Freedom 35’s Lending Loop Update – 2018 Results

Lending Loop Update

I’ve been investing with Lending Loop for over 2 years now. My first year in 2017 was better than expected, ending with a 10% return net of expenses. I was only expecting an 8% return. In today’s post I’ll dive into my 2018 performance with Lending Loop and also explain how the site has changed over the last year.

Liquid’s 2018 Portfolio Performance (11% return)

My 2018 average loan interest rate after fees was 12.7%. A loan write-off shaved away 0.7%. And a bunch of delayed payments costed me another 1%. Which means my actual net return came out to be 11%, or $3,369. Score! 😀 I started 2018 with $30,400 in my account, and the end of year balance grew to $33,700.

Here is my 2018 earnings statement.

Income

• Interest earned   $3,968
• Servicing fees       -$421
• Bonuses                    $25
• —————————-
• Total earnings    $3,572

Loan Losses

• Principal defaulted    $204
• Principal recovered       -$1
• —————————
• Total charged-off       $203

Unfortunately I did have one loan write-off in 2018. But it was a relatively small loss of $203. The borrower, a street sweeping business, owed significantly more taxes to the CRA than the value of its assets. The CRA would naturally have priority over other creditors in any bankruptcy or insolvency proceedings. This was the first loan write off in my portfolio, but it likely won’t be the last.

Portfolio at a Glance

Here are some quick stats about my Lending Loop portfolio.

• I have made 87 loans in total over 25 months.
  • 18 of those loans have been paid off in full. Hurray!
  • 1 has defaulted, and I lost 81% or ($203) of my principal on this loan.
  • 68 loans remain ongoing for now. 60 of these have no major problems, but 8 are either delinquent or in default.

As of this week in March 2019, I’ve made a lifetime earnings of $6,300 from Lending Loop. 🙂

As with dividend or real estate investing, having patience is a key element to the fixed income game. Due to compound interest, my total lifetime earnings should hit $10,000 by this time next year, assuming portfolio performance remains consistent. 🙂

In terms of what types of loan I hold, they’re mainly B and C+ grades, which has an expected yield range of 10% to 13% after fees. This mixture hasn’t changed much for me over time. Most of the loans I participate in have a 3 to 4 year term.

What Changed in 2018

Like all financial technology companies, it’s a constant challenge for Lending Loop to adapt quickly to the changing fin-tech landscape. I’ve written previous posts on how the website works and the user experience. But here are some changes I’ve noticed to the platform over the last year.

• Things I liked
  • The Dashboard has greatly improved. The new “Portfolio Analytics” section is awesome for giving lenders a detailed look at how diversified their loans are using pie charts. It also shows the overall payment status of the portfolio. For example, I can see that 9.79% of my current outstanding principal is either delinquent or in default. So it’s a useful diagnostic tool to evaluate portfolio risk.
  • Auto-Lend is a nice addition. It lets investors get into loans that meet their specific criteria as soon as the loans become available. The criteria is based on a credit rating filter that lenders can customize. I personally don’t use this feature, but it’s nice to have for more passive lenders.
  • Referral bonuses. 🙂 Refer a friend to Lending Loop with a unique referral code and both people will receive $25 once the new lender invests a total of $1,500. If anyone is interested my referral code is CC145C, or you can use this referral link to sign up. So far there has already been 1 person who used my code. Thanks! That explains the $25 bonus I received last year.
  • Better information. An icon in the marketplace shows whether or not you’ve already loaned money to a company or not. Some businesses take out multiple loans from Lending Loop.
  • No correlation to my equity portfolio. The Canadian stock market fell 12% in 2018, taking my stock portfolio down with it. But my Lending Loop investments stayed above water, helping to keep my net worth stable.
  • Growing platform. Lending Loop has helped 341 businesses across Canada and paid over $2,000,000 in interest to lenders. The company managed to partner with the Ontario government to grow its loans. It’s good to see Lending Loop expand and gain influence, so they can be more selective about accepting more high quality loans. Which brings me to the next section.

• Things I did not like
  • A lot more new loans seem to be poor quality. Maybe it’s just been a bad year, but nearly 10% of my outstanding portfolio is experiencing delayed payments. Most of those in the 10% are 4 months delinquent or already in default, but haven’t been written off yet. This is a major bummer. In comparison, only 2% or 3% of the loans I had in 2017 was in trouble.
  • Removed lender’s contribution amounts. I find it’s useful to see the list of lenders that have already committed to a loan. For example maybe I have concluded that a borrower seems trustworthy. But if I don’t see any of the regular high rollers participating, then maybe I’ve overlooked something in my initial due diligence. But Lending Loop has removed both the usernames and the amount each person contributed, reducing transparency.
  • Replacing usernames with locations. Lenders were able to ask questions to borrowers using an anonymous handle. But now MasterInvestor69 appears as “Lender from Moose Jaw, Saskatchewan” to everyone in the Q and A section of a loan. There probably isn’t a lot of Lending Loop users in Moose Jaw. So this reduces lender privacy in smaller communities.

My Lending Loop Strategy for 2019 

Overall 2018 was an okay year. Despite some of the complaints I’ve mentioned above, the end result still shows an impressive double digit return. This is how my portfolio currently looks.

As for the rest of this year I will be more selective choosing new loans to invest in. And due to the large amount of delinquent loans in my portfolio I am less optimistic about my 2019 returns. Here are my expectations.

• Average yield after 1.5% fee to Lending Loop 12%
• Estimated loan loss due to defaults -3%
• Estimated income lost due to delay in payments -1%
• Total net return = 8%

Unlike last year, I am expecting quite a few defaults this year. But I’ll be happy with an 8% return before tax. Not great, but better than any 5 year conventional bond right now.

10 Rules to Pick Better Loans

Going forward I will be using the following guidelines to pick safer loans, and reduce the chances of accumulating even more delinquencies in the future.

1. Don’t lend to D+ or lower grade loans anymore. Stick with C or higher. Unfortunately this will lower my average portfolio yield. But it should also reduce default risk.
2. Try to pick loans that offer multiple personal and corporate guarantees. So if for some reason the loan can’t be paid back, there are multiple sources to get reimbursed.
3. Lend to companies that have a positive shareholder equity and a growing, as well as positive net income.
4. Don’t put too much confidence in the credit rating system. Sometimes B rated loans goes delinquent after making just 1 or 2 payments. Lending Loop’s due diligence is not transparent nor consistent from what I can tell.
5. Try to choose companies that have tangible assets like equipment or inventory so there’s some kind of collateral in case the loan defaults.
6. A company should be in business for at least 3 years. But 5+ years would be ideal.
7. Consider the online reviews of the company. Internet comments complaining about the owner is often a bad sign, since the owner’s behavior reflects on the business operations.
8. Don’t lend to trucking companies. It’s a long story but basically there are better risk/reward options on the platform.
9. Be weary of companies that are borrowing money to either pay down an existing loan, or to pay taxes owed to the government.
10. It’s better to wait for a good loan to appear even if it means stock piling some extra cash than to invest in a mediocre loan just to stay fully invested.

Those are just some rules I started to follow this year. We won’t know if these guidelines will succeed or not until some time has passed.

Lending Loop has come a long way, especially in terms of usability and tools. But it still faces many challenges. One of which is improving the quality of borrowers on the platform. At the end of the day, as a lender, I just want to see a solid return on my investment. I’ve been quite impressed with my portfolio’s performance over the past 2 years. But it feels like the tables are slowly turning now. Late payments are becoming more frequent, and delinquencies are piling up. If this is just a temporary phase then there’s nothing to worry about. But if this is the beginning of a trend, then I would be concerned for the long term viability of the platform. Let’s check back next year to see how things are going. 🙂

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