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Please keep in mind that LendingClub actually made loans in 2007, so one can analyze their data and see that those portfolios did OK in 2008 and 2009. Investors expecting to make 9% actually made about 1.5% or 2% on those loans. So, unemployment went up by 5% and defaults in consumer loans went up by about 7%. That's your recession experiment right there, and it's not so bad. BTW, this exactly mirrors the results of the credit card companies.
Please refer to the attached link for Federal Reserve data on interest rates and defaults. Credit card companies saw defaults hit about 10.8% at their peak, while they were charging about 13%.
From my perspective LC default rates would have to increase to 17% (my average interest rate) before my principal is at risk. This is a risk-reward investment I'm willing to make since the worst recession since the Great Depression only saw credit card default rates at less than 11%.
Just a thought: if these people borrowing at such high rates had truly low credit risk, they should be able to borrow from conventional channels at lower rates than here.
In this industry there is truly no high returns at low risk. In this case if the borrowers are paying off early the rates are not high as it seems. On the other hand, if the borrowers are willing to pay pawn-shop style rates they are not truly high grade.
In that case, before I risk my capital I would like to see some tangible asset backing it. At least with conventional bonds you are first in line in case of bankruptcy. Here you are an unsecured creditor. As others have pointed you might not be even a creditor in legal sense and might not have represented in bankruptcy court.
Reply to @Investor: Because the banks have essentially abandoned the non-secured personal loan market. Banks have zero interest in helping consumers get out of the revolving trap – that’s how they make all their money. Here's a real life example: John Doe's credit score on the application Wells Fargo pulled for a consolidation loan was 720 – their reason for turning John down was “Excessive obligations” – no kidding, that’s why he was trying to consolidate them all into ONE loan with fixed repayment terms so he could get out of that trap. Fortunately, LendingClub came to the rescue, and John will be debt free in 3 years.
I also have had good success with Lending Club over the last couple of years. The comparison to CDOs doesn't work - there is no marking issue because most of the loans are held to maturity. The better comparison is credit cards. How are credit card companies doing making unsecured small loans to large pools of borrowers......
Reply to @Hrux: They were just starting out during the recession and didn't really take off until 2010 or so in loan volume. Low sample data to compare. It is like comparing the performance of a very new fund with low AUM where the ER might be held low initially and extrapolating it to how it will perform at scale. This is why some people think of LC as a Ponzi scheme like some people do with Herbalife that the experience of later participants may not match that of earlier participants.
There is data available on their site to show average annualized returns of 5-10% depending on category since inception. This takes into account the defaults and adjusted for delayed notes. That is the average across all loans. Don't know the spread to see what a typical investor might expect. It would also be interesting to see how the returns behaved by year as they scaled up. Is this data available?
Reply to @reids: Since credit card loans are a common backing instrument for CDOs along with student loans, mortgages, etc., would you mind explaining what you mean?
Comments
Please refer to the attached link for Federal Reserve data on interest rates and defaults. Credit card companies saw defaults hit about 10.8% at their peak, while they were charging about 13%.
http://www.federalreserve.gov/releases/chargeoff/chgallsa.htm
From my perspective LC default rates would have to increase to 17% (my average interest rate) before my principal is at risk. This is a risk-reward investment I'm willing to make since the worst recession since the Great Depression only saw credit card default rates at less than 11%.
In this industry there is truly no high returns at low risk. In this case if the borrowers are paying off early the rates are not high as it seems. On the other hand, if the borrowers are willing to pay pawn-shop style rates they are not truly high grade.
In that case, before I risk my capital I would like to see some tangible asset backing it. At least with conventional bonds you are first in line in case of bankruptcy. Here you are an unsecured creditor. As others have pointed you might not be even a creditor in legal sense and might not have represented in bankruptcy court.
Thanks a million for sharing all the information about P2P lending.
Merry Christmas & Regards
Nath
Because the banks have essentially abandoned the non-secured personal loan market. Banks have zero interest in helping consumers get out of the revolving trap – that’s how they make all their money. Here's a real life example:
John Doe's credit score on the application Wells Fargo pulled for a consolidation loan was 720 – their reason for turning John down was “Excessive obligations” – no kidding, that’s why he was trying to consolidate them all into ONE loan with fixed repayment terms so he could get out of that trap. Fortunately, LendingClub came to the rescue, and John will be debt free in 3 years.
Shhhh. We need to keep LC a secret = more good loans for us!
There is data available on their site to show average annualized returns of 5-10% depending on category since inception. This takes into account the defaults and adjusted for delayed notes. That is the average across all loans. Don't know the spread to see what a typical investor might expect. It would also be interesting to see how the returns behaved by year as they scaled up. Is this data available?
Regards,
Ted
He is a member, nothing more, nothing less; as all the other individuals involved in this disucussion.
Respectfully,
Catch
P2P lending is not a mutual fund/stock. I shouldn't have brought this up here in this forum.
I will be more careful next time.
New year is very close...Happy New Year to all of you and hope 2014 brings more good news to you and your families.
Regards
Nath
This link will help explain how defaults impact returns as loans season.
http://www.lendingmemo.com/lending-club-prosper-return-curve/