This is part 2 of a series of guest posts from New Jersey Guy who is an active member on the LendAcademy Forum. He is located in New Jersey as his name suggests so he is not currently able to invest in notes directly through Lending Club. However, he has decided to share his secrets on investing in FolioFN – the secondary market for Lending Club. There will be 4 posts in this series that will outline 3 of his strategies that can help you break the mold for better returns with Lending Club.
Strategy #1: Change the way you buy some of your notes.
The first tip is going to be in note selection. This won’t increase your yields, but will help in reducing risk. Yes, I do buy newly issued notes off of Folio. However, I have found myself buying fewer and fewer. Why? Have you ever bought a note and had it make one, two, or even NO payments then go into default? Have you ever bought a note then 2 months later you see a Bankruptcy entry in the collection log? It happens all the time, and the losses on these notes are nearly equal to what you paid. It’s been widely accepted that the highest rate of defaults happen around month 14. That means the borrower stopped paying around 10 months into the loan. So that first 10-months represents your highest risk. Therefore, I only shop for 36-month loans that are over that hump. The older a loan is, the lessor your risk of default. Again, 36-month loans, NOT 60 month loans (I don’t trust 60-month loans until they are 4 years old.)
There are some advantages to this. First, you get to see a track record of how the borrower has paid. If their last 12 payments were sloppy, don’t buy it. Go for quality here. Secondly, you get to see their FICO trend. Despite the fact the borrowers profile never gets updated, their ongoing FICO scores will give you some indication of how their finances are working. Thirdly, you are risking less money in these notes. Instead of paying $25 for a fresh issue, a note with 22-24 payments remaining will run $17 to $19. Lastly, don’t look for discounts on the Lending Club platform. You can, though, find discounts on Folio. I NEVER buy a note that is even marked up a tiny .1%. All my notes are either at Par value, or discounted. I love discounts! Buying discounted notes will return more in the long run.
Now, if you’re investing large sums of money on a monthly basis, I am not suggesting you abandon your daily Auto-Buy strategies. I am suggesting that you take the time to manually explore this avenue as a way to supplement the fresh notes you are buying. In my opinion, these seasoned notes are a great value.