Poll

Yeah, so okay....  ummm, Prepaid good? or Prepaid not good? Choose the one closest to your opinion.

Good, if the loan is 8+ months old.
4 (25%)
Good over the long term of your well-diversified account.
0 (0%)
Bad no matter what.  It hurts your bottom line.
7 (43.8%)
Meh. Better than defaults so...  no big deal.
5 (31.3%)
Go back and read what I said about this in the string!
0 (0%)

Total Members Voted: 16

Voting closed: August 18, 2014, 10:46:37 AM

Author Topic: Account reaches it's first birthday with a 9% Fully Paid status  (Read 42428 times)

Fred93

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #15 on: July 30, 2014, 08:52:55 PM »
What large fees on prepayments? I've been searching around the LC site and I'm not sure what fee you're talking about

They call it the "servicing fee" or something like that.  They charge 1% of each payment, without regard to the allocation of the payment to principal or interest. 

If a borrower borrows $1000 and then pays it off immediately, there is no interest (well maybe a day or two of interest, but it is inconsequential), and the single pament is $1000 (plus a day or two of interest), and LC would subtract $10 for servicing. 

For a loan which runs to term, the lendingclub servicing fee could end up being on the order of 5% of the interest you earn, but on a prepaid loan, the servicing fee can be several times LARGER than the interest you earn.

Prepaid loans reduce your return by any reasonable measure.

Fred

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #16 on: July 30, 2014, 08:53:38 PM »
You can actually lose money if the borrower pays in full on their first payment.

This only applies if the interest rate is 12% or lower (currently, Grade A1 - B4).

Fred93

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #17 on: July 30, 2014, 08:54:47 PM »
Prepayment HURTS the lender, because of the large fees LC charges on prepayments

It does not hurt more.  LC collects the same total fees on a loan anyway, whether it is prepaid early or it survives until maturity.

Oh yes it does.  Your total RETURN, which is all that matters, is lower when loans prepay.

Rob L

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #18 on: July 30, 2014, 08:55:56 PM »
It does not hurt more.  LC collects the same total fees on a loan anyway, whether it is prepaid early or it survives until maturity.
The question is on the interest amount -- young loans produce higher interest portion of monthly payment.
Sure, but I'd rather let the loan go to maturity and pay LC over the full term.
If not then I have to take out another loan that may also be preaid, etc...
LC keeps getting 1% of the same principal invested over and over again; right?

Fred

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #19 on: July 30, 2014, 09:05:49 PM »
Oh yes it does.  Your total RETURN, which is all that matters, is lower when loans prepay.

On the loan-basis, yes; however, on the portfolio-basis (assuming you re-invest the prepayment), I think your portfolio will get the benefits.

BruiserB

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Account reaches it's first birthday with a 9% Fully Paid status
« Reply #20 on: July 30, 2014, 09:09:28 PM »

You can actually lose money if the borrower pays in full on their first payment.

This only applies if the interest rate is 12% or lower (currently, Grade A1 - B4).

Yes, but prepayment always hurts.  I was just demonstrating how it can hurt to the point of loss.  And as mentioned earlier in the thread, the lower rate loans tend to pay off early more often.

Now don't get me wrong, I'd rather have some prepayments than nonpayments!

Fred

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #21 on: July 30, 2014, 09:13:47 PM »
Yes, but prepayment always hurts.

I beg to differ.  It does not always hurt, especially if you have good reinvestment mechanisms.

Now don't get me wrong, I'd rather have some prepayments than nonpayments!

Yes, me too ;-)

AnilG

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #22 on: July 30, 2014, 09:16:38 PM »
I will leave this here.  :P

Early Repayment of Loans and Impact on Lenders' Yield at Lending Club
Posted by Anil Gupta | 28 Apr 2014 00:00:53 | Category: Lending Club

https://www.peercube.com/blog/post/19
---
Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
PeerCube https://www.peercube.com

BruiserB

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Account reaches it's first birthday with a 9% Fully Paid status
« Reply #23 on: July 30, 2014, 09:21:21 PM »

Yes, but prepayment always hurts.

I beg to differ.  It does not always hurt, especially if you have good reinvestment mechanisms.

Now don't get me wrong, I'd rather have some prepayments than nonpayments!

Yes, me too ;-)

The sooner you are paid back, the sooner you give Lending Club 1% of your principal.  If you get paid back and then re-lend the money then you begin paying Lending Club 1% of the same principal again.  The least effect of Lending Club's fee is on the longest term loan paid back as scheduled (not early).

Fred

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #24 on: July 30, 2014, 09:32:55 PM »
The sooner you are paid back, the sooner you give Lending Club 1% of your principal.  If you get paid back and then re-lend the money then you begin paying Lending Club 1% of the same principal again.  The least effect of Lending Club's fee is on the longest term loan paid back as scheduled (not early).

I think you are missing my point here.

When you chart the amortization schedule (payment, principal, interest), you will notice that the interest is monotonically descending until reaching zero at maturity.

When the loan is prepaid, and reinvested, and prepaid, and reinvested, etc., the interest will look a sawtooth wave.

If you measure the area under the interest curves -- i.e., total interests earned -- it will be greater on the second case.

Fred93

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #25 on: July 30, 2014, 09:35:41 PM »
Oh yes it does.  Your total RETURN, which is all that matters, is lower when loans prepay.

On the loan-basis, yes; however, on the portfolio-basis (assuming you re-invest the prepayment), I think your portfolio will get the benefits.

Nope.  Your whole portfolio will have a lower return when loans pay early.  The math is really pretty simple.

Not that there's anything you can do about it.  Prepayments apparently come with the territory.

Fred

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #26 on: July 30, 2014, 09:49:59 PM »
Nope.  Your whole portfolio will have a lower return when loans pay early.  The math is really pretty simple.

Care to elaborate?

Fred93

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #27 on: July 30, 2014, 10:24:59 PM »
Care to elaborate?

It is difficult to know what to elaborate.   Assuming we have the same interest rates and defaults, then he who pays lower fees has a higher return.

The lender who has more prepayments pays more fees.

Randawl

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #28 on: July 30, 2014, 10:45:32 PM »
Folks, what really matters is the timing in which the prepayment occurs.  I was about to link to Anil's blog, but he beat me to it.

Fred

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #29 on: July 30, 2014, 10:47:13 PM »
Nope.  Your whole portfolio will have a lower return when loans pay early.  The math is really pretty simple.

Care to elaborate?

It is difficult to know what to elaborate.

The math, please.  ;)