Lending Club Strategies

What does it mean when someone asks about Lending Club strategies? Well, you would have to ask them what they mean, however, in most cases they really want to know how to pick loans that will not default. Some people say this is like trying to figure out if a stock will go up or down, but in reality picking loans is more of a science that picking stocks. You may be wondering why there is a difference so I will explain the one simple reason for this difference.

Why is picking loans different than picking stocks? It has to do with the way these investments are valued. In the case of a stock, the value is based on market conditions: How many people want to buy or sell the stock and what price they are willing to make the trade at. Therefore, basic rules of supply and demand apply, and the stock price accurately reflects what the entire market feels is the likely value of that investment over the long term.

As you know, loans are not valued based on how investors feel about them. Loans are valued based on the grade and interest rate assigned by Lending Club. The interest rate assigned to a loan is based on the underwriting standards and practices used by Lending Club. P2P lending strategies must take this fact into consideration. 

What is underwriting? Underwriting is simply the process and practices used to determine the ability and likelihood of a borrower repaying a loan. Information provided by the borrower and credit rating agencies is used to perform this analysis. This information is very extensive and includes monthly income, credit card balances, repayment history (including late payments), home ownership, bankruptcies and other relevant information.

How does Lending Club evaluate all of this information? Every lender has their own standards and practices; however, there are many consistencies across the industry. One of the biggest factors in assessing a borrower is their credit score. You have probably seen offers to get your credit score for free and there are many people trying to improve their score.

But how useful is credit score in predicting future loan defaults? The answer is pretty good, but not great. In fact, there is other data available to Lending Club (and loan investors) that is as good or better. When some of these pieces of data are viewed together they can paint a better picture of a borrower than the Lending Club analysis does. Although the difference is not huge, it is certainly enough to give an investor a proven statistical advantage that is not available to stock investors.

The challenge comes when trying to determine which data to use for Lending Club investing, and how much of a difference it will make in your portfolios investment return. This type of statistical analysis is very complex and is really only available to the experts. That is why many investors use a service such as PeerLoanAdvisor.com to help them select loans and build a strong portfolio. These services are generally inexpensive and can have a significant impact on your returns. If you are experiences average of below average returns, then a qualified advisor can help you improve your performance.