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baquerd posted:default risk (which is the only kind of risk we care about in P2P lending) Just want to step in here and point out that you should seriously reconsider (or at least educate yourself before continuing) investing in a fixed income product if you are not aware of two major other serious risks regarding fixed income products with similar characteristics. You are correct that default risk is the most important risk in high yield consumer loans. However, consider these two risks: Interest rate risk (a sub-component of which is inflation risk): This is the risk that benchmark interest rates such as the federal reserve discount rate rises. When interest rates rise, the value of all fixed-income products (with the exception of floating rate) falls. I know you're probably planning on holding notes to maturity anyway, but consider the following scenario: -You have a $50,000 notes portfolio with an average interest rate of 10% -Benchmark interest rates rise by 2%, so therefore lending club raises their base rate by 2% -Now, new notes with the same exact rating as your current portfolio (on average) are yielding 12% -Your notes are now worth significantly less than $50,000. This is because someone could go out and either A) take on the same exact default risk as your portfolio but earn 12% instead of your 10% or B) could construct a portfolio that yields an average of 10% just like yours but with significantly less default risk -Notice how the default risk of your portfolio has not changed in this hypothetical scenario, you've been burned by interest rate risk alone. Even if you hold your notes to maturity (which is your plan I assume), you've lost significant economic value and are now earning a return that is not justified given the default risk you are locked into -Finally note that this can work in you favor on the other side - if interest rates drop. However, the fact that these loans are pre-payable complicates things: Pre-payment risk: Let's consider an opposite scenario where rates drop 2%, back down to the levels we saw in mid-2012 (don't think interest rates can't go lower, look at Japan's interest rate history) -You have that same 10% average interest rate portfolio described earlier, and now interest rates drop 2% so lending club drops their base rate by 2% -Now, all of those borrowers are looking at the current interest rates and they notice: hey, I'm still a [B3] like I was a year ago when I took out this lone. But the current B3 loan rate is 2% less than my rate! What the heck! -All of these borrowers put up new loan requests. Use of proceeds: to pay off the loans you gave them. -They get the loan and pre-pay you in full -So now, interest rates are lower (which increases fixed income prices, except...when they're pre-payable), and your portfolio gets repayed. Now you have to either sit on your cash or A) create a new portfolio with the exact same default risk but now it only gets 8% or B) take on significantly more default risk in your new portfolio to get an average rate of 10% like you had before Note: of course it is an oversimplification to say your entire portfolio would get prepayed. It assumes that the borrowers are monitoring interest rates and that even if they are that they are willing to put in the  to go through the process again. However, a significant interest rate drop will certainly lead to a very significant amount of pre-payment activity as we have historically seen in mortgages, which are also pre-payable (and re-financing a lending club loan is infinitely easier than refinancing your home)Please do not interpret this as me ragging on P2P lending (both of the risks I just described apply to fixed rate mortgages since they are fixed rate and pre-payable too!), I think it is great and am thinking about getting into it. But you should understand all of the risks behind any financial product before investing. Source: Undergrad degree in finance and currently work as an investment banker at a major US financial institution. There are also many other risks that are less important than default, interest rate and prepayment risk. Ask me if you're interested! 
Swingline fucked around with this message at 04:46 on Dec 26, 2013 |
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Dec 26, 2013 04:42
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kansas posted:Whats are the thoughts on using LC Prime to hold a lot of money for medium term (3-5 year) timeframe? The reason this question can't be answered one way or another is because this is a new product. You can look at historical average returns and the standard deviation of those returns for financial products that have existed for a long time (stocks, bonds) and decide based on that whether you're ok with taking on that risk. Until P2P lending has been around for decades we will not even begin to approach a big enough data set to estimate the average return and standard deviation. So, the only good answer is only put money in P2P lending if you would be ok with those funds losing 50%+ of their value. At this stage P2P lending could be the best investment ever or the worst investment ever (or just a pretty average risk/return profile that is neither better nor worse than other financial products), but we will not know one way or the other until it is too late. Until the data set exists you need to go in assuming you could lose the vast majority of your money. Edit: Actually, if you are specifically looking to eventually liquidate your investment for a down payment, then at this time P2P lending is actually a bad choice unless you time the maturity of your notes to line up with when you want to purchase a home. The reason is because P2P lending trading platforms are not liquid enough for you to cash out enough money for a downpayment without facing serious liquidity risk. That is, you won't be able to sell your notes at fair value because the market is not there to absorb it. Even if you decide "I'm going to buy a house in 3 years so I will drop $X into 3 year P2P lending notes now and not reinvest any interest," what if two years from now you find a really good deal on a house and your spouse really wants to buy it? Chances are you won't be able to liquidate those notes in a timely manner except at firesale prices. Unless P2P note trading becomes A Thing by then and you have dedicated institutional market makers keeping bid/ask spreads low. But that is something that would likely take a long time to develop, if it ever develops. Swingline fucked around with this message at 06:40 on Dec 27, 2013 |
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Dec 27, 2013 06:24
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Saint Fu posted:I'm the same as baquerd. How do they report losses? I'm no tax expert but I'm pretty sure that since you are actually buying securities that are backed by a loan, as long as you still hold the note you would not be able to deduct it as a loss. That could be why they report it differently than you think they should. You <----> Security <----> LendingClub <----> Loan The reason why I'm pretty sure they're securities is because LC files and regularly amends a prospectus for them via the SEC, as required by securities laws: http://edgar.sec.gov/Archives/edgar/data/1409970/000140997014000041/postingsup_20140109-100001.htm Anyway, I would consult a tax professional before possibly filing your taxes wrong for a few years in a row and therefore pissing off the IRS.
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Jan 10, 2014 03:06
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Lelorox posted:People with a rediculous amounts of credit lines: I've seen quite a few loans where the person has 30 plus open lines of credit. As someone with very few lines of credit open this set off a red flag in my brain. Should I not worry about this too much? I personally have ~15 lines of credit but my utilization rate (total balance / total combined credit limit across all accounts) is about 1%. Utilization rate is far, far more important. People like to min/max credit card rewards which means opening a few each year and either not using them after you get the sign-up bonus or only using them for bonus categories like 3% cash back on gas.
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Jan 23, 2014 03:17
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