Post on 18-Dec-2015
Beating the Average
Peer Lending Investment Strategies
Scott LangmackMarch, 2009
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Agenda
• Peer to Peer Lending Overview• The Unbelievable Bank Industry Secret• Understanding Unsecured Credit and Defaults• Strategies for Maximizing Returns• What to Expect
Lending Is Investing?
• Two types of lending
Banks: Big, Powerful, Stable, Monolithic
Personal: The riskiest thing you can do
• Why are loans to people you know risky?
Banks will destroy your credit, come after you with lawyers and ruin your life
Your friend thinks you have “Extra Money”, you wont really miss it, and since its extra, you didn’t need it anyway
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What If You Could Operate Like a Bank?
• For the first time in history, you can
• You can leverage Systematic selection of the best credit
borrowers Operational and Legal administration of
thousands of loans & payment processing The threat of ruining someone’s credit, and
coming after them with collections and lawyers
• All without ever getting your hands dirty
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How To Think Of The Investment
How To Think Of The Investment
Bank Disintermediation
TAKING THE BANK OUT OF THE PICTURE
Powerful and sophisticated investing
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The Unbelievable Bank Industry Secret
• Banks overcharge 20+ Million People
Banks overcharge the best to offer credit to the worst
Its about SHARE OF MARKET
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Defaults Are Predictable
• The only thing that can possibly go wrong is that a borrower wont pay you back
• If you can know with a high degree of confidence the percentage of borrowers who will not pay you back, you can make money
• The entire trillion dollar credit card industry is based on this very real, very well known dynamic
Why Defaults Are Predictable
We are a credit society
• People with good credit get: Acceptance, options, stuff, pride Better interest rates on everything, including
mortgages
• When people default on a loan: Credit reporting agencies report broadly It means REJECTION, for credit cards,
mortgages, car loans, etc.
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What's in a FICO Score?
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Defaults Vary Dramatically By FICO Score
Credit card statistics for November ’08 to April ‘09
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Default Rates are Part of the Return Formula
• Very best credit risk people• Low default risk = low interest rate loans
8%
0%
5%
10%
15%
20%
0.5%
Loan Rate Expected Defaults
0.8%
Fees
6.7%
Investment Return
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Loan Rates Vary Based on Expected Defaults
• Higher default risk = higher interest rate loans
17%
0%
5%
10%
15%
20%
4.7%
Loan Rate Expected Defaults
0.8%
Fees
11.5%
Investment Return
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Current Recession Adjustment
• Like banks and credit card companies, Lending Club raised rates to borrowers
20%
0%
5%
10%
15%
20%
7.7%
Loan Rate Expected Defaults
0.8%
Fees
11.5%
Investment Return
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4 Keys To Maximizing Returns
1. Diversification is essential
2. Select for job stability
3. Select loan type
4. Select your rate and expected returns
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#1 Diversification is Essential
• Best to have 400 or more notes• Make statistics work in your favor: visual example
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Example of Ranges of Returns
Num
ber
of L
oans
Returns17
Expected Returns by Number of Loans
Example: 10 Loans
Num
ber
of L
oans
Returns18
Num
ber
of L
oans
Returns
Expected Returns by Number of Loans
Example: 100 Loans
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Expected Returns by Number of LoansN
umbe
r of
Loa
ns
Returns
Example: 400 Loans
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Expected Returns by Number of LoansN
umbe
r of
Loa
ns
Returns
#2 Select for Job Stability
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Job Stability The Most Consistent Factor
• Look For: Length of employment Stability of company Quality of company Stability of industry Tenure
• Watch Our For: New jobs New careers Lower paying jobs Low tenure
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#3 Evaluate Loan Purpose
Lending Club statistics show defaults vary by loan purpose
Data based on loans 12 months and older
Vacation
Wedding
Green Energy
Car
Medical
Credit Card Refinancing
Debt Consolidation
Other
Moving
Education
Home Down Payment
Home Improvement
Business Loan
Best
Average
Worst
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#4 Select Your Risk/Return Mix
• More volatility in the higher ranges Example: Current LC total portfolio of loans between 12 and 18 months old:
Target Return
11%
What to Expect: Default & Return Curve
0 3 6 9 12 15 18 21 24 27 30 33 36 39
Months
0%
1%
2%
3%
4%
5%
6%
7%
8%
Delinquencies + Defaults & Charge-offs
all impact NAR
13-1=12%
13-7.5=5.5%
13-4.75=8.25%
13-4=9%
Net Annualized Return At Various Stages Of 13% Loan Portfolio (LC Fees not included)
9%
13%
12%
10%
Net
Ann
ualiz
ed P
erce
nt
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200
8 L
oa
ns2
009
Lo
ans
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: Default Curve Example
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Beating the Average: Recap
1. Diversify x400+
2. Job stability
3. Purpose of loan
4. Select risk/reward
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