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Why I will no longer invest in Lending Club

Lending ClubEvery great story will end one day. This is the case of my investments in Lending Club. Yes I am closing my account (or significantly reducing my exposure) with Lending Club and moving all available cash to equities.

The reason? Recent changes in trading platform which now prevent me from effectively manage and protect my investments.

What are those changes about?

Some investors and gurus call it a loophole and I am fine with it. For me it was an edge to protect my investments.

Lending club was processing notes in a certain time frame and there was a time or day limit when the notes were supposed to be processed. If it didn’t happen I sold the note in the secondary market with a discount before the note turned into a grace period status.

This is no longer possible. Now during note processing it will not be possible to sell the notes. When the processing is over you will be able to sell the notes as long as they are in current status. If the notes during that period changes into Grace period or late, you won’t be able to sell. You are locked in a bad note.

 
(MORE: Major Changes to the Lending Club Trading Platform Today)
 

My first reaction was that it was similar to NYSE or NASDAQ preventing you selling stocks which are declining and allowing you to sell them only when they are rising.Mad man

Normally I would be OK with this procedure in LC trading platform if I had a lot better filtering options and enough time to evaluate the notes. Right now in today’s environment investors in LC were buying using phony filters and mostly had no time to use them unless they automated the process.

Now trading in LC becomes more risky to me and I am not willing to take that risk.

As Peter Renton says, for some investors this will be a major blow:

There is a little loophole/trick that some investors have exploited to offload their notes that are about to go late…that allowed investors to sell a note the day before it went into In Grace Period if they knew how to exploit it.
That loophole has now been closed. Investors will no longer be able to list a note for sale once Lending Club has begun processing the payment…For most investors this will be an inconvenience and for some it will be a major blow because the loophole will now be closed.

Yes, I must admit, I was one of the investors using this process to my advantage. Not anymore. Thus it is time to say good bye.

What’s next?

My next steps will be unwinding the positions and selling whatever I can without loses. I am also expecting some late notes starting to show up in my account.

As of today, my NAR reached 16.28% and my XIRR 11.60%

It was nice experience and great returns. In the future I may use LC with very little money (up to $1000 but not more) if I see the trading platform improves and be providing more valuable information to investors so we can see to whom we are really lending our money, whether it is an honest borower or a scammer.

 
(MORE: My Returns at Lending Club & Prosper for 2013Q3 – 13.89% ROI)
 

At this point I would prefer investing into small businesses rather than to consumer credit which seems to me less risky. An example would be U-haul company which allows you to lend them money on their website the similar way as you did in LC. They will use the loan to expand their business by buying equipment. the interest rates are smaller than with Lending Club, but the loans seem to be safer since there is a company behind it with some assets which can be used to satisfy investors.

You still will be able to see my Lending Club results at my Lending Club holdings page, but I will no longer update the page. You would be able to see the result up to today.

I loved it, but this story reached its end.
 
 





2 responses to “Why I will no longer invest in Lending Club”

  1. Peter Renton says:

    Thanks for referencing my recent article. I understand why you have decided to liquidate your investments but I also wanted your readers to hear a different perspective. I have never exploited this investing loophole despite knowing about it for two years now. The reason: it is not good for the industry.

    There was someone on the other side of every transaction who was buying a note they expected was a good note but that the seller knew to be otherwise. This did not lead to a win-win but a win-lose transaction. I believe that p2p lending is a great investment but I also believe that every transaction here should be win-win if at all possible.

    • Martin says:

      Peter, I completely agree with you and I have nothing against it. The only thing is that closing this opportunity makes investing in LC unattractive. I may stay, but definitely reduce my exposure before I find new ways to invest in LC. I just don’t like being locked in a bad note and have no chance to get rid of it.

      Applying the same or similar logic to the stock market I have better chances there than in LC. Better liquidity, better borrower (company) reporting. But I am not bitter about it. I knew that lately this opportunity or loophole was the only thing which kept me staying with LC.
      Thanks for stopping by.

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