Investing

Lending Loop - peer to peer lending - do due diligence

  • Last Updated:
  • Nov 15th, 2017 3:41 am
Sr. Member
Feb 25, 2007
903 posts
360 upvotes
Ottawa
jb10071 wrote:
Apr 25th, 2017 3:25 pm
I'm curious after doing some math and spreading some risk, it should be viable to make 8-12% per year. That would seem like a very attractive investment. ...] Anything I'm missing besides being aware of the risks?
I have somewhat soured on Lending Loop and am letting my (small trial) portfolio run out rather than adding to it. I think it's great in theory, but at its current scale and economics it's not worth it to me.

Suppose you have a portfolio with an average rating of B. It looks like you should be yielding 12.2%, which looks attractive.
But LL takes the first 1.5%, so you're only looking at 10.7%. Then you need to make allowances for loan losses. It's early and there isn't much data, but LL's own PD (probability of default) estimates in their offering memorandum are a good start. You have to guess average LGD (loss given default), but you rapidly realize expected losses (EL) might account for 1/4 of the nominal return, so you're now down to ~7.5-8.5%.

Then you add the inefficiencies coming from the investing process. Your keep on getting your principal back, which is good for minimizing losses, but means you either accumulate unproductive money in your account, or you need to be frequently be logging in to reinvest. Which would be fine if there were a large selection of loans, but so far the market liquidity, while impressive given they're just starting up, doesn't actually have that many choices. If you put on any restrictions for yourself ("I understand loans in sector X better" or "I want only high-rated (or instead high-yield) loans", "term below (or above) X") it's easy to find none or just 1 or 2 options available. At which point you try doing due diligence, and find yourself saying "do I hold my nose and invest my money and trust diversification, or do I hold back my money at 0% and wait for the next opportunity". Finally, don't forget your money is earning 0% the moment you commit it to a loan, in the period before the loan finalizes.

Add to all of this the tax inefficiency (as @treva84 pointed out) since it's all income rather than dividends and cap gains, and it's easy to find yourself making actual returns like a passive balanced ETF couch potato portfolio, but with a lot more work on your part.

Don't get me wrong; I don't think Lending Loop is hopeless. I wish them the best of luck to get to 3X the loan volume so there's actual meaningful choice and faster turnover. I hope competition will drive down their fees from 1.5% to 1%. Hopefully the best possible current assumptions on expected losses will turn out to be to have been too pessimistic. Allowing RRSP/TFSA accounts would get around the tax inefficiency. And perhaps they'll eventually develop a robo-allocator. Once they achieve 3 or 4 out of those 5 things, I think they'll become a much more attractive value proposition for investors who want to be a bit more active/hands on to get decent return on their money as well as the time they put in.

I'm firmly convinced active investing is much more likely to create (rather than destroy) value in peer-to-peer lending -- and small business lending in general -- than active management (or self-managemend) of publicly traded equities and government bonds! Just LL aren't quite there yet.
Member
Apr 9, 2012
435 posts
119 upvotes
Markham
philland wrote:
Apr 25th, 2017 11:16 pm
One week ago you said you invest $50 to $100 and now you say $100 to $300. Anyway, $300 to you could be $25 to someone else or $2,000 to another. Everyone has a different risk appetite, different experiences that shape their opinions, and do a different amount of due diligence. I don't know why you are painting everyone with your brush.
Yes, I started at around $50-100 but have increased it to $300 on max B rated deals now. I don't have too much time to go through each deal (i.e. look at the website, look at the reviews if it's a restaurant etc.). I now tend to do $300 for B rated deals and $50-$100 for C or C+ etc.

I don't think I am painting everyone with my brush but it is a very general statement which should be applicable to majority of the people. If you spend a lot of time for $25-50 investments then good for you. But I don't think most people will do that.
Deal Addict
Jul 18, 2016
1827 posts
661 upvotes
I am a business owner. I am looking at this from my perspective as a business owner: why on earth do they offer loans as low as 5K? What is the point? I would have to pay a fee of somewhere between 3.5% to 4.5% plus whatever interest rate I'd be charged. I can do far better than this with a credit card or line of credit. On one hand, they are limiting you to businesses with revenue of more than 100K; on the other hand they are offering loans as low as 5K which would be better serviced in other ways. The only people who would go for such a small loan would be maxed out on pre-existing credit instruments which would subject you investors to extreme risk of default.
Member
Apr 9, 2012
435 posts
119 upvotes
Markham
bewiseman wrote:
Apr 26th, 2017 10:25 am
I am a business owner. I am looking at this from my perspective as a business owner: why on earth do they offer loans as low as 5K? What is the point? I would have to pay a fee of somewhere between 3.5% to 4.5% plus whatever interest rate I'd be charged. I can do far better than this with a credit card or line of credit. On one hand, they are limiting you to businesses with revenue of more than 100K; on the other hand they are offering loans as low as 5K which would be better serviced in other ways. The only people who would go for such a small loan would be maxed out on pre-existing credit instruments which would subject you investors to extreme risk of default.
But so far, all of the deals they have are business asking for $80-100k loan.
Deal Addict
Jul 18, 2016
1827 posts
661 upvotes
atang810 wrote:
Apr 26th, 2017 10:27 am
But so far, all of the deals they have are business asking for $80-100k loan.
Interesting. So, you really are dealing with well established companies with reasonably good revenue. In most cases, the risk of loss would be quite low on shorter term loans.
Member
Apr 22, 2014
413 posts
197 upvotes
Edmonton, AB
bewiseman wrote:
Apr 26th, 2017 11:25 am
Interesting. So, you really are dealing with well established companies with reasonably good revenue. In most cases, the risk of loss would be quite low on shorter term loans.
Borrowers are required to be incorporated or a partnership for at least 1 year and have generated a minimum of $100,000 in annual revenue. The lowest loan I think I've seen was $20K. But that was a rare exception. Most loans are 50-100K. The biggest loan was 150K.

The bigger the loan, the harder it is to get funded. Small loans get funded pretty quick (probably because you know your money will be going to work very soon). There is a 100K loan up right now that has been on the market for 2 weeks and is only 55% funded. They put up a 35K loan this morning that is going to be funded today (maybe within the hour).
Member
Nov 6, 2013
492 posts
210 upvotes
Winnipeg
jb10071 wrote:
Apr 25th, 2017 3:25 pm
Any updates for Lending Loopers?

I'm curious after doing some math and spreading some risk, it should be viable to make 8-12% per year. That would seem like a very attractive investment. Aside from plucking a nice stock, this seems like one of the nicer returns available for Canadians. Anything I'm missing besides being aware of the risks?
Here is where my account is at:

23 Active Loans
1 Loan Repaid (Early repayment by business)
0 Loan Defaults
1 "Problem" Loan which is late with payments but continues to pay
$57.01 lifetime earnings
12.9% Gross yield (minus 1.5% fee for 11.4% real return)
$1000 cash deposited
$223 cash withdrawn
$833 current account value

Not sure I will be adding more money or just letting this marinate and keep reinvesting profits.
Deal Addict
Sep 23, 2009
3899 posts
1102 upvotes
I was looking into this as another pocket to make some return.

Does anyone notice that lower grade investments get funded quicker?

Could it be that individual investors don't see the value in the grades?

That is, do they see an A+ rated company (with 6.8% interest) and a D rated company (with 20.67%) as the same risk?

Since there has been no replies since April, has any other investments gone into default or "Problem" Loan?
Deal Addict
Nov 9, 2013
1901 posts
664 upvotes
Edmonton, AB
My current loan portfolio is 32 active loans; 6 that have been fully repaid; 1 that was charged off (resulting in a 4% loss of funds committed, or 0.2% of the total portfolio) and 1 that is delinquent.

I note that loans with shorter durations and those with lower total dollar amounts seem to be funded the quickest, regardless of risk rating.
Sr. Member
Feb 25, 2007
903 posts
360 upvotes
Ottawa
renoldman wrote:
Jul 14th, 2017 8:27 am
Does anyone notice that lower grade investments get funded quicker?
Could it be that individual investors don't see the value in the grades?
Lower grade loans *and* lower-duration loans get funded quicker, which means investors are chasing yield and discounting (stated) risk, but also afraid of risk and wanting to minimize it by getting paid quicker. The latter makes sense if your portfolio is too small to be diversified, but is not rational if you are diversified: getting paid quicker means you have to work harder to stay invested.

I think *some* investors just don't understand risk-return and are just chasing yield -- a dangerous game, as the financial crisis showed. Other investors probably just feel there isn't enough information, and enough track record, on how LL assigns loan ratings, and so don't quite trust them yet. In either case: if you're not sure what kind of pig in a poke you're getting, might as well get a heavy one.
Deal Addict
Sep 23, 2009
3899 posts
1102 upvotes
I have recently gone over the details of the now available loans in the marketplace.

I have this strange feeling that some of the current loans are over rated for the business and the financials provided.

I realize that means I have the option of not investing, but in all honesty I am wondering if these loans ought to have higher interest rates .... but the businesses essentially turned around and said that they wouldn't borrow at a higher rate.

One of the financials (Owner's Equity) look really suspect and the rating is B+.

I realize that I probably am putting far too much thought into it (relative to what I should invest), but I really wonder if Lending Loop is also in a bind.

If they don't have loans to fund, maybe Lenders lose interest and just focus on public stocks. If they rate loans too high, maybe less companies come to them seeking a loan.

I mean, if a business ought to be rated at a 20% interest rate but the owner's don't want to pay that, maybe Lending Loop should indicate this. If the community doesn't agree with the lower rate, the loan disappears and funds are returned to lenders. Extending funding time shouldn't just automatically happen. The market's reaction - not funding the loan within some period - should be indicative of something.
Member
Nov 6, 2013
492 posts
210 upvotes
Winnipeg
renoldman wrote:
Jul 20th, 2017 12:36 pm
I have recently gone over the details of the now available loans in the marketplace.

I have this strange feeling that some of the current loans are over rated for the business and the financials provided.

I realize that means I have the option of not investing, but in all honesty I am wondering if these loans ought to have higher interest rates .... but the businesses essentially turned around and said that they wouldn't borrow at a higher rate.

One of the financials (Owner's Equity) look really suspect and the rating is B+.

I realize that I probably am putting far too much thought into it (relative to what I should invest), but I really wonder if Lending Loop is also in a bind.

If they don't have loans to fund, maybe Lenders lose interest and just focus on public stocks. If they rate loans too high, maybe less companies come to them seeking a loan.

I mean, if a business ought to be rated at a 20% interest rate but the owner's don't want to pay that, maybe Lending Loop should indicate this. If the community doesn't agree with the lower rate, the loan disappears and funds are returned to lenders. Extending funding time shouldn't just automatically happen. The market's reaction - not funding the loan within some period - should be indicative of something.
I don't think that is a problem.

[–]LL - Co-founder and CEOlendingloop-cato 12 points 4 months ago

So far, we’ve had $83 million of loan requests, $30 million of which have come in since January. If you’re a lender, you’ll probably observe that this means we’re quite conservative since we’ve only approved just over $3 million so far. Hopefully that gives you an indication of the amount of interest we are seeing from small businesses.

https://www.reddit.com/r/PersonalFinanc ... _and_only/
Deal Addict
Sep 23, 2009
3899 posts
1102 upvotes
primetimey wrote:
Jul 23rd, 2017 9:49 pm
I don't think that is a problem.

[–]LL - Co-founder and CEOlendingloop-cato 12 points 4 months ago

So far, we’ve had $83 million of loan requests, $30 million of which have come in since January. If you’re a lender, you’ll probably observe that this means we’re quite conservative since we’ve only approved just over $3 million so far. Hopefully that gives you an indication of the amount of interest we are seeing from small businesses.

https://www.reddit.com/r/PersonalFinanc ... _and_only/
So, you think Loans that are not funded within 30 days should just be extended?

What is the purpose of the deadline if they just auto-extend?

If the loan doesn't get funded within 30 days (or whatever length is decided) shouldn't that indicate that either investors think the loan is too low rated relative to the details and financials provided (thus reward is to little for perceived risk)?

Go through some of the B+ rated loans today - not just lend $25 or $50 automatically - and tell me if they seem too low rated for the financials given.
Member
Dec 7, 2006
429 posts
73 upvotes
Toronto
I've experienced good success (or luck) so far on LL. I started lending as soon as they were regulated and only lend to those that I believe have good financials (went to school for Finance / Accounting, so the basic statements are somewhat still familiar to me). I'll also do a bit of DD by going to the company's website, Yelp, Facebook, etc. I currently have 21 active notes and none have been charged off (fingers crossed), although one did become delinquent, but made its way back to active. My account is showing $483 lifetime earnings, weighted average yield of 15.2%, and maximum exposure 15%.
Newbie
User avatar
Feb 28, 2012
66 posts
8 upvotes
Vaughan
PC_YYZ wrote:
Jul 26th, 2017 9:26 am
I've experienced good success (or luck) so far on LL. I started lending as soon as they were regulated and only lend to those that I believe have good financials (went to school for Finance / Accounting, so the basic statements are somewhat still familiar to me). I'll also do a bit of DD by going to the company's website, Yelp, Facebook, etc. I currently have 21 active notes and none have been charged off (fingers crossed), although one did become delinquent, but made its way back to active. My account is showing $483 lifetime earnings, weighted average yield of 15.2%, and maximum exposure 15%.
Of the lifetime earnings, how much do you get to keep after taxes?

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