Author Topic: Is $75 investment preferable?  (Read 6022 times)

Newlyfrugal

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Is $75 investment preferable?
« on: March 09, 2012, 05:11:38 PM »

A year or two ago, I read a comment in a blog.  The poster suggested that we invest $75 in each loan in order to reduce fees.  He ran the figures and determined that a $75 investment at LC fares better because the fees come out to be less.   Does anyone know about this?  If I find the comment again, I will post it here.  I do not know how to determine whether the poster is correct.

Usually I re-invest $25 as it becomes available.  But I just added $5k to my LC account and wonder if I should be investing $75 in each loan.   I used to invest in A and B loans, but now choose lower grade loans for the higher returns.  My risk tolerance is above average and I invest only enough money that I can afford to lose. 

Peter

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Re: Is $75 investment preferable?
« Reply #1 on: March 11, 2012, 07:12:14 PM »
I have read something like this as well. It is to do with the way Lending Club calculates it's fees. The way I understand it is that Lending Club takes a cut of every payment and often this cut is less than a cent. Everything is rounded to the nearest cent so if Lending Club is taking 1.4c in fees, it will only take 1c. But there are so many factors other than the amount of the investment that determines monthly payment. Low interest investments will have very different payments than high interest notes.

So, I don't think you can make a blanket statement that $75 loans are better - it will depend on loan grade as well.
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Josh Brooks

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Re: Is $75 investment preferable?
« Reply #2 on: April 22, 2012, 09:56:58 AM »
I would also say that the penny or two that you may save would be greatly offset by the loss of diversification.  Diversification is one of the keys to a low default rate and higher return.

Peter

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Re: Is $75 investment preferable?
« Reply #3 on: April 22, 2012, 08:09:37 PM »
Good point Josh. I don't think any investor should consider going above $25 per note unless they have at least $10,000 invested which would mean 400 notes.
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veggivet

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Re: Is $75 investment preferable?
« Reply #4 on: April 27, 2012, 07:42:46 AM »
If defaults were not an issue, then using the $75 level would work best regarding LC fees due to the rounding effect. However, one default on a $75 note would greatly outweigh any benefits of reduced fees. I only invest $25 per note, without exception.

SeanMcD

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Re: Is $75 investment preferable?
« Reply #5 on: August 16, 2012, 09:55:25 PM »
It also depends on the term of the loan, and will change as interest rates change.  The optimal point is currently $75 only for a very narrow number of loans: grades A1 - B2, 36-month loans.  Basically, you need to calculate the monthly payment for each investment value, then determine the value that gives a payment closest to ending in 49 cents without going over.  If no such value exists, then use the highest cents to minimize the amount of rounding loss.

I agree with Josh, that the tiny amount saved isn't worth the loss of diversification, but just for the sake of curiosity, attached are charts showing the optimal rounding ranges for notes up to $100.

Sean


[attachment deleted by admin]

Peter

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Re: Is $75 investment preferable?
« Reply #6 on: August 17, 2012, 11:30:32 AM »
It also depends on the term of the loan, and will change as interest rates change.  The optimal point is currently $75 only for a very narrow number of loans: grades A1 - B2, 36-month loans.  Basically, you need to calculate the monthly payment for each investment value, then determine the value that gives a payment closest to ending in 49 cents without going over.  If no such value exists, then use the highest cents to minimize the amount of rounding loss.

I agree with Josh, that the tiny amount saved isn't worth the loss of diversification, but just for the sake of curiosity, attached are charts showing the optimal rounding ranges for notes up to $100.

Sean

Sean, Thanks for the extra info and the chart - it is good to have the complete picture.
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Keltset

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Re: Is $75 investment preferable?
« Reply #7 on: November 14, 2012, 02:44:04 PM »
Sorry to dredge up an old topic...

But I thought that the rounded amounts of fees and unpaid principal/interest were all stored up in an "adjustment" pot and paid out once a whole cent was reached? I was under the impression that is what the adjustment field under the account details meant. Currently my adjustment amount is something like 8 cents...

Wouldn't this mean it's totally irrelevant other than the actual rate of re-investment which has to be an even smaller effect than the gain or loss of a portion of a 1% fee?

-Keltset
« Last Edit: November 14, 2012, 02:47:48 PM by Keltset »

flyp52

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Re: Is $75 investment preferable?
« Reply #8 on: November 14, 2012, 03:03:27 PM »
I also recall from a long time ago LC saying that they kept track down to fractions of a penny.

Keltset

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Re: Is $75 investment preferable?
« Reply #9 on: November 14, 2012, 04:09:20 PM »
I must say... I'm now questioning my interpretation of this. From the bottom of the note details pages you can see the following, "Fractions of cents are accrued and paid periodically." However I suppose this is only specifically talking about payments and not portions of fees. However because the payments have service fees combined into what you receive it becomes questionable if this is part of the fractional accrual they are meaning or if their fractional accrual occurs before service fees are calculated into the payment owed for your particular note? I really don't think they the accrual would be done after, so I would "guess" that the service fee is included into the accrual pot for the individual investor. I'm just not really sure...

Peter

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Re: Is $75 investment preferable?
« Reply #10 on: November 14, 2012, 06:14:59 PM »
My understanding of the fraction of cents quote that you are quoting above is that this is the borrower payments. The service fee part doesn't seem to be caught up until the loan is paid in full. Then Lending Club will make the lender whole and make sure that the total service fee was not more than 1%. I hope that's clear.
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yojoakak

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Re: Is $75 investment preferable?
« Reply #11 on: November 14, 2012, 06:18:58 PM »
There was some discussion of this recently in the comments to one of Peter's posts:

http://www.lendacademy.com/an-in-depth-look-at-investor-service-fees/

It was news to me, too!

Of course, what happens if the loan defaults? or takes 10 years to get paid off? What's the maximum amount of time one could conceivably have to wait to get that "adjustment" credited to you account?

(What's the present value of "6 cents" paid to you in 10 years anyways?)
« Last Edit: November 14, 2012, 06:23:32 PM by yojoakak »