F.A.Q. | Lending Alpha
Lending Alpha FAQ Summary
This section includes Frequently Asked Questions related to Lending Alpha’s services. Click on the questions below to expand the answers.
How do I get started with Lending Alpha?
Activate at https://www.lendingalpha.com/new-account/
To complete the activation process, you’ll need a Lending Club Account Number, API Key, and select the strategy for your portfolio.
How does Lending Alpha design the portfolio strategies?
We strategically designed three strategies for your investment risk profile:
- Conservative – Prioritizes on returns stability
- Balanced – Balances between returns and risks
- Aggressive – Prioritizes on returns
Strategies are associated from loans selected from our statistically significant Loan Selection process:
- Approach – Select the “Best of the best” loans for each of our 30+ loan grouped by the combination of (Term, Grade, and Purpose). Our models purposely consider statistically significant findings and focuses on causation factors that directly determine default risk. The goal is to identify loans that yield the same returns, but with lower default rates against its own cohort groupings. Finally, our models are reviewed and adjusted quarterly based on new loan data and external risk information.
- Results – Despite Lending Club’s reputation to only work with credit-worthy borrowers, less than 10% of new loans are actually selected by our models. We’ve found that our selected loans exhibit defaults rates that are 20-50% lower than its own cohorts.
Note: We are considering creating a new strategy that is even more conservative than our Conservative strategy that, in addition, would introduce the use of A graded loans if there is enough demand from our clients.
How well does a portfolio strategy perform during an economic recession?
How much idle cash will I have in my account?
How long will it take to fully allocate loans my initial portfolio?
Depending on which strategy you choose as well as loan availability and loan selection rates, we target 3-4 weeks to fully allocate your initial portfolio with 400-600 loans. The Conservative strategy typically is easier and faster to fully allocate while the Aggressive strategy may take significantly longer. This timetable should improve as Lending Club’s originations rate expands in size in the future.
How many loans do I need to be diversified?
We are interested in designing portfolios where annual returns year-in and year-out is very close to our expectations and this can be accomplished through loan diversification. We’ve found that in order to target a +/- 1% variance in annual returns, we need 400-600 loans in a portfolio, depending on the strategy. We found that the higher the default rates, the higher the number of loans required in order achieving this result.
Lending Club recommends at least 100 loans, while independent research has shown that a portfolio with 300 loans is enough. We take advantage of the nature of free diversification and target an even higher number of loans in order to further narrow future volatility. Since we have the luxury of automated trading and the benefit of free diversification, we employ generous diversification for each strategy using the following target number of loans during the initial portfolio construction:
- Conservative – 400 loans
- Balanced – 500 loans
- Aggressive – 600 loans
Continuous reinvestment of payments would continue to diversify your portfolio over time. We don’t expect an ultra-high number of loans to have a negative impact to your portfolio’s overall performance. Instead, we expect it to enhance the consistency of your portfolio’s periodic returns.
What’s the minimum account size recommended for Lending Alpha’s designed portfolios?
- Conservative: $5,000 (300 loans @ $25)
- Balanced: $10,000 (400 loans @ $25)
- Aggressive: $15,000 (500 loans @ $25)
For Balanced and Aggressive strategies, we employ additional loan size scaling for the top loans from our selected pool, which triggers loan size doubling for this group. This allows your portfolio to allocate twice as much per loan to these loans to optimize for highly desired loans (due to high returns or low supply). To benefit from this feature, it is automatically used when accounts with Balanced and Aggressive strategies are over $15,000 and $20,000, respectively.
How fast are Lending Alpha’s loan selection and trade execution processes?
During each cycle for new loans, two time-critical processes occur: Loan selection and order submission. We are able to complete the Loan selection process in under 1 second. Then, we are able to submit the first orders for the selected loans within 2 seconds after that. Relative to the standards today, we are highly competitive in terms of speed. Because most of the execution time is dependent on Lending Club’s server latency, we designed with efficiency and placed our server closest to Lending Club’s trading servers to minimize latency. Furthermore, since our server is horizontally scalable, we are able to maximize computing power when executing orders using multi-threading.
What’s the largest account that Lending Alpha can manage?
Based on today’s liquidity and loan availability, accounts with values under $3,000,000 may be serviced by Lending Alpha effectively. That means that we are able execute the same performance results for a $3,000,000 account as for a $50,000 account. We have experience managing accounts with a variety of sizes and we’re comfortable executing on an account from as little as $5,000 to $3,000,000 as of today. As the Lending Club marketplace grows, we will be able to support even larger accounts.
How much money does Lending Alpha currently manage?
We are new, but we have been running a pilot with selected members for over a year. Without giving an exact number, we service accounts totaling over 7 figures. A sizable amount is from the co-founders’ personal capital because we believe in our products, the future of this asset class, and the investment opportunity in general. We do not foresee a limit in the amount of account value we are able to effectively manage in the near future as we have been designing our technology and business model for to position ourselves for scale.
What can Lending Alpha access with my account information?
Since we do not have full login credential to your account, we have limited access. Here are the details:
- API access limits the client information viewed by Lending Alpha
- Available cash and account balance
- Invested loans and payment performance
- API access limits the client account actions executed by Lending Alpha
- Submit trades
- Create & modify portfolio name
- More at https://www.lendingclub.com/developers/lc-api.action
- No visibility by Lending to sensitive client and account information
- Contact and account type information
- Order history
- Account activity
- Bank account information
- Account Settings (notifications, API Key, email, address)
- Secondary market trading (FolioFn)
What’s the difference between Lending Alpha and Lending Club’s “Automated Investing” feature?
From the surface, Lending Club’s own “Automated Investing” offering sounds like the right solution for automated investing. However, here are a few disadvantages and limitations:
- It does not invest into “popular” loans. If Lending Club detects that there are a lot of investor interest in certain loan grades when new loans are allocated, it will not execute your order for that loan. Since most of the popular loans are of grades D/E/F, “Automated Investing” has trouble investing into these loans. Popular loans may be due to generally low supply or above average credit worthiness. The less popular loans may be riskier for the same interest rate.
- It invests at a high level. “Automated Investing” does not pick loans from borrowers with strong credit profiles whereas Lending Alpha does.
- It does not use loan size scaling to invest more into better loans. Lending Alpha does using sophisticated factors such as cash ratio, account value, and selected loan confidence.
- It does not have a dedicated team to ensure that the investment selection and execution is optimal for current and future market conditions. Lending Alpha monitors your account’s investment activity multiple times a day and leverages our industry expertise to optimize your portfolio.
What is your technology security infrastructure?
We are serious about data privacy and service redundancy. Therefore, we designed our technology with security in mind.
- Firewall & Multi-layered security protocols: External access to Lending Alpha master database limited by IP range, administrator credentials, and encryption keys
- Nightly server code and database drive backup
- Virtual server instance cloning and backups for fast emergency reboots
- Server instances in multiple geographic locations (San Francisco, Seattle, and Virginia)
- Fast and reliable internet connectivity: 500/300 Mbps up/down speeds hosted by Amazon AWS with priority bandwidth
How do you calculate returns?
We use Internal Rate of Return (IRR) to calculate returns. Our returns expectations include reinvestment of cash flow from principal and interest (monthly payments, pre-payments, late fees). It also includes the 1% Investor Fee charged by Lending Club when processing payments. It does not, however, include the principal collected from the collections process. Finally, it does include the timing of cash flow (fundamental to IRR), which negative impacts of cash flow due to idle cash, rejected loans, payment lag, etc.
Does Lending Alpha support Secondary market (FolioFn) trading?
Can I change my portfolio’s strategy at any time?
If I have an existing account, should I create a new one for Lending Alpha?
If you already have an existing account that you invest manually or using Lending Club’s Automated Investing, you may use Lending Alpha to continue servicing your account. You may also create a new account, but that will not be necessary and remember that Lending Club only allows a maximum of three accounts per person.
Should I liquidate using FolioFn? Liquidation via the secondary market takes patience, effort, and pricing sophistication. Therefore, if that is something beyond your capabilities, we recommend that you do not liquidate your portfolio in the secondary market. We currently do not offer secondary market trading automation nor pricing models. Doing so on your own may result in selling your loans at a relative discount to their true value. Finally, there is a possibility that not every loan will be sold successfully over time and full liquidation with this approach may not be realistic.
How will I differentiate between loans serviced through Lending Alpha versus existing loans? Lending Alpha creates a portfolio called “Lending Alpha” in your account. In addition, we could provide customized performance analysis on this portfolio over time, which allows you to separate returns reporting with your existing loans.
How do I switch to Lending Alpha? If you’re using Lending Club’s Automated Investing feature (or a similar third-party service), turn it off. Then, activate your account with us here.
How do I stop/pause using Lending Alpha?
How does Lending Alpha control risk via loan selection?
Frequent Model Updates: Credit risk changes as economic conditions changes. Therefore, we strategically adjust our selection models quarterly to consider new originations and loan performance data, economic changes, and logistics adjustments to ensure optimal performance.
Independent Risk Profiling: As an added advantage, since we filter loans based on our credit risk model, should Lending Club change their risk grading or origination practices, our selected loans will mostly be unaffected due to our fixed selection criteria. This means that if Lending Club decides to put riskier loans into Grade E and F in order to generate more revenue from originations, these loans may not make it into our filters due to our specific selection rules.
Stringent Filtering: Although Lending Club typically rejects about 80% of loan applications on their originations platform, Lending Alpha’s loan selection models typically rejects over 93% of new loans that passes through Lending Club’s application process.
How could a rising risk-free interest rate affect my portfolio?
Your portfolio’s interest rate, once invested, does not change with the U.S.’s risk-free rate whether the Fed increases or decreases rate, over the term of your loans. Our loan selections for your portfolio are designed to be held until maturity and performance should withstand most financial scenarios.
Increasing rate environment: For accounts that reinvest cash proceeds, new loans are expected to have higher interest rate if risk-free rates increases. Because an average account receives about 35% of the portfolio’s value per year in payments, constant reinvestment in new loans over time will adjust the average interest rate of your portfolio. From the borrower’s perspective, their monthly payment will be slightly higher due to higher interest rates, though only marginal in perspective.
Decreasing rate environment: For accounts that are reinvest cash proceeds, new loans are expected to have lower interest rate if risk-free rates increases. Because an average account receives about 35% of the portfolio’s value per year in payments, constant reinvestment in new loans over time will adjust the average interest rate of your portfolio. From the borrower’s perspective, their monthly payment will be slightly lower due to lower interest rates, though only marginal in perspective.
How does Lending Alpha make money?
Before we think about our monetization model, we first think about how we can make you money with unmatched value added services. At the moment, we’re working on a competitive service model for the future, but our focus now is to roll out the best and most effective Lending Alpha platform that we could build and get everyone onboard.
F.A.Q. | Lending Club
Lending Club FAQ Summary
This section includes Frequently Asked Questions related to Lending Club’s platform. Click on the questions below to expand the answers.
Is Lending Club available in my state?
As of today, only 28 states currently allows investing directly with newly originated loans. However, LendingClub’s recent move to take the company public could quickly change that as Blue Sky Laws could soon allow investing from all 50 states. As an example, Massachusetts became the newest addition to the list of states available to invest in new loans. Other key states such as Texas, Arizona, Michigan, and Pennsylvania could soon be next.
To invest in Notes through the Lending Club platform, you must reside in one of the following 28 states and meet that state’s financial suitability conditions: California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Kentucky (Accredited Investors only), Louisiana, Maine, Massachusetts, Minnesota, Mississippi, Montana, New Hampshire, Nevada, New York, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington, Wisconsin, West Virginia, and Wyoming.
If your state is not listed above, you may be eligible to trade Notes via the FOLIOfn Investments, Inc. Note Trading Platform.
At this moment, residents of the District of Columbia, Kansas, Maryland, Ohio and Oregon are not eligible to trade Notes on the Note Trading Platform.
How do I sign up for Lending Club?
For a limited time, get an account credit when you fund your new account. See available promotions below:
- Open a new Retirement Account
- Promotion 1: Get $25 when you deposit over $5-10k
- Get $25 when you deposit $5,000 to $9,999
- Get $50 when you deposit $10,000 to $24,999
- Get $125 when you deposit $25,000 to $49,999
- Get $250 when you deposit $50,000 to $99,999
- Get $500 when you deposit over $100,000
- Terms: This offer is valid for New Lending Club IRAs that are opened by April 30, 2015. The amount of any bonus will be determined based on both the amount of new funds transferred from external accounts and the amount of those funds invested within 90 days of opening a New Lending Club IRA. The account credit, if awarded, will be processed within 120 days of account opening.
- Promotion 1: Get $25 when you deposit over $5-10k
More information on getting started: https://www.lendingclub.com/public/getting-started.action
Why is Lending Club special?
Lending Club is the world’s largest online marketplace connecting borrowers and investors. Borrowers access low interest rate loans through a fast and easy online or mobile interface. Investors provide the capital to enable the loans in exchange for earning interest. Lending Club’s marketplace enables loan approval, pricing, servicing and support operations, and provides the regulatory and legal framework that make it all possible. Lending Club operates fully online with no branch infrastructure, and use technology to lower cost and deliver an amazing experience. Lending Club pasess the cost savings to borrowers in the form of lower rates and investors in the form of attractive returns. Lending Club is transforming the banking system into a frictionless, transparent and highly efficient online marketplace, helping people achieve their financial goals everyday.
More information: https://www.lendingclub.com/public/how-peer-lending-works.action
Other key qualities:
- Financial transparency: https://www.lendingclub.com/public/transparency.action
- Industry awards: https://www.lendingclub.com/public/awards.action
- Industry leadership team: https://www.lendingclub.com/public/company-leadership.action
- Powerhouse board of directors powerhouse: https://www.lendingclub.com/public/board-of-directors.action
- Influential advisors: https://www.lendingclub.com/public/board-of-advisors.action
- 80% market share of P2P lending in the U.S.
- Publicly traded as of December 2014 (Symbol is “LC” listed in NYSE). LC has a market value of over $9 billion as of December 2014.
- Lending Club started in 2007
What kind of annual returns am I expecting?
Lending Club Notes have Historical Returns by Grade A-C of 4.74% to 7.98%.
Since default rates changes over time (lower during stronger economic times such as recently), historical returns may be different from actual returns today. Orchard Indexes put together a peer-to-peer performance index for the U.S. market (comprised of around 80% Lending Club and 20% Prosper loans) with real-time returns:
Please note that this range is different from the Lending Alpha portfolio returns. Because Lending Alpha selects the best loans, we expect higher net returns due to lower default rates. Moreover, Lending Alpha’s calculation of returns is based on Internal Rate of Return (IRR), which is closest to the actual return on your investment over time.
What are the risks of investing in this asset class?
Lending Club Notes are offered pursuant to a Prospectus filed with the Securities and Exchange Commission. Investing in Lending Club Notes involves risks, including the risk borrowers will not repay their loans and the risk of Lending Club discontinuing the servicing of the loans.
Lending Club’s obligation to make any payment on a Note is wholly dependent upon a borrower paying Lending Club on the corresponding loan in which you invested. The risks of investing mean that investors may lose all or most of their investment. Before purchasing any of our Notes, you should carefully read our Prospectus, particularly the “Risk Factors” section on pages 17-32, which provides detailed information about the risks of investing in our Notes. The Notes are not guaranteed or insured by any governmental agency or instrumentality or any third party.
What is the cash flow that I may I expect from a P2P portfolio?
As borrowers make principal and interest payments each month, the funds are distributed to investors and are available for investors to reinvest or withdraw at any time. For example, if an investor made a $100,000 one time investment in 36-month, grade B Notes providing an aggregate 7.0% net annualized return, they would receive approximately $3,079 each month in cash payments to reinvest or withdraw.
How can I diversify within my Lending Club portfolio?
Diversification is a way to manage investment risk by spreading your dollars across many different investments to reduce the exposure to and the risk of a single investment. Investing in a combination of assets that are not correlated can lead to a return with lower volatility and less unique risk. Instead of investing in an entire loan, you can invest in fractions of loans in $25 increments. Each fraction of a loan is called a Note. Notes come in 36- or 60-month terms, depending on the term of the corresponding loan. By purchasing many small Notes of equal size that correspond to different borrowers loans, you can diversify your portfolio and reduce the impact of any single loan loss.
More on diversification: https://www.lendingclub.com/public/build-portfolio.action
What kind of borrowers am I lending to?
Applications are approved based on stringent credit criteria designed to focus on the most creditworthy borrowers. As of September 30, 2014, the majority of our members use the loans to pay off high interest rate loans, most often credit card balances. The average interest rate on credit cards is over 17%.
As of September 30, 2014, the average Lending Club borrower shows the following characteristics:
- 699 FICO score
- 16.9% debt-to-income ratio (excluding mortgage)
- 15.8 years of credit history
- $73,157 personal income (top 10% of US population)
- Average Loan Size: $14,182
What are the typical loan purposes?
The loans are unsecured consumer debt available for the following purposes:
- Credit card payoff
- Home Improvement
- Major Purchase
- Car Financing
- Medical Expenses
What are the investor fees assessed for using the platform?
Lending Club uses its low operating costs to pass savings on to investors in the form of solid returns and low investing costs. There are no hidden fees or charges. Lending Club collects fees from investors when they receive payment proceeds, so our revenue from investors is tied directly to their cash flow.
Service Charge Lending Club provides servicing for the loans facilitated through our platform. This includes maintaining investor accounts, collecting and processing principal and interest payments from borrowers, and distributing these payments net of fees to investors. Investors pay Lending Club a service fee equal to one percent (1%) of the amount of any payments received within 15 days of the payment due date. If a borrower misses a payment, investors do not pay a service fee.
Collection Fee When borrowers miss payments and loans become late, Lending Club uses best practices from the banking industry to bring delinquent loans back to “current” status. Currently, Lending Club charges investors one of the following collection fees, which is deducted from any amount recovered:1) 18% of the amount recovered if the loan is 16 or more days late and no litigation is involved, or 2) 30% of hourly attorneys’ fees, plus costs, if litigation is involved. Lending Club does not charge a collection fee if no payments are collected, and no collection fee will be charged in excess of the amount recovered.
Can I sell loans from my portfolio if I want to liquidate before they mature?
Yes. You may sell your loans prior to maturity in the secondary market. This is currently available for non-retirement accounts.
What are the impacts of taxation on my portfolio?
Lending Club provides a Consolidated 1099 Package each year by January 31 for your account in order to prepare to file taxes. Because the investments in your Lending Club portfolio are payment-dependent notes, the IRS taxes you on all interest collected as ordinary income. Charged off loans are treated as either short-term or long-term capital gains, depending on the age of the loan at the time of charge off.
The taxation rules for payment-dependent notes may imply that:
- If you are a high ordinary income earner with little of no capital gains in other investments, a portfolio with a high average interest rate notes and relatively high charge off rates would be tax inefficient. This is because you are taxes on all interest collected, and not net of charge offs. Charge offs are offset against short-term or long-term capital gains when appropriate.
- Investing using a retirement account such as IRAs, Rollover 401k, SEP, etc. is tax efficient and the tax efficiency improvement is more evident on high average interest rate portfolios with relatively high charge off rates.
Please consult with a tax expert on how taxes may affect your returns performance based on your specific financial situation.
What are the advantages of investing using a retirement account?
You may enjoy the tax advantages of a self-directed Traditional or Roth IRA that allows you to invest in Lending Club Notes.
Individual Retirement Accounts (IRA)
A Traditional IRA account can help reduce your tax burden in the year you make a contribution. They also enable your investment to grow tax-deferred until you begin taking withdrawals. Investors over age 70 1/2 must take taxable required minimum distributions from their Traditional IRA.
A Roth IRA account offer tax-free growth and distributions, but the contributions to a Roth IRA are not tax-deductible. There is no minimum distribution required for investors over the age of 70 1/2.
Taxation differences: Interest collected and charge offs are not subject to taxation each year. For Traditional IRAs, net returns are taxed at ordinary income at the time of a qualified distribution event. For Roth IRA, qualified distributions are not taxed. These tax-advantages allows for tax efficiency, compounding reinvestment, and capital efficiency that translates to additional returns in the long-term horizon.
Available types of retirement accounts: Roth IRA, Traditional IRA, SEP IRA, and Simple IRA.
Contribution to retirement accounts: 401k Rollovers (into a Traditional IRA), IRA Transfer (from an external IRA account), and/or Annual Contribution (subject to the type of account’s annual limits).
Account custodian: Retirement accounts are managed by a Self-Directed IRA Services. Lending Club pays for the $100 a year account fee for accounts that meets the minimum account value requirements. Finally, retirement accounts are subject to residency requirements. Please consult with a tax professional for tax advice relevant to your financial situation. See links below for more information: