Beating Broke

Selecting Lending Club Investments – How I do it

August 24, 2011 By Shane Ede 22 Comments

As I mentioned in my previous post on finding a Real Rate of Return for My Lending Club Portfolio, I am unable to invest directly into the loans on Lending Club. There’s some regulatory issue between Lending Club and my state that makes it that way. So, I have to purchase my investments through their note trading system called foliofn. Not a huge deal, but it makes it a bit more interesting.

Using the Lending Club foliofn Search

First, I have to search for available investments. They’ve got a decent search, but it’s missing a few key things that really would make it top notch. Here’s what you’ve got as far as filters for the search, and, also how I usually set it up when I do a search.

I don’t like seeing anything that’s been late, or is currently late. Late payments don’t show any intention of improving your situation, so I’m not going to take a risk on you if you don’t take it seriously enough to pay on time. You’ll notice that I also change the remaining payments to 56. The max is 60, but it’s hard to eliminate those who have been late if they haven’t had the chance to be late, so this makes it so that a few payments have to have been made. Of course, there are shorter term loans available in Lending Club, so you’ve got to keep an eye out for those. I don’t really limit the rates at all. I’ll explain why in a moment. Here’ s a sample of the results you’ll see when you do a search (click to see bigger).

Selecting Lending Club Investments

As you can see you get a really basic overview of the available loans. They’re all sortable. I usually sort by Asking Price because I usually have a set amount of available funds in my account and I want to purchase investments that will come as close as possible to exhausting those funds. There are three things that I pay very close attention to when I’m shopping for investments here. The first is the Credit Score Change. This is a visual indicator of whether the borrower’s credit score has gone down, up, or stayed the same since the loan was issued. I only buy loans where the credit score has gone up. It’s indicated by a green arrow that points up and to the right. Again, this is a personal preference, but I want borrowers who are want to improve their situation. It’s what this site is about, and something that I feel strongly about. I like to think of it as ethical investing.

The second thing that I look closely at to compare the term of the loan with the remaining payments. This goes back to the late/never late thing. I’m able to eliminate loans that have been late through the search if the term of the loan is 60 months, but not if it’s anything shorter than that. I’m looking for loans that have made at least 2-3 payments. Finally, and most importantly, I look at the Yield to Maturity field. If I could change one thing about the search on foliofn, it would be to add a way to filter by this field. Here’s why. Because foliofn is a secondary market for these investments, you aren’t necessarily paying the price of the remaining principle. The seller is able to set his own price for the investment. So, the interest rate on the loan isn’t necessarily what you will earn on the loan. The Yield to Maturity field shows what the yield on the loan will be when it is paid off. This field will vary. That’s also why I don’t limit the interest rate in the search, although you could if you were looking for a certain credit level of loan to invest in. If you look at the example above again, you’ll see that the investments shown would be very, very bad choices. Where you draw the line for the yield will vary based on your personal preferences, but I usually won’t buy any of them unless they are at least 5%.

Further Thoughts and My Results

My goal is to maintain a higher interest rate than any savings account, while maintaining a medium-high risk level. This means that my portfolio is weighted towards the C-D range loans. I still keep it diversified amongst the different rate levels, but it’s heavier in that area. You’ll notice that the results don’t show what range the loan is. For that reason, it’s handy to know, generally, what the interest rate ranges are for each of the loan credit ranges. Using the interest rate (not the yield to maturity) field, you can guess where the loan lies.

So, all that goes into it. I look for an investment that has a upward trending credit score, that hasn’t been late and has made at least 2-3 payments, and that has a Yield to Maturity of greater than 5%. My portfolio is still rather small, so I try to keep individual investments to a $20-$40 range. I just don’t want to put too much of the portfolio in one loan and then get caught with my pants down if it defaults. As the portfolio grows, I’ll likely increase the upper end of this range. So far, I have had 4 of the investments paid off. Two of them have been paid off early. I have had no defaults. That’s a screen grab of my real return on the left. Adjusted for inflation, using the formula in my previous post, it’s still above 10%. Try and get that anywhere right now. My 401(k) is at -0.85% YTD, and my local bank pays 0.25% on savings accounts. Sure, it’s riskier, but I feel the increased return outweighs the increased risk, and I think it will keep it’s place as part of my investment strategy.

I feel that I should make a disclaimer here. I’m not an investing professional. None of this should be taken as advice, but merely an amateur sharing information on my portfolio. See an investing professional if you’re looking for advice. Otherwise, feel free to share your stories in the comments! And, as always, if you liked the post, please take a moment to share it using the bar on the left hand side, or at the bottom of the post.

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Calculating a Real Rate of Return on My Lending Club Portfolio

August 22, 2011 By Shane Ede 14 Comments

For the past month or so, I’ve been performing a bit of an experiment. I’ve been taking 10% of all income from this and my other sites and splitting it between an investment account and my Lending Club portfolio. The idea, of course, is to see which performs better.

In order to do that, I needed to find a good way to calculate what the real rate of return to me is. Here’s the formula I settled on.

(1- (Total Deposits / ((Total Deposits + (Total Interest Received – Fees Paid))*.97)))

I should qualify the rest of this by saying that I’m not the best at math, so there may be flaws here. Feel free to let me know in the comments. Also, if there’s a better way to go about this, please let me know in the comments as well.

So, let’s break that down a bit. The *.97 part is meant to give some accounting for inflation. It takes 3% right off the top as an inflationary cost. Is 3% enough? That’s debatable, but it seems like a fair average, historically. This bit: (Total Interest Received – Fees Paid) is merely the total income on the portfolio. I’m missing a small bit here, as the cost of the principle is not equal to the actual principle of the portfolio. That’s because I live in a state where Lending Club doesn’t have the right permissions to allow me to directly invest in the loans. So, I’m having to go through their foliofn note trading platform to buy my notes and there is usually a small premium on the notes. I haven’t decided on a good way to really include that in, or if it really should be. The next bit, (Total Deposits / ((Total Deposits + that previous bit is basically determining the % growth. Total deposits divided by current “balance”. The 1- part at the beginning just gives the cleaned up decimal percentage.

Let’s walk some numbers through it. We’ll use these:

Total Deposits = $1000

Total Interest Received = $25

Fees Paid = $5

So, plugging those numbers in we get: (1-(1000/((1000+(25-5))*.97)))

We’ll do this old school and solve as we go, showing our work. Parenthesis get priority, followed by addition and subtraction. So, we next end up with (1-(1000/(1020*.97))). Then, we end up with (1-(1000/989.4)). Next step, 1-1.011 = -.011. So, we get a return of -1.1%.

Seems logical right? In the case of my portfolio, the result comes back as 10%. That’s a pretty good number, if you ask me. I haven’t had any defaults yet, and I’ve had loans in my portfolio since January of 2010. (the experiment I talked about earlier only began in July, however, but previous portfolio is included for easy of calculations)

I’m sure there’s some much more complicated formula that would take in risk of default on remaining invested principle, and a way to get the most accurate number, but really, I’m not sure that I want to take it that far. This will never get to the point, I don’t think, of having a majority of my overall portfolio in it. It’s not nearly safe enough for that, and my retirement accounts will remain in more traditional markets.

But, with results like 10%, and the current state of the stock market, one has to begin to wonder if the stock market is the safer of the two markets. The stock market certainly isn’t showing returns of 10% recently.

photo credit: lumaxart

5 Creative Ways to Save

August 17, 2011 By MelissaB 17 Comments

Common financial advice is to pay yourself first; set aside your own savings before you pay any bills. Yet, what happens if you don’t have enough money to pay yourself first? What if you can’t set aside $100 or more each month? How can you continue to save for your goals whether they are establishing a $1,000 emergency fund as Dave Ramsey recommends, saving for a replacement car so you can avoid a car loan, saving for a down payment on a home or simply saving for a vacation?

My husband and I are temporarily in a tight financial situation; he is finishing his Ph.D. and I am staying home to take care of our three children while doing freelance work at night. While I expect our financial situation to improve in a few months when my husband graduates, we are now in the situation where we have little to save, yet we would like to begin to save for a down payment for a house. We have found unusual, creative ways to save. Utilizing these methods won’t get us to our 20% home down payment, but they offer a great way to start saving, and we will add to the savings when our income increases. If you are trying to save more, try some of these strategies:

Save all of the $5 bills that you get. You are at the grocery store and you buy $33.22 worth of groceries; for your two twenties you give the cashier, you get back one single and one $5 bill. Put that $5 bill into savings. My husband and I have been doing this since June 1, and already, in less than three months, we have saved $175. That is a savings rate of approximately $60 a month. More importantly, that is $60 we didn’t think we had to save. Sometimes it is painful to put that money aside, but in the long term, it is worth it. Of course, this method works best if you routinely pay in cash.
Save all of your change. This is a similar strategy to the $5 bill strategy, but it is a little less painful because you will be saving less overall. However, your savings will still add up quickly. My husband and I used this method a few years ago to save for a weekend vacation. We saved $300 in a year’s time.
Save one dollar a day. Another blogger I read was told at her wedding that she and her husband should save one dollar a day. She and her husband did just that, and at their 10 year wedding anniversary, they had $3,650 saved, which they used on a 4 day second honeymoon. Talk about a painless way to save, but what a great reward at the end.
Save the money you would have spent on an impulse purchase. Do you really want a pop when you are checking out at the grocery store, but you resist the urge? If so, take the $1.59 you would have spent and put it in your savings account. You would have wasted it on an unhealthy, impulse purchase; why not instead use it to your benefit and put it in your savings account?
Have $5 or 10 automatically withdrawn from your pay check. Even if money is very tight, you can probably sacrifice $5 a week. If that is the case, arrange to have the equivalent of $5 a week automatically withdrawn from your paycheck and placed in your savings account. Over the course of a year, you will have saved between $260 and $520.

Of course, there are many ways to save when on a tight budget; you just need to get creative with how you do it. Also, don’t worry that the saving method you choose is not adding up quickly enough. Saving something is much better than saving nothing, and once you become disciplined to save money regularly, as your income increases, you can save more.

photo credit: Carly Jane1