Lending Club, one of the greatest financial innovations of the 21st century has been my private experiment for the last year. It facilitates the interaction between those with money and those needing money, bypassing a significant handicap of the federal reserve system, using a state sponsored banking intermediary.
My three thousand dollar experiment in lending club was a success, not a single default, though my account was 90 percent 'A' rated loans, and ten percent 'B'. There were some laggards in payment but lending club is quick to bring these individuals back into the fold. The platform is simple to use for lenders, and shopping for borrowers is highly entertaining for this amateur banker. Additionally, Lending Club provides a secondary market for the loans, where notes may be bought and sold.
Now, I am positively bearish on the U.S. economy. Having much needed cash locked in loans for two more years was not very appealing to me for testing the platform, so I began to shed my loans in their secondary market. Initially, fifteen hundred dollars worth of loans sold immediately. The last few months however, it has become impossible to divest the remainder unless I discount the notes significantly. Something is wrong in the Lending Club marketplace. I believe there is a very real lack of liquidity.
Lending club may have given a nod to my contention,
"Lending Club is committed to the marketplace model and we do not plan to become a balance sheet or "hybrid" lender. Our mission of connecting borrowers and investors has not changed.
That said, there may be situations where the temporary use of our balance sheet makes sense. One example would be to enable test programs. Another situation would be to bridge imbalances on the platform. In plain English, this means that if there is a timing mismatch resulting in more borrower demand for loans than available investor capital, we'll consider investing in and holding the loans with the plan to sell them to investors in short order. Our borrowers expect a great experience, and bridging may occasionally help us deliver it while keeping the marketplace running smoothly." -Lending Club
Taking a lesson from modern macro, lending club has elected to act as a central bank to increase liquidity and purchase what the market has deemed unsuitable loans. If cash is unavailable to borrowers, then it is being deployed to the most productive use elsewhere.
An alternative solution may be entertained using basic supply and demand. If enough cash is not available in investor accounts to fund loans on the market place, the interest rates for these loans must go up. A shift in the supply curve will result, and fresh capital will be sent into Lending Club. Unfortunately, this still has lending club acting as the gauntlet that guides the market.
The solution that will save Lending Club, a revamp the platform to allow capital to be bid at auction, or capital bid under conditions the lender picks similar to preset filters when searching for loans. This will result in free floating interest rates where lenders and buyers will find one another and the most efficient use for money will be discovered.
Coincidentally, if the above solution is adopted, Lending club would be doing mankind the greatest service since the creation of the federal reserve by discovering the 'market rate' of interest. Collection of the data and making it publicly available would assist in market analysis for years ahead.
If lending club doesn't take heed of this suggestion, a very profitable entrepreneurship opportunity exists in the marketplace for a savvy programmer.
I haven't been invested very long (17 months), nor have I invested very much (below), but by carefully selecting the notes I buy, I've got a pretty nice ROI so far, so I'm curious how my portfolio will play out over the next year (the time when most defaults occur). I HAVE had one refinance payoff, which was bittersweet as the note was a performer, but since I joined LC in order to help others get out of bad credit debt, it's also a victory.
I've used LC successfully too, making about 6%. One charge-off, a couple in late status, but with the risk spread over a bunch of loans it all works out.
Thank you for the reply. I think if the USD was stable, this would be a real opportunity for average investors!
The USD is stable - it's actually rising at the moment!
Well, your not going to get 6% from a bank, that's for sure. Still, I wouldn't put all my money in LC. But so far so good and I really like the custom filter and auto investing features too.
Absolutely. g-dubs!
I see
stay tuned for more posts! More content soon ;D
Years back (in like 2004 I think) I jumped into Prosper, the very first micro lending platform before the SEC jumped in to claim jurisdiction and opened a can of worms. I was amazed at the free market solution to lending, from reverse-auction bids on interest rates to the awesome credit details for lenders to make intelligent decisions on loan risk.
Around 2008, when the banks decided to shut down credit lines and jack credit card interest rates, Prosper provided a real alternative to the public. I loved it and made money along the way. Prosper also took he path of Lending Club and pushed into securitization and institutional clientele. I dumped my holdings about two years ago because all the tools they provided investors, they removed. I fear there will be a significant meltdown in the microlending market with a quick follow up by the regulators to eliminate the microlending maretplace.
the regulatory risks concern me as well. thank you very much for the reply!
stay tuned for more posts! More content soon ;D
Good post. I love the concept of Lending Club, I hope they can adapt properly and help fill this important need in the market.
thank you for the reply! I am quite excited about more players innovating on the LC/prosper concept. Lets hope the feds don't shut it down.
stay tuned for more posts! More content soon ;D
Great article, it might be worth trying to strike a deal with LC with the redesign.
It has been something i've considered. Many idears ahead gents. Thank you for the comment.