Lending Club Liquidation: A Cautionary Tale

Caution, Wet Floor

A few years ago I started up an investment in Lending Club to see what the peer-to-peer lending world was all about.  Over the course of next year, I ended up investing close to $24,000 and had just under 1,000 notes.  Then the tax bill came.

While they were paying pretty good interest (defaults hadn’t picked up much yet), I was getting taxed on the earnings at ordinary income rates.  At the tax bracket I was in at the time, more than one-third was going to the government.  I made the decision to liquidate all my notes and use the proceeds to fund a Roth IRA with Lending Club instead.  Theoretically I would get the same returns, but minus the taxes.

This is the story of what happened when I sold all my notes on Lending Club’s trading platform, Folio Investing.  Needless to say, I took a loss when I sold, but there are some other less obvious take-away’s that are more broadly applicable.

Lending Club Trading Process

Lending Club allows you to buy and sell notes on a secondary market after they’ve been issued to borrowers.  As long as a payment isn’t pending or a few other conditions, you can buy or sell, and at pretty much any price relative to the current outstanding amount.

Selecting Notes to SellSell Notes - Lending Club

It lists all of the notes you own that are available to sell and some summary information about each.  You simply check the box next to the ones you want to sell and click the blue “Sell Notes” button.  I selected the first three on my list as an example.

Pricing Selected Notes to Sell

Submit Notes for Sale - Lending Club

At the next screen, you get to pick the price at which you want to offer your notes for sale.  First, click the “Principal + Interest” button.  This sets the base amount as the principal remaining on the note plus any interest that has accrued since the last payment.  Next, click the “Markup/Discount” button and select how much you want to ask above or below the base amount.  In my example, I selected a discount of 5%.  There was $73.74 of principal and interest on my three notes, so once sold I would collect $70.05.  Lastly, I’d owe a 1% fee to Lending Club for the Sale.  Click “Submit” and you’re done.

Buying Lending Club Notes

Once you’ve made your notes available for sale, they go out into the marketplace.  Here is what the buying side of the platform looks like:

Browse Notes - Lending Club

You can filter based on specific criteria and then see what notes are available and at what price.  Check the boxes next to notes you want to buy, then click “Add to Order” and you’re done.  Notes typically are available for sale for a week, but you can specify the time too.  If they expire, you can resubmit them at the same or different price.

931 Notes Offered for Sale

I went through all the of steps above, but instead of selecting a single note to sell, I selected them all.  931 in total, which had a principal value of $20,328.82 at the time.  Since I didn’t know any better, I priced them at exactly principal+interest with no mark-up or discount.  My plan was to sell what I could, then each time I relisted the expired notes drop the price a bit until I sold them all.

I clicked submit, then stood back to watch!

Day 1

On the very first day of the sale, 524 of my notes sold!  That represented about 56% of the total notes and principal value.  Because I listed them with no mark-up or discount, I only had to pay the 1% trading fee and realized 99% of principal.  I was feeling pretty good.

Days 2-30

Over the rest of the first month, I sold an additional 293 notes.  That brought my cumulative sold to 88%.  A few expired and I had to relist lower, so I only realized 98.3%.  Still though, if my main concern was liquidity, I was able to sell the overwhelming majority of my notes within the first month.

Days 31-60

Starting to tail off a bit, I sold 73 of the remaining 114 notes.  I really had to start discounting more heavily here to get them sold and only was able to get 87.7% of the original value.

Days 61-180

24 notes were sold for 86.1% of original value.  I was logging in every single week to relist the remaining notes and more often than not wouldn’t have any sell.  At the end, I was left with 17 notes that I basically had to give away.  I only got 54.6% for those.

In total, my 931 notes sold yielded $19,668.38 or 96.75% of the value I started with.  Liquidating them cost me $660.44.  To summarize, here are the notes sold and % of par by time period.

Lending Club Summary Graph

The Cautionary Tale

When the dust finally settled, I reflected on what I had done and whether or not I could have done better.  My general sense is I did okay, but the structure of how notes are bought at sold doesn’t do you any favors.

  1. Price Discovery is Tough with Unique and/or Illiquid Investments.  With each note essentially a unique security unto itself, there is no way to determine “market” price that is known before transacting.  I had to keep lower my ask until I found someone willing to buy.  That takes time, in my case over 6 months to get rid of them all.
  2. The Good Ones Go Fast.  It would have been great to bundle all of my notes together and sell them as a package, but the system didn’t work that way.  The “good” notes all sold quickly and I was left with the “bad” ones that required significant discounting in order to move.
  3. My Good Ones Were Probably Priced Too Low.  I initially thought I did really good selling so many notes on the first day.  Over time, however, I didn’t feel as good about it.  Was the reason they sold so fast that I under-priced then?  Probably.  I could have started higher, but that would have just lengthened the amount of time it would have taken to sell.  There is a trade-off between price and liquidity; my example shows that clearly.

Don’t get me wrong, I don’t have a problem with Lending Club or their process for buying and selling notes.  I do think that the lessons above are applicable as you think about other transactions that don’t involve securities with prices posted in advance.  How have you figured out what to ask for an illiquid asset that you’re selling?  Anything you wish you could do differently?

John started Present Value Finance in 2017 to share his experiences and insights on personal finance to help people make better decisions and take control of their financial lives.  

He achieved financial independence in 2016 by walking away from the high stress world of corporate finance to focus on his family. He’s a husband, father, family CFO, and all around finance geek.

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