Anyone done this? Apparently most of the in grace period notes will not default. So I have been looking at them on Folio and buying them.
1. Usually I buy a note with 10 payments or less left. I am guessing they won't want to incur a hit to their credit for 10 payments.
2. The cost of the note is so little that if it defaults.. it doesn't hurt too bad. Usually under $5.00.
3. Sometimes you can see right in the history that there is a problem with the mechanism of payment not necessarily that they don't have the money. Payment bounced back / non sufficient funds.
4. You can actually find some grace period notes with high credit scores and high income. I can't say for sure if they won't default but, it seems unlikely.
5.Usually this discount is like 30% or more. This makes for quite the profit if the person does not default.
Thoughts?
Be careful interpreting the 25% number provided by LC for IGP. It represents the loss estimates in
next 9 months only. The number doesn't include defaults that may happen after 9 months. The actual default rate for IGP most probably is much higher than 25%.
My analysis couple of years ago and shared in my blog post "Lending Club Secondary Market: Profitability of Trade and Recovery Rate with Loan Status at Listing"
https://www.peercube.com/blog/post/lending-club-secondary-market-profitability-of-trade-and-recovery-rate-with-loan-status-at-listing indicated ~42% default for IGP notes
The other thing to keep in mind is if the note starts going 16 days. LC very well might not only take your interest but principle too due to fees. I am sitting on a note that I have tried selling that is 30 days late for the past 3 months and has three months left on it. $0.15 fee kills the $0.05 I get in interest.
I would be really interested in reading how those guys who buy the loans at 90% discount fair that the notes in absolutely going to default. I get it that they are grabbing some collection fees and the occasional note that starts paying. I guess it must work for them otherwise there would not be a market right?