[Editor’s Note: Today we have a guest post from New Jersey Guy – he is an active member of the Lend Academy Forum and investor on the Lending Club trading platform. In this post he provides his reasoning on why it is better to invest via Foliofn for Lending Club investors.]
Whether you’re new to Lending Club or already a seasoned investor, I’m sure you’ve already made one important discovery. The Lending Club platform to invest in new loans is only available to just over HALF of our 50 states. This leaves 24 states (including my state of New Jersey) dangling in the wind, left only with the secondary market as a means to invest in peer to peer lending.
Foliofn (or Folio for brevity’s sake) is the gateway to the secondary market. Unfortunately, the platform is viewed as inferior and filled with notes (as one forum member put it) considered to be “the toiletries of loans.” Stop here for a second. On any given day, there are over 60,000 notes listed on Folio. Look at that number again…..60,000! That’s a lot of notes available for sale! It’s a ton more than you’ll ever find for sale on the Lending Club Platform at a single time! But again, they must all be poor performing notes that are not making payments and on the verge of default, right? Well, as of this writing 56,000 of those notes are showing up as either freshly issued or current in their payments. Only 4,500 notes are showing up as being over 30-days late. Not quite the toilet as we were led to believe!
Granted, Folio is the market where investors will dump very poor performing notes. However, ultra-conservative investors will dump perfectly good notes at the drop of a hat. You know the old saying! “What’s one mans garbage is another mans treasure!” Yup, there’s treasure in there, and if you know how to mine Folio for it, you can create a portfolio that will rival any investor on Lending Club. This article is going to show you different thoughts and ideas that aren’t available to Lending Club retail platform users.
Undoubtedly, the two biggest disadvantages of using folio is the platform itself and the search filters. In a word, they stink. I’m sure you certainly don’t want to be looking at 60,000 notes, one note at a time. If you haven’t already, it’s a must that Folio users sign up with one of the various services that offer more defined filters to narrow down the number of notes to look at. Personally, I use Interest Radar. Interest Radar offers great filtering for Lending Club Platform users. However, the site is one of the few that actually puts a super strong emphasis for Folio users which is nearly equal to the Lending Club section. I’m not making a plug for Interest Radar, but other sites take a narrow approach to Folio as if we were second class citizens making the secondary market look like something nobody wants to be bothered with.
8 Reasons Why it is Better to Invest Through the Trading Platform
Okay, let’s start with some thoughts, ideas and strategies:
1. A common myth is that unlike purchasing off of Lending Club, Folio members can’t invest in fresh loans. Totally untrue! Many Lending Club platform users will purchase Freshly Issued Notes with the intent of reselling them on Folio at a slight profit. Thanks to people like these, Folio states can choose brand new notes each and every day (7,800 listed at this very minute). Keep in mind, though, that sellers must pay a 1% Folio fee, so most of the notes for sale will be slightly marked-up. This is not always the case. But even with a 2% to 3% mark-up, you can still find quality notes offering attractive yields. One big advantage is that you can still find fresh notes that are offered at a discount. There are currently 84 notes listed at discounts up to 1%. Unlike Folio buyers, Lending Club retail platform buyers are never offered a discount.
2. Folio buyers don’t have the issue problems that Lending Club buyers have. With the rise of institutional buyers on Lending Club, it’s getting harder and harder for individuals to get their money vested in new loans. In addition, they tie up their money. Even if they get their money vested in a note, there is no guarantee that the loan will issue. Lending Club (or the borrower) can cancel the application resulting in the investors’ money being returned without a cent of interest paid. In this business, idle money is bad money! Since the loans on Folio have already been approved and issued, you can put your money right to work.
3.Typically, a newly issued loan bought off of Lending Club will need to wait at least 30-days before the first payment is made (and the first interest payment made to the investor). Again, idle money. When you buy a note off of Folio, that clock has already begun ticking. I’ve bought notes where first payments are made within days of me purchasing them. So, Folio buyers can receive quicker gratification!
4. Previously issued notes are NOT “used” notes! We’re not talking about old socks here! There are advantages to buying notes that are 3, 4, 5 even 15 months old. First, a payment track record has already been established for you to study. On a fresh issue, no such track record exists. Secondly, you can compare the borrowers current FICO score to their FICO at origination. A sharp decline can warn you to stay away. Plus, if there were any communication between Lending Club and the borrower, this would show up in the collection log. Again, it’s additional information you can use to your advantage. Both of these tid-bits of information were NOT available to the investor who bought this note off of the Lending Club retail platform.
5. Folio buyers have the option to skip the first 12-month “Danger Period”. Ask any investor if they experienced a new loan that made 1 payment, 2 payments or even NO payments, then defaulted on the loan! It happens! And when it does, you can count on losing nearly all of your principal. Studies have shown that 50% of all defaults happen on loans that have made 10 or less payments. That means you risk the highest chance of default during the first year. Folio buyers have the option to purchase notes over 1-year old. This is no guarantee that the note won’t default, but you tip the odds slightly more in your favor. Plus, you won’t be paying a full $25 for the note. 36-Month notes that are 1-year old will generally run you $18. Shop a little bit, and odds are you’ll find some nice notes at additional discounts, which could really boost your Yield-to-Maturity (YTM). Lastly on this thought, your note will mature faster. If you buy a 36-month note that’s already a year old, you only have to hold it for 2 years. Lending Club retail platform buyers do not have these options!
6. Lending Club retail platform buyers will argue that by buying a note that’s a year old, you’ll miss the highest pay-out of interest that occurs during the first few months. Seem logical, right? Not quite! First off, you’re not investing $25, but a much smaller amount. So yes, you’ll receive less cash over the life of the loan. However, it won’t alter your Yield-to-Maturity (YTM) that much.
7. Folio buyers have the opportunity to “Hedge” their portfolio. Do you want to boost your returns by 1%, 2%, 3% or more? Folio gives you that opportunity! Ultra-conservative investors will dump a note at the first sign (of what they think) is trouble. Personally, I’m not that conservative and those notes seem perfectly good to me! (What’s one mans garbage….) Every now and then, I’ve purchase a “Grace Period” or “16-30 days late” note for up to 50% off. That would give me a YTM of 90%, 120% or even 150% on that particular note as most of the money I make is in Capital Gains. As of this writing, I have not had one go into default. This could many times be a good gamble, as you’re not risking tons of money. Besides, if you spent $10 on a note and it did default, that $10 won’t send your portfolio into a downward spiral. In actuality, if the note failed to pay, odds are you could resell it on Folio and recoup part of the $10. In order to have this opportunity, all investors must turn to Folio as it’s not an option with Lending Club.
8. Here’s a penny-stock type of idea that even a new investor can do with as little as $100. Use Folio to purchase 36-month notes that have 11-12 REMAINING payments. “Whaaaat?”. Here is the logic behind that madness. Everybody knows that “A” and “B” quality notes are considered the safest but unfortunately offer the lowest rate of return. However (in my unqualified opinion) after 24 months, all the notes, regardless of grade, start to become more equal as far as overall risk. If you find an “F” or “G” note that shows a perfect payment record of 24 months, odds are that “F” and “G” note will continue to pay perfectly throughout the rest of the loan term. Folks, let’s not forget something here! “F” and “G” borrowers are NOT the “Dregs of Society”! These are people with respectable jobs, lives and credit. They were approved by Lending Club’s rigorous application process. “F” and “G” borrowers DO pay! So after 2 years, what’s the difference between an “A” borrower with a perfect track record and a “G” borrower with a perfect track record? The rate of return, that’s what! You can build a sizeable portfolio of nothing but these inexpensive notes. With risk now starting to diminish and equalize, you can buy “E”, “F” and “G” notes with more confidence and less fear of default. Average cost is about $8 per note, and you can still yield a YTM of 8% to 12% depending on how you pick your notes.
I’m sure other Folio users probably have additional advice. I know there is a lot more than what I posted. But, you know, when you step back and think about it, it appears that Folio players have more options than those that play on the Lending Club retail platform alone. Folio has more diversification, more choices and offers up opportunities that Lending Club can’t!
Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.