You’re probably already familiar with Lending Club, the largest peer-to-peer lending platform in the US. Since the site began operating in 2007, it has funded almost $16 billion worth of loans. It does this by bringing together borrowers and investors – who will be the ultimate lenders – on the same platform to make loan arrangements that will benefit both parties. This provides a form of direct borrowing/lending that effectively removes the “middle man”, which in traditional loan arrangements is the bank.
Borrowers benefit because many of them either pay lower interest rates on their loans, or are able to borrow money that would not be available from banks. But investors have perhaps an even bigger advantage – they are able to invest money in those loans and earn interest rates that are substantially higher than what they can ever get through the banks and other conventional fixed income investments.
The peer-to-peer universe, and especially Lending Club, are now drawing billions of dollars in investment capital from investors who are eager to take advantage of those higher returns.
Lending Club provides the perfect platform for the creation of new loans on a continuous basis. However one function that Lending Club doesn't provide is the direct ability to buy or sell an existing loan note. For that, they are working with Folio Investing, an investment service that provides everything you need to buy and sell peer-to-peer loan notes on the secondary market.
And it all takes place through the Lending Club platform.
What Is Lending Club Folio?
Lending Club itself is solely responsible for the origination of new peer-to-peer loans. Investors can purchase entire loans, or they can purchase a small part of a loan, both of which are referred to as a “note”. You can purchase a loan note in denominations of as little as $25. This will enable you to diversify an investment of a few thousand dollars across a very large number of notes, limiting the amount of loss that you will suffer when a single loan defaults.
But if you want to sell a note before the end of the loan term, or if you want to purchase existing notes, Lending Club enables you to do that through its affiliation with Folio Investing.
McLean, Virginia based Folio Investing began operations in 2000, determined to bring about investing innovations that will help investors benefit from smarter investments. The company has developed new technology to help investors that have resulted in 19 patents. And the company is committed to developing even more.
You can actually open an account with Folio Investing for the purpose of investing through other platforms, in addition to Lending Club.
How Lending Club Folio Works
If you want to buy or sell existing notes, you first sign up for a Lending Club investor account and then move to the Note Trading Platform. There you can buy or sell notes from and to other Lending Club investors.
The Note Trading Platform is operated by Folio Investing through the Lending Club site. In order to participate on the platform you must have an account with Lending Club, and you must also open a Folio Investing trading account, which you can do through Lending Club. Folio is a member of both FINRA and SIPC.
If you want to buy or sell a note, you can offer it on the Note Trading Platform. There you will set the asking price. Potential buyers can browse through the list of notes available for sale, including your note, as well as get detailed information about each note. If a buyer is interested, he or she can choose the note, and place an order to buy it.
Pricing a note. The price of a note that is offered for sale is determined by the seller of the note. There is a marketplace rule however requiring a note not be priced at a markup greater than 70% of the total value of accrued interest and outstanding principal, or that would otherwise produce a negative yield to maturity.
Trades typically settle in one business day. Borrower payments made after the trade settlement go to the buyer, including principal and interest accrued before the sale of the note. The payments will be received from Lending Club, not Folio Investing.
In each sale, the transaction fee is paid by the seller, not by the buyer.
If you want to buy existing notes, rather than brand-new ones, you simply need to go to the Note Trading Platform and browse through the notes that are offered. There you can choose to buy any notes that meet your investment criteria.
We'll discuss the reasons why you might want to invest in existing notes, rather than brand-new ones, below.
Features and Benefits
There are a number of benefits to selling existing notes, and selling them through Folio.
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Liquidity – One of the limitations of peer-to-peer investing is the lack of options to sell a note once you buy it (it is one of the only real complaints about lending club). Not only are you unable to sell directly through Lending Club (other than through Folio), but you can't sell them through a traditional investment broker either. At least at the current time, peer-to-peer loan notes exist only on peer-to-peer lending platforms. But through Folio, Lending Club provides you with an outlet to sell your current notes. That provides you with a solid measure of liquidity, that makes investing through Lending Club even more advantageous.
Portfolio management – With the ability to sell notes, you have an enhanced capability to manage your note portfolio. Let's say that you invested in a note that met your criteria at the time you purchased it, but it no longer does; Folio provides you with the ability to sell it out of your portfolio and to move on to other notes. Perhaps this happens because the note does not perform as expected, or because you have changed your investment criteria since purchasing the particular note. As is the case with investing in any type of asset, it's always best to have the option to sell the security after the fact.
Potential profit – Though it isn't a common investment activity (yet), but it may be possible to earn extra income on a note if you can sell it at a price above par. For example, if you have a note with $75 remaining to be paid on it, but you can sell it for $77, you have an immediate additional profit of $2 on the investment. That may not seem like a lot of money, but if you can multiply the activity across many notes on a monthly basis, you could increase your investment returns considerably.
Fees – When you sell a note through Folio you are charged a fee of 1% of the purchase price. If you aren't satisfied with the performance of a note, you may be happy to pay such a small fee in order to get out of it.
There are also a number of benefits to buying existing notes, and buying them through Folio.
Short-term investing – New notes purchased on Lending Club range from 36 months to 60 months. But let's say that you don't want to tie up your money for up to five years – you can buy existing notes through Folio that will have shorter terms due to the fact that they are already in progress. For example, you can purchase a 60 month term loan that has been in existence for three years; that means that the loan will have just 24 months remaining until it is fully paid. In this way, you can choose the maturities of the notes that you invest in.
Investment opportunities – You may be able to purchase existing notes that are priced below what you think they are actually worth. This could have something to do with the performance history on the note, or it can simply be that the current noteholder wants to dump it and move on. Whatever the reason, an underpriced note will offer you an opportunity to earn some extra principal on on it, in addition to the remaining interest due on it.
Loan “seasoning” – This is actually a term that is common in the lending industry. “Seasoning” refers to the fact that a loan is existing, and therefore it has an established payment history. This makes the integrity of the loan a known commodity. It is important to understand that there is no way to know with absolute certainty how a loan will perform when it is brand-new. Even borrowers with AAA credit profiles occasionally default on loans. But with existing loans, you have a better idea of the borrower's willingness and ability to repay the loan. And since the loan has a shorter remaining term, that also serves to reduce the risk of the investment.
Access – There is simply no other source where you can buy existing Lending Club notes. They are not available through traditional investment brokers, despite the fact that they can represent profitable investment opportunities.
No Folio fees – Folio does not charge a buyer for purchasing existing notes. The only fee in the transaction is charged to the seller of the note.
If you are going to invest in peer-to-peer lending, as thousands of people now do, then it's an excellent idea to sign up with Folio Investing through the Lending Club site. Folio will give you the ability to sell any notes that you are no longer comfortable owning. And if you decide that you would like to diversify your note holdings by adding existing notes to new ones, you will have that ability.
Liquidity – the ability to sell an investment – is a welcome feature in any investment portfolio. Not only does it reduce the risk of holding a note that you no longer consider to be investment-worthy, but it also gives you the ability to create the exact kind of portfolio that you want.
Once you become an investor set up a Note Trading Platform through Folio Investing, even if you don't think you'll use it. Chances are good that you will, sooner or later.