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How to Spot Bad Notes in Lending Club Before They Turn Bad – Part 1

Lending ClubSince a few months ago when I claimed that I had zero In Grace Period, Late, or Defaulted notes in my Lending Club account, I have started receiving emails from other investors whether I would be willing to share my strategy how I avoid the notes before they turn bad.

Originally I was just responding to those emails, but the number of them was growing so much that I made a decision to publish my strategy of managing Lending Club account.

At first, I didn’t want to post my method publicly. The first reason was that I wanted to test it longer than a few months and the second reason was that I thought it might not be wise to tell the world how to do it, since if everybody starts doing it, it will diminish the strategy.

So when I finally got rid of my paranoia I told myself “why not” and decided to tell other investors how to do it.

It is so simple method, that I believe there are plenty of other users who are already using it in a different way or modified so why not to tell my own strategy.

Among thousands of other investors I no longer think that my method, once published, would destroy my ability to invest in Lending Club successfully.

A Little Bit of History of My Lending Club Account

It’s been exactly three years since I opened an account with Lending Club. And even today I can still claim zero In Grace Period, Late, or Default notes in my account. It wasn’t like that all time. When I opened my account I experienced a lot of notes going into a grace period status. A few went into a Late 16 – 30 or 30 – 120 days status. Fortunately none of the notes defaulted at that time.

I was lucky enough, that many of those notes returned back to Current status. So as soon as I opened a FolioFN account I immediately sold those notes.

See my account for yourself to prove my claim, that my account still shows zero problematic notes:

Lending Club

However, at the beginning I was relying on pure luck and hope. I was hoping that the notes won’t turn bad and if they do, I would sell them as quickly as possible. But I realized that notes which turned into a Grace Period status were unsellable.

And that was the point for my search. A quest to find the way, how to spot the notes which can be potentially bad before they turn into Grace period started.

The Strategy in Four Steps

In this short series I will describe the process which can help you to manage your Lending Club portfolio to avoid bad notes before they actually turn bad. Of course, this method I am about to reveal, is not 100% bullet proof.

Wait! I just claimed that I could avoid all bad notes, so how come this method is not bullet proof?

Well, yes, with my method, which is incredibly simple, you can really avoid all bad notes. But sometimes, you will get rid of a note, which turns into a good note later on. It happened to me many times, that the note changed into Grace Period or even Late and later it changed back into Current status.

This is what I mean by not being bullet proof. At the end you may be selling notes, which may end up as good notes.

On the other hand, would you be willing holding an investment in a note whose borrower was at the beginning claiming how great a borrower he was, never missed a payment and then got late on his second payment? I wouldn’t lend my money to such borrower at all!

This series will show you step by step how to:

  1. Select notes you want to invest in the first place.
  2. Tools you want to have to effectively manage notes you have already bought.
  3. 5 minute daily procedure to spot bad notes.
  4. A winning battle action.

You will be surprised how simple this strategy is and how accurate it is. And it really takes circa 5 minutes daily to manage your account.

Are My Claims Valid?

I am so confident in this strategy, that I even started taking in riskier notes (E, F, and G) and still have zero defaults.

I have my account with Lending Club for three years, however, I started practicing this strategy for about a year now. Is one year enough? I believe it is.

As you can see on the following chart on which I am tracking my annual interest rate, how successful the strategy was:

The first spike in interest rate is contributed to the low age of the account. You will probably experience it in your account as well, that your initial interest rate rapidly grows, but then as you mature and take more notes in the rate will average down too.

Mine averaged at around 12%. But I wanted more and still play it safe. When I discovered my method in March 2012, my account started dramatically grow. You can see my Lending Club account metrics on my Lending Club Holdings page.

In the next part I will show you my selection to eliminate high default probability notes.

3 responses to “How to Spot Bad Notes in Lending Club Before They Turn Bad – Part 1”

  1. Martin says:

    W2R and CI,

    I will be posting the rest, definitely. But right now I am extremely busy at work that I have very little time posting. I will be back to normal probably next week.

    Thanks for stopping by.

  2. CI says:

    Looking forward to the next part of the series. Sorry to get back to you so late, I’ve been on vacation/incredibly busy the past month. I am now back to my normal schedule. Wooo long month for me!


  3. Martin, definitely looking forward to reading the rest of your series on Lending Club! I am a huge fan of Lending Club myself am always interesting in seeing how others pick and decide upon a criteria, and how they manage their accounts.

  4. […] Hello Suckers begins the first of a quartet of posts on spotting bad Lending Club notes before it’s too late. […]

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