Using FOLIOfn to Maximize P2P Lending Returns – Part 4

This is part 4 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.  This is the last post in the series to help investors break the mold for better returns with Lending Club.  Be sure to check out the other posts if you missed them.

Strategy #3:  Speculate on Grace Period Notes.

This strategy is going to need a hard stomach and is clearly not for everybody.  The reason being is that the notes you buy will probably get worse before they get better. In other words, you’ll be sitting on a bunch of late notes. If you decide to work this method, I suggest you get your feet wet by investing in only 5-10 notes for the first 30 days.  This will give you an opportunity to learn how to work this.  If you make mistakes, your losses will be limited, as the amount you are investing in each loan will only be 40% to 55% of Principle.  It will also give you a pretty good indication of whether or not you’ll want to continue with this method.

Here is how it works.  Lending Club claims that 77% of all notes that go into “Grace Period” will eventually go current.  That’s not bad odds.  But with a tiny bit of filtering, that could be boosted to push 80%.  That means, for every loser you end up with, you should have 4 winners.  When I work this system, I find the statistics to be pretty close to that.

Like I stated before, the problem here is the note will get worse before it gets any better, and I’ll tell you why.  The window between a “Grace Period” note going “16-30 days late” is very short!  Like the status said, 16 days!  This 16-day period will encompass Lending Clubs second attempt to extract funds which usually takes place 7 to 10 days after the original due date.  Typically, investors will not list these notes for sale until the second attempt has failed.  Therefore, many of the notes listed for sale are already 9 to 12 days into their 16-day period.

Now, let’s see how we can turn this around.  First off, we already know the chances of a note we buy will go downhill.  Therefore, they will need a “Curing” period.  Create a separate folder dedicated to only these notes.  This way, you can keep a good eye on them.

When shopping for “Grace Period” notes, you only want to purchase notes at a discount of 45% or greater!  But don’t get duped into buying any note that has any reference to a Bankruptcy!  So it is imperative that you scan the collection log for any mention of a BK.  This is so important, I’m going to state it again.  You need to scan the log for Bankruptcies!

Buying a note at a heavy discount will help you in a couple of ways.  If you get a “Grace Period” note for 45% off, then the value of that note will be close to what it’s worth if it drops into “Late 16-30 Days”.  Secondly, you are not risking a large amount of money.  Like our past example, a note with a $22 principal balance can be bought for $12 (45% discount).  The good news here is that your risk is actually less than that.  If the note goes really sour and you need to dump it, it is worth something.  BK-7 notes sell on Folio all day long for $1.50.  So even if you dump the note for a bankruptcy price of $1.50, your total loss is only $10.50.  I think this is a loss we can all live with.

2nd tip: Like I stated before, the older the note, the better the odds.  Unless the discount is so high and the price so cheap, it may not be worth betting on newer notes.  However, if you are looking at a $24 principle note for $7, it might be worth a shot.  Judgement call!  Use your own tolerances on this one!

CollectionLogLendingClub3rd tip: While you are scanning the collection log for bankruptcy references, check to see if there has been any REAL borrower contact!  This is your tiny filter I mentioned above.  Positive borrower contact is what can boost that note to an 80% cure rate, or even higher.  What do I mean by real contact?  Notes like “Borrower contacted Lending Club” and “Borrower promised to pay” are indications the borrower took the initiative to address the problem.  Unfortunately, this kind of contact is only sporadic.  When a borrower misses a payment, Lending Club sends them an email.  The good borrower knows there is a problem, and may have already addressed the problem in their checking account.  They feel no need to contact Lending Club.  If the second attempt fails, more emails are sent and it could be several days before any type of phone calls are made by the collection department.  But some borrowers are very self-conscience.  The moment they receive that first email, they contact Lending Club to resolve the problem.

4th tip: Don’t be misled by fake “Payment Plans”.  If you see the notation “Payment Plan”, chances are its computer generated, and not something the borrower physically agreed upon.  You will quite frequently see these fake Payment Plans on both Grace Period and 16-30 day late notes.  Typically, the payment plan is nothing more than a single payment equal to what’s due.  A real payment plan will be noted in the collection log, and the payments spread out over several months.

So, now that we just purchased a note for $12, what do we do with it?  Well, if it’s still in “Grace Period” after it settles, get it back up on Folio the same evening at 25% discount.  There is a good chance you can resell it quickly, especially if it’s a note that isn’t flooded on Folio.  If you succeed in doing this, you just netted $4.33 in profit after Folio Fees.  If the note goes “16-30 Days Late” after listing it, cancel the sale, and Cure the note.

Now, remember that the whole idea behind this strategy is to create “Late-to-Current” notes.  If a note cures and does go current, refer to Strategy #2 above.  The big plus here is that not only did you collect some interest, but you can actually list the note on Folio at a discount greater than 3% and still make a juicy profit.  At a 10% discount, you can offer the note for $19.80 and sell it relatively quick.  You’ll net $7.60 after Folio fees for a 63% return on your $12 investment.

About discounting.

Please make a note of that 10% discount!  I’ve found that a 10% discount is a sweet spot when moving Late-to-Current notes.  I can attest I have never had a problem when listing notes at –10%, and they do move rather quickly (I like quick).  However, this is not written in cement, and you should experiment with different discounts to see what works best for you.  Keep in mind that the reason I like to move these notes quickly is because I don’t want them sitting around.  The last thing I want is a note going back into Grace, and I have to start the process all over. 

So, how would this work out in the long run?  Assuming you had 4 winners for every loser, you will come out $19.90 ahead if you ended up selling the loser for $1.50.  If you paid $12 each for all 5 of those notes, your total investment was $60, and your actual return was actually closer to 33%.  Naturally, you can increase your profit potential on notes you are buying for more than 45% discounts, and selling them at a lessor discount than the 10% I suggested.    Believe me, you’ll quickly learn how to adjust your numbers as you learn your notes. You’ll occasionally find super-bargains on Folio.  Not very often, but it happens!  Somebody, for whatever reason, decides to dump several “Grace Period” notes at 55% or 60% discounts.

There is usually a good selection of “Grace Period” notes available for sale on Folio.  You should be able to build a good portfolio rather quickly.  However, since you have to deal with the curing process, it may take you 25-45 days before you start seeing real results for your efforts.

What happens after a year?

Now, I know many of you will complain that this seems like a lot of work to pick up trivial pennies.  But you need to see how working this will affect your overall returns for the year.  Even if your account is worth $100,000, picking up an additional $100 per month will increase your returns by 1.1%.  However, if you’re working with this much capital, you’re short-changing yourself if that is all you are striving for.

On the other hand, a $1200 gain on a $15,000 account has a much larger impact.  Your gains are closer to 8%.  Therefore, if you are currently making a paltry 9% on your account, you can see how 17% is achievable.  Make $2000 extra, and you are well over 20%.

So what do I do with my profits.  The profits I make on my sales are used to purchase quality notes that I intend to hold.  It’s almost like getting notes for free, and the amount of interest I make increases slightly each month.  Since I am using “Found” money, I feel better investing in mainly C and D grade notes. The weighted average between my Buy/Hold folders is about 15.2%.   I don’t get very many serious delinquencies. When I do, an advantage that I have is to transfer the note over to my speculative notes, and dump for a loss if need-be.  I post that loss against my gains, but still come out well ahead.   Being able to absorb Capital Losses in another big, big advantage when you’re able to make money on Folio.

Once again, I want to warn readers that speculating on Folio is risky and I obviously cannot guarantee you’ll be successful at it.  There are a lot of different situations that may arise, and I couldn’t cover all of them unless you were sitting next to me for a week. Speculating does require time.  Not only does it require you to constantly check listings, it also requires the management of the notes you own.  If you are willing to break the traditional mold and venture into these new areas, it is an area of P2P lending that can reward you handsomely.

Wrap Up

I want to thank New Jersey Guy for sharing his FOLIOfn strategies with our readers.  From personal experience, getting started in investing in the secondary market can be a scary thing.  The key thing is educating yourself to increase your chances of being successful.  If you have any questions about the strategies he has mentioned or anything else related to FOLIOfn please feel free to ask them in the comments.

Posts in this series:

Part 1
Part 2
Part 3
Part 4



  1. says

    Nice job NJG, and thank you for sharing your insights. Certainly you have a wealth of experience in trading notes on the secondary market and these are some nice tips for leveraging the inefficiencies in the market.

  2. Kate says

    Super helpful easy to understand info. Much appreciated. I am new to Lending Club/Folio but pretty excited about the opportunities it presents. This is a rookie question, but any tips/strategies for keeping track of the notes and earnings in excel or other platform?

    Thanks again!

    • says

      Kate, glad you enjoyed the posts. That’s actually a great question and I’m sure some heavy FOLIOfn users have some pretty nice spreadsheets. I personally don’t sell notes so I don’t have a spreadsheet myself. I’m solely a buyer to avoid the tax headaches, but I suppose accurately tracking would make this easier - provided you keep it updated. If I was to track them, I would do so with google docs and go through the monthly FOLIOfn statements. You would probably want to track the date, purchase price, principal remaining, sold price and then the earnings/losses. Not sure if that helps at all and if I ever create (or receive) a standardized spreadsheet, I’ll be sure to pass it on and post it to the site. Thanks for stopping by!


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