Lending Club is an online social lending portal that brings individual lenders and borrowers together. Individuals looking for money can borrow up to $25,000 for a fixed interest rate repayable over three years. Lenders looking to invest can lend money in increments as small as $25. But until recently, there was one major drawback for lenders–once they invested in a loan, their money was out of reach until the borrower paid the loan back over the three year period. If an investor needed his or her money back sooner, they were out of luck. Lending Club has now solved this drawback by being the first P2P lending site to introduce a Trading Platform.
Lending Club’s Trading Platform
To use Lending Club’s Trading Platform, you must be a registered lender with Lending Club. The registration process is quick, easy and costs nothing. Click here for more details.
The idea behind Lending Club’s Note Trading Platform is really quite simple. Investors holding Lending Club loans who wish to cash out can list the notes for sale on the online Trading Platform. You as the original investor set the price you are willing to accept, much like a “Buy it Now” eBay auction. We’ll talk about how to determine the value of a note in just a moment. Your note is then listed on the Trading Platform for other investors to review and buy the note.
How to sell a note on the Trading Platform
Listing a note for sale on Lending Club’s Trading Platform is very easy. From the Lending Club home page, you will navigate to its Trading Platform via the “Trade” tab:
The “Trade” tab takes you to LendingClub’s Trading Platform, which is administered by FolioFN. You’ll need to register with FolioFN the first time you visit the Trading Platform. Once registered, it’s a snap to buy or sell existing notes.
The first step in selling a note is to navigate to the Trading Platform’s “Sell Notes” page. From this page, you will see listed all of the loans you own that are eligible for sale. Due to the timing of Lending Club’s Form S-1 registration with the SEC, only notes acquired after October 12, 2008 may be sold. Here’s the loan listing for one of the loans I own:
From here, simply check the loan or loans you want to sell and click the “sell notes” button. On the next screen, you will enter the asking price for each loan you are selling. It is important to note that FolioFN does charge a 1% fee to sell your note. There is no fee to buy a note.
How to Buy a Loan on LendingClub’s Trading Platfrom
Buying a LendingClub loan is as easy as selling one. From the Note Trading Platform, select the “Browse Notes” tab to view a listing of available notes. You can search the available notes based on interest rate, payment history and months remaining on the loan. For each listed note, LendingClub provides the interest rate of the note, the payment status (i.e., whether payments are current), days since last payment, remaining payments, any changes in the credit score of the borrower, outstanding principal, accrued interest, the asking price for the note, and the markup or discount of the note (more about the markup/discount in a moment):
Buying a loan is as simple as selecting the notes you want to buy. But the real question, whether you are buying or selling a note, is how to value a loan.
How to Value a Loan on LendingClub’s Note Trading Platform
When valuing a note for resale, we have to ask one very important question: Why would I buy this note at the listed price on the Trading Platform rather than investing in a brand new loan on LendingClub? And the first step in answering that question is to compare the interest rate on the note for sale to the interest rate we would earn if we invested in a new loan to a borrower with the same credit profile. To see how this works, we’ll use the first note listed (as of 1/5/09) as an example. Here’s what the loan listing looks like, followed by the detail of the loan:
Notice that the borrower here as a credit category of B4 and an interest rate on the note of 11.49%. So how does that compare to the interest we would earn on a new B4 loan today? Scanning LendingClub’s listing of available new loans, I found a B4 loan listed at 11.89%. So by investing in a new B4 loan, we can actually do slightly better than if we purchased the loan advertised above.
If you’d like more information on how LendingClub calculates interest rates, check out this article comparing LendingClub and Prosper.
So if we were selling this note, what might we do to encourage an investor to buy the loan? We’d do exactly what bond traders do on Wall St. We’d sell the note at a discount. In this case the principal balance is $25 plus accrued interest of $0.02 for a total balance of $25.02. So we might list the note at $24.90, for example, to make up for the slightly lower interest rate as compared to a new loan today.
You may have heard the expression that as interest rates go up, bond prices go down. And as interest rates go down, bond prices go up. The exact same thing is true here. Now the loan above, rather than selling at a discount, is being offered at a 1.98% premium. Why? Frankly, it is probably because the seller thinks he or she can sell the bond at a premium. Of course, I can’t tell you what you should do, but I would never buy that loan at its current asking price. The loan has not been aged (i.e., it was just issued so there is no history on how timely this borrower pays back the loan), and I could get a higher interest rate on a similar loan by investing in a new note.
Final Thoughts on LendingClub’s Note Trading Platform
LendingClub’s Note Trading Platform places the person to person lending site in the #1 position, in my opinion. It is the only social lending company to enable investors to resell notes. This adds liquidity to the investment as investors can sell their loans if they need to cash out. From an operational perspective, it does add some burden on LendingClub. It now must registered its debt securities in every state, a process it is working on now. As such, investing in a note is limited to residents of the states where LendingClub’s registration has been accepted. Eventually they will be in all 50 states, but not yet. In addition, there are income and asset requirements to becoming an investor, which have to do with certain securities regulations. And LendingClub now has certain periodic filing requirements with the SEC.
All of that said, however, the trading platform was an absolutely critical next step in social lending. And LendingClub managed to cross the line first.