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My Lending Club Loan Selection Criteria

Written by Nickel - 14 Comments

I’ve had a few people ask me about how I go about selecting Lending Club loans, so I thought I’d write something up for all to see. Back when I was first testing it out, I built two test portfolios, one composed of “high risk” loans, the other “low risk.” In the time since then, however, I’ve started manually selecting my loans.

Getting started

For those that aren’t familiar with Lending Club, I thought I should start from the beginning… Not surprisingly, you get started by logging in. From there, simply click the “Invest” tab along the top.

This will pull up a screen that offers you three different “auto-invest” scenarios: More Conservative, Moderate, or More Aggressive. There are a couple of things to note from this screen…

For starters, you can click on the “More Options” tab to get a slider that gives you access to a continuum of strategies. Next to that is a button labeled “filters.” Click this button gives you access to a wide variety of filters that allow you to set specific investment criteria.

Those options are all well and good if you’re comfortable with auto-investing, but I’m not. If you’re looking for more control, look no further than the “Build a Portfolio from 117 Notes” link over to the left.

Selecting your filters

Once you decide to build your own portfolio, you’ll want to develop a set of custom filters to rule out loans that you deem unacceptable. The good news is that you really only have to do this once, as you can save your filters.

Filters can be accessed over in the sidebar of the “Browse Notes” screen. Though they’re all collapsed, you can see the primary filters that I use in the picture below.

Setting up your filters

If you’re intent on selecting your loans by hand, you’ll need to learn how to effectively filter out the loans that don’t interest you. The following is a rundown of how I set up my filters.

  • Inquiries in the last 6 months. This filter can be set from 0-10. I limit it to 3, as I’m not interested in lending money to people who appear desperate to borrow.
  • Delinquencies (Last 2 yrs). I set this one to zero. In reality, I won’t lend money to anyone that has a delinquency on their credit report (ever), but Lending Club doesn’t have a “no delinquencies, ever” filter. Thus, I use this one to pre-filter and then I double check by hand.
  • Min length of Employment. This can be set between 0-5 years. I’m looking for stability, so I require 3 or more years in their current job.
  • Max Debt-to-Income Ratio. Note that this is not a typical DTI calculation in that it doesn’t take housing expenses into account. On the first pass, I typically limit this to 10%, though I’ll sometimes relax it to 15%.
  • Exclude loans already invested in. Lending Club loans sometimes take awhile to get completely funded, and I don’t want to accidentally invest in the same one more than once, so I check this box.
  • Public Records. I exclude all borrowers with a public record on their credit report. Fortunately, Lending Club has an absolute filter for this one, so I don’t have to review them by hand.
  • Month since last Delinquency. As noted above, I don’t want to lend to someone with a delinquency on their record, so I set this to the most stringent setting (60 months or more) to get rid of as many as possible.

Once you have your filters set up, click the “Save” link near the top. You’ll now be able to quickly and easily filter the current crop of loans whenever you come back (by clicking the “Open” link).

Manual review

While the filters above do a good job of filtering out the least attractive loan requests, I next do a quick manual review before investing. Here, I’m looking for two main things…

As noted above, I’m not willing to invest in anyone with a delinquency on their record, no matter how long ago. Thus, I quickly scan through the loan requests and rule out anyone with a delinquency. The good news is that only a few such loans are left after running the filters outlined above.

Next, I compare the monthly payment on the requested loan to the borrowers gross monthly income. If it’s more than 10%, I pass. There’s nothing magic about 10%. It’s just an arbitrary threshold that I’ve selected to make sure the loan payments won’t be a huge burden to the borrower.

While this sounds like a lot of work, it’s really not. If you click on the title of the loan (after filtering), it will expand to reveal more information. In order to efficiently review the loans, I click on each title (one-by-one), eyeball the delinquencies and payment-to-income ratio, and then collapse anything that isn’t acceptable. That leaves me with a slate of expanded, candidate loans from which to select.

Other considerations

In my experience, the above process knocks out the around 75% of the listed loan requests and it only takes a few minutes. From here, I follow my gut. One big thing that I do is to avoid business loans. In general, small businesses have a high rate of failure, and I don’t the added risk.

Other than that, I take look at what the loan is for and ask myself if the details add up. Borrowers are asked to include a loan description. Some do, and some don’t. If they can’t be troubled to explain why they need the money, I pass. If their reasoning doesn’t make sense, I pass. If a lender has asked them a question and the answer doesn’t make sense, or if the borrower has evaded part of the question, I pass.

Another common sense test is whether or not the request is consistent with the available information about the borrower. For example, many people request money to refinance credit card debt. In such cases, I compare that amount to the revolving debt on their credit card. If they’re requesting a bunch of money and don’t have much in the way of revolving debt, I steer clear.

Closing thoughts

While I haven’t been at this for a long time (less than a year), I’ve had a fairly good experience thus far. I’ve had one loan (from my auto-selected, high risk portfolio) go into default. That being said, all of my “low risk” loans are being paid on time, as are all of my manually selected loans.

Could I get away with using the auto-selected portfolios? Quite possibly, but I like having a bit more control, and I’ve managed to streamline my loan selection process to the point that it doesn’t take too much time. If Lending Club added a bit more flexibility to their filters, I could do it in even less time.

Published on February 1st, 2010 - 14 Comments
Filed under: Saving & Investing

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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14 Responses to “My Lending Club Loan Selection Criteria”

  1. 1
    Matt Jabs Says:

    Nickel gave me a sneak peak at this info about a month back and I use it each month to fund my new loans.

    No defaults yet! Thanks Nickel… great info.

  2. 2
    Nickel Says:

    That’s good to hear, Matt — though it’s impossible for a loan to have defaulted in just one month. :-)

    Regardless, I hope things continue to go well.

  3. 3
    Investor Junki Says:

    I think auto selecting the loans to be a bad method to generate decent returns with Lending Club. I mention my filters on my blog post:

    http://investorjunkie.com/lending-club-review

    As of today I have 10.94% return with no defaults. I can’t complain and plan on adding more funds this year.

  4. 4
    Eric Says:

    Yup, pretty much what I do.

  5. 5
    Eric Says:

    Oh I am curious about one thing. Do you not filter by credit score at all? I guess it makes sense if you’re looking for higher interest rate returns. I mainly stick to the A and B grade loans so I prefer people with over 700 FICO score.

    Also, for people who need that extra assurance, you can filter if LC has formally verified the person’s income information and credit history. It’s not a dealbreaker for me (the process takes awhile) but it’s nice to know since the initial information is solely self-reported by the borrower.

  6. 6
    Investor Junki Says:

    @Eric: I filter by credit score. Check out my link, I do slightly different than FiveCentNickel.

  7. 7
    Nickel Says:

    I don’t filter by credit score, as the other filters pretty much take care of that. In other words, once I run my filters, the remaining borrowers have realtively high credit scores. Conversely, if I did filter by credit score, loans that break my other rules would often sneak through.

  8. 8
    forty2 Says:

    Is there much difference between Lending Club and Prosper? I almost signed up w/Prosper as a lender but some of the applicants stories were a little over the top and tripped my b.s. alarm.

    I got some $ going around and around at Kiva but that’s entirely different as in I don’t expect any profit on that at all.

  9. 9
    LarryF Says:

    Great article about Lending Club lender stategies. I like to use the 10% of income strategy as well. Too bad there isn’t a filter for that. In that regard, lenders can ask questions regarding secondary or spousal income which can make loans attractive that might not be otherwise.

    The next level of strategy involves the use of FOLIOfn to minimize the risk of carrying a Note too long, those that go into grace periods, or those that drop in credit score. Using FOLIOfn effectively can increase your return and lower your risk. Unfortunately, FOLIOfn has no filters so it’s much harder to manage but workable with some practice.

  10. 10
    Ace of Wealth Says:

    Nickel thanks for these great tips. I definitely will be applying as many of these strategies as possible when I invest in new notes. I had a rough idea of what I wanted, but these are great concrete ideas.

  11. 11
    Jon Says:

    Nice article, thanks for sharing, but the housing debt is the invisible elephant in the room. My test lendingclub loan was to a pristine borrower, but that borrower got into too much house and declared bankruptcy.

    I don’t think I’ll invest any of my money with lending club until they get housing costs into the dti information.

  12. 12
    almost there Says:

    I also had a lender that made two payments and declared BK. On a 15K loan I am only out less than 25 bucks. Thanks for the info. I was investing by letting them pick the notes for me on an 11% return but the money would stay uninvested for up to a month. I now try to buy notes each $100 balance in the cash account. I had better scale down my dti ratio as I assumed it included housing costs.

  13. 13
    jackie Says:

    I have been lending on LC for 4 months now. Obviously its a little early yet, but so far I am happy with the results. I’m am wondering if more money could be made by essentially flipping the loans (on their selling site) after 4-6 months of good payment history for a small profit. This would also avoid the potential risk in changes in the borrowers circumstances. Have you any experience/thoughts on this?

  14. 14
    Jason Says:

    A lot has changed on LendingClub since 2010. I’ve done several blog posts talking about lendingclub investment strategy at my website. All kinds of algorithmic selection algorithms are popping up for the peer to peer lending networks.

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