Beating the Average
Peer Lending Investment
Strategies
Scott Langmack
March, 2009
Agenda
•
•
•
•
•
Peer to Peer Lending Overview
The Unbelievable Bank Industry Secret
Understanding Unsecured Credit and Defaults
Strategies for Maximizing Returns
What to Expect
2
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
3
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
4
How To Think Of The Investment
5
5
How To Think Of The Investment
Bank Disintermediation
TAKING THE BANK
OUT OF THE PICTURE
Powerful and sophisticated
investing
6
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
7
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
8
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.
9
What's in a FICO Score?
10
Defaults Vary Dramatically By FICO Score
Credit card statistics for November ’08 to April ‘09
11
Default Rates are Part of the Return Formula
• Very best credit risk people
• Low default risk = low interest rate loans
20%
15%
10%
0.5%
5%
0.8%
8%
6.7%
0%
Loan Rate
Expected
Defaults
Fees
Investment
Return
12
Loan Rates Vary Based on Expected Defaults
• Higher default risk = higher interest rate loans
20%
15%
4.7%
0.8%
10%
17%
5%
11.5%
0%
Loan Rate
Expected
Defaults
Fees
Investment
Return
13
Current Recession Adjustment
• Like banks and credit card companies, Lending Club
raised rates to borrowers
20%
7.7%
15%
10%
0.8%
20%
5%
11.5%
0%
Loan Rate
Expected
Defaults
Fees
Investment
Return
14
4 Keys To Maximizing Returns
1.
2.
3.
4.
Diversification is essential
Select for job stability
Select loan type
Select your rate and expected returns
15
#1 Diversification is Essential
• Best to have 400 or more notes
• Make statistics work in your favor: visual example
16
16
Example of Ranges of Returns
Number of Loans
Expected Returns by Number of Loans
Returns
17
Example: 10 Loans
Loans
Number
Loans
Numberofof
Expected Returns by Number of Loans
Returns
Returns
18
Example: 100 Loans
Number of Loans
Expected Returns by Number of Loans
Returns
19
Example: 400 Loans
Number of Loans
Expected Returns by Number of Loans
Returns
20
#2 Select for Job Stability
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
21
#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
Best
Car
Medical
Credit Card Refinancing
Debt Consolidation
Other
Average
Moving
Education
Home Down Payment
Home Improvement
Business Loan
Worst
22
#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
23
What to Expect: Default & Return Curve
Net Annualized Return At Various Stages Of 13% Loan Portfolio (LC Fees not included)
13%
13-1=12%
Net Annualized Percent
12%
11%
10%
13-4=9%
9%
8%
13-4.75=8.25%
7%
6%
5%
13-7.5=5.5%
4%
Delinquencies +
Defaults & Charge-offs
all impact NAR
3%
2%
1%
0%
0
3
6
9
12
15
18
21
Months
24
27
30
33
36
39
24
2009 Loans
2008 Loans
: Default Curve Example
25
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Beating the Average: Recap
1.
2.
3.
4.
26
Diversify x400+
Job stability
Purpose of loan
Select risk/reward
26