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Lending Club will not have trouble raising capital or finding borrowers because it is a lower-cost operation than banks. As such, it can reduce the spread betwe
by 11thEarlOfMar 12y ago
Lending Club will not have trouble raising capital or finding borrowers because it is a lower-cost operation than banks. As such, it can reduce the spread between the yield 'investors' earn and interest rates borrowers pay, making it more attractive to both. The growth of their total loan activity bears that out: 5 Billion in total loans over the last 5 years. 1 Billion of that in the last quarter.
The key to their business is in their ability to accurately forecast the default rate of borrowers. The more they can predict the performance of the loans, the more 'fixed' the income seems to investors and the more attractive it is. They do predict default rates for loans and inform investors what those rates are for each loan. Over time, I'd expect their statisticians and big-data analysts will be able to refine the models to be highly accurate.
I've been experimenting with LC as an investor for about a year and a half. So far, my loans are performing about 1% better than Lending Club forecast they would. I attribute that to an improving economy.
- foobarqux 12y ago> about 1% better than Lending Club forecast they would. I attribute that to an improving economy. Probably just statistical variation.
- 11thEarlOfMar 12y agoIt was over 120 loans. All at 17.25% with a forecast 4.95% default rate. 0.5% fees. Actual return after 18 months is 13.85% with 5 defaults.
- foobarqux 12y agoMaybe not, I don't feel like modelling the math right now to see if it could be statistical variation. (I don't understand your numbers though. Forecast return was higher than actual?)
- db48x 12y agoPresumably because there were 5 defaults when 5.94 were predicted. On the other hand, if any of those 120 loans are still outstanding, then they could still default later.
- michaelt 12y agoWell, 4.95% defaults on 120 loans would be 5.94 loans. And presumably you can't have 0.94 of a default, so we have to round to an integer. In other words if you have 5 defaults, you're doing better by the smallest possible margin :)