One of the serious issues with Peer to Peer Lending is the liquidity. It can take time, effort, and money to get out of your investments before all your notes come due. If you are reinvesting in the longest notes available, that period can be as long as 5 years from the time you make the decision to get out. What if you need your money sooner?
The answer is that you have to sell the notes on the secondary market, known as FolioFN. This is also where you want to to go if you decide you want to sell your underperforming notes. You can also buy notes here, especially if you're looking for risky bargains or if you live in a state where you can't buy lending club notes directly from Lending Club.
The seller chooses a price to sell the note at, which can be at par value, at a significant discount, or at a significant premium, depending on how the note has performed thus far. The seller also pays a 1% fee to Folio for the transaction. This is in addition to the 1% that Lending Club (or Prosper) takes to service each loan payment.
I decided to get a Folio account when I had my first Lending Club loan go 16 days late because I wanted to look into possibly selling the loan, and what it would take to sell it. I learned a few things from the experience that I wanted to share.
1) The Folio platform is clunky.
It's much easier to search the Lending Club or Prosper database than it is to use the Folio database. You can arrange the notes by whether they've never been late, whether they're currently 16-30 days late, or whether they're currently 31-120 days late. You can also just look at the ones that are now current. You can order them by number of payments remaining, yield to maturity, or even original interest rate. But you can't search them by how many late payments the person has made. You have to actually go into every single loan listing to look. Once you do, you can see every contact Lending Club has made with them, as well as every payment they've made and when they made it.
2) Past Data is unobtainable.
I have been unable to find a website such as Lendstats that contains past performance data on these secondary market notes. It's hard to let evidence guide your investing when you don't have any.
3) It's a no-man's land.
There are notes advertising a yield to maturity of anywhere from 1200% to -1200%. Notes can be selling at a discount of 90%+ or a premium of over 100%. You could buy a really bad deal. In fact, it looks to me like MOST of the notes for sale are a bad deal. You're either paying near-par for a loan that's already late, or a huge premium that eats up your return for good loans.
4) It's hard to sell new notes.
Judging by comments from other users, as well as premiums/discounts offered on the site, it's hard to sell a relatively new note that just went late. You certainly can't sell it for anything near par. Although I can't tell exactly what sells and for what, a proven note that has made its payments
on-time for the last year or two can be sold for a significant premium. In fact, of the 21,000+ notes for sale, only 247 (around 1%) have 10 payments or less left. In fact, only 22% of the notes for sale have less than 31 payments left. Although a small percentage of notes sold on Lending Club are 60 month notes, most are 36 month notes. That means nearly 4 out of 5 notes currently for sale on Folio are unproven notes, less than 6 months old. I suspect this is because buyers want at least one of two things out of these secondary market notes: One, a shorter term than the usual 36-60 months or two, notes with proven payments. Why should they take a flier on a long-term speculative note when they can get a great return for a low premium on a proven note? Especially when the cost of the transaction is paid by the seller. A good place to learn more about using Folio to invest in these notes is a blog written by a Lending Club investors who only invests through Folio.
5) It's hard to sell bad notes.
If you're just trying to dump your “bad notes”, I'm not sure Folio is going to give you what you're looking for. I don't get the impression that there are very many buyers of notes with poor payment records, at any price. If your plan, like mine, was to dump relatively new notes as soon as they go into the grace period, you might be better off holding onto them and hoping for the best than selling them at the discount you'll need to sell them at to actually unload them on Folio. (Update: In fact, you can't even sell a late Prosper note on Folio.)
6) You can see what a truly bad note looks like.
Here's a current one on the site selling at a 90% discount. It was issued in July 2011, hasn't had a payment for 116 days, A payment failed in December, 4 attempts were made by Lending Club to get payment, a collections agency was engaged in December, no one can locate the borrower, and once a month the collections agency sends an email to the borrower. As you might expect, the borrower's credit rating has been dropping steadily. Want to buy this loan? Not at any price. Only 3 payments were ever made, so the investors lost 97% of their principal.
Here's another one selling at a 75% discount. Issued in February 2011, no payment for 40 days or so. The borrower had made 11 payments, all on time. The only note on the account is that the borrower filed Chapter 7 Bankruptcy on 2/9/12. Want to buy that one? Didn't think so. Even after 11 payments, the investors still lost 86% of principal. Risky stuff.
7) There are lots of bad deals for buyers on safe loans.
If you search for loans that have never been late, and have 12 payments or fewer remaining, you only find 163 loans, half of which are for $10 or less. All are selling at a premium. The typical premium starts at about 5%, which essentially eats up most or all of the remaining return. This tells me it is easy to sell a safe loan at par, but impossible to buy short term, safe loans. In fact, none of the 163 loans currently for sale actually has a positive yield to maturity. Perhaps there's an institutional buyer snapping all of these safe loans with a positive return up as soon as they hit the platform. More likely, few people want to sell these proven performers.
In conclusion, I think if you had a need to liquidate a relatively mature peer to peer portfolio from Lending Club or Prosper relatively quickly, you could do it. You'll be able to sell the good loans easily for par or even a bit of a premium. The bad ones and the new ones you'll either be stuck with, or have to practically give them away.
Update: In between the time I wrote this, and when it went to press, I was actually able to sell that note. I listed it at par value (minus the current month's interest). I had it up for sale for about a week total, but only a couple of days at that price (I was asking for par plus the current month's interest.) The note only had 3 payments made on it, the most recent one made 16-30 days late, but was current. Of course, I also lost the 1% fee on it. Overall, IMHO, this was a good price to get for a new note that had apparently barely made its last payment.
Good post. The trading platforms on Folio are still very much a wild west type environment. Many of the notes there are priced at ridiculous premiums, so they will never sell, but there are plenty of people willing to take a gamble on a recently late loan that is offered at a reasonable discount.
One point of clarity for your readers – on Prosper you cannot sell late loans on Folio only current notes. Lending Club has a more vibrant platform than Prosper because Lending Club allows investors from many states to invest via the trading platform and not the retail platform. But even on Prosper you can liquidate a portfolio (of current notes) for close to break even.
Thanks Peter. I haven’t sold one on Prosper yet, but am selling a second one on LC for a small discount. I’m surprised how few there are listed on there at a discount.
Thanks for the blog mention. It might also be helpful when using FolioFN with Lending Club to use my Chrome Browser extension (http://lcp2p.blogspot.com/2012/03/lending-club-chrome-extension-version.html). It let’s you see what discount you are selling at and what your annualized gain/loss would be.
Hi,
I’ve put notes up for sale with less than 15 months of payments left at a 5% premium and they get snapped up immediately. I started pricing them almost at the remaining payment figure and they’re still selling! Some of these buyers will make less in interest than the 1% folio fee, which means they’ll lose pennies over the course of 12 months. I don’t know why they’re buying but they are. Sometimes I feel bad but whatrya gonna do?
Lou
Marc-
I’ve been trying to use your browser extension with some success. A how-to guide explaining each box would be helpful. It isn’t as intuitive as it ought to be.
Lou-
It’s a bit of a Wild West market, isn’t it? I sold another note where payments had been getting less and less. It sold the day before it went to 16-30 days late (incidentally the same day the guy made the payment.) That’s like 4 or 5 months in a row when he paid it in the grace period. The data I’ve seen shows a 16-30 day late note has only a 75% chance of getting completely paid off, I should have to sell the note at something like a 25% discount to get a buyer. I easily sold it at a 2% discount. I think there is a real ability to make some serious returns in that market. The problem is the notes are so small and it takes so much work to capitalize on all the tiny free lunches.
I wouldn’t feel badly. You’re providing liquidity to the market.
I’ve invested a little over $8k through Lending Club’s Folio secondary market over the past few months. There are good investments available. First, I don’t have a problem paying 3% or less for a seasoned loan (6 months of no late payments at minimum). Also, some people dump notes in the grace period thinking they are bad loans. But if I see the borrower has paid every time on a specific day of the month in the grace period, I can see they just prefer to pay on that date. As long there isn’t something else on their initial loan app screaming that they are struggling to make payments I’ll snatch those up.
The big thing is patience – wait for a good deal. I suspect a lot of people on there are in states where this is their only way to get into P2P so they are just snatching stuff up. I’ve sold about 4 late loans on there at what I felt was a fair discount in about a week or two.
Amazed you can’t sell bad notes in the secondary market on Prosper.
When you say “dump loans” what kind of discounts are you seeing? I haven’t had to discount mine (that have either been late in the past or will be late in a day or two) more than 1-2% to dump them.
Dump was probably too dramatic of a term. I’ve just found some pretty good deals on loans with 6+ payments that were made in the grace period. So, like you mention, a 1-2% discount compared to a similarly aged loans selling for a few percentage points markup.
@WCI, Thank you for the feedback. I’m working on a blog post as a sort of tutorial. I was waiting for the next version to be ready to post. Coming soon.
Do you have to pay any taxes when you sell your notes at par?
Thanks, ML
I only sell notes that have been late, and haven’t been able to sell those at par or better, so my sales are all losses. In my small taxable account, those are deductible losses. In my Roth IRA, no dice. If I had gains, I’d have to pay capital gains taxes. Why would you pay taxes when you sold them at par?