1. Forget the bank: The future is peer-to-peer lending By: Nicholas Lemieux School of Business
Lending Problems
Following the financial crisis large banks were imposed with capital regulations that forced them have stricter loan requirements. Many of the “regular” citizens of the world were squeezed out of receiving once traditional loans. With the gap between banks and borrowers closing, LendingClub emerged as a relatively young concept of lending. Known as peer-to-peer lending it allows borrowers to receive loans from another individual who stakes the money through an online platform. This provides an opportunity for investors to receive a return higher than traditional investment vehicles. My goal was to investigate the peer-to-peer lending environment from the investors side by taking a $500 personal investment and attempting to garner a 12% return.
Results & Profits
Purchased 20 different $25 “notes” ranging from grades B-E
Currently have 21 note portfolio through reinvestment
One note paid in full, zero defaults
Garnered 16.50% return
$13.83 earned as interest
Account valued at $513.44
Weighted average of return on current portfolio: 16.28%
Switched investment strategy from lower risk B grades to incorporate higher risk / reward D and G grade
With an a goal of achieving a 12% return on my portfolio, I have achieved this to date. However, as the length of these loans get longer, defaults are expected
Intend to continue manually investing with this strategy while adding more cash to the account to diversify further
Goal to continually see these returns while diversifying with about 100 notes
Loan Grades Standard Returns
Loan Market Portfolio View
Account Summary Loan Description
Investing Language:
FICO Score: A persons credit score calculated with software from Fair Isaac Corporation.
Peer-to-Peer Lending: Practice of lending money to individuals through online trading platforms.
Diversification: The process of allocating capital in a means to reduce exposure or risk.
Refinancing: Replacement of a debt obligation with another under different, typically better terms.
Interest Rate: Proportion of loan charged as interest to a borrower, often annualized percentage.
Filtering Notes
Investing in $25 “notes” or partial shares of a loan
Focused on debt reconsolidation and credit card refinancing
Filter available loans via strict criteria
Traditional filter:
Open Credit Line: 5-30
Delinquencies: 0
Home Ownership: Mortgage
Inquires In last 6 mn: 0
Public Records: 0
Loan Term: 36-months
Max Loan Amount: $30,000
Monthly Income: $5,000-$20,000
Credit Score: 675+
Literature Cited:
Acknowledgements
A special thank you to Professor Michael Ice, my sponsor, who guided me through this process while providing invaluable investing advice through his own personal financial journey.