660- level I sell such note even though it is in current status.
Having troubled notes recorded somewhere else besides your portfolio, where you can quickly review what is the status of the note at the end of each week (sometimes when defaulting note gets current, you can easily lose track of such note) and check if it consistently pays late helps me eliminating notes which may potentially, one day slip into default. So far this method works for me and my portfolio is clean and has only current notes. My net return is still around 12.37% and I am no longer nervous seeing some of the notes slipping behind in payments.
How are you eliminating potential troubled notes when investing with Lending Club?