Lending Loop is a Canadian peer to business lending platform, which I enjoy for several reasons:
- Businesses use loans to support their development, whereas personal loans often have some measure of excess/luxury spending. I consider the risk of default less with the former, as a consequence. So far, this seems to be accurate.
- As I am repaid on a per loan basis, I can have a steady stream of funds available to either re-lend or withdraw for other purposes.
- The rates are competitive, for whatever risk level I am comfortable with:
As most of us lack the time, skill, and premonitory powers to pick 0% of defaulting borrowers, many choose to invest using their Auto-lend function:
Lenders are able to adjust several settings, but I want to focus on the “Custom Plans” at the bottom. Currently, we can set different commitment amounts for each loan grade. For example, we could set $25 for the lower risk half (A+ to C+), and $100 for the rest (C to E). This is great for automating how much we commit per loan, but ignores one major factor: The proportion of loans available when our funds become available to lend. When my funds become available, I might prefer all of it went into C-E, but it could all end up in A-B.
When providing feedback to Lending Loop, I realized there were several possible solutions for improving the Auto-lend function:
A. Delayed Allocation with Ranking
Rather then lending once a loan becomes available, waiting for a certain period of time or a funding threshold has been reached. Then the best loan could be chosen based on a predetermined ranking. We could rank the risk bands from highest to lowest priority, and the system would automatically pick the highest priority available.
This option would only slightly improve the situation, as the available loans can still group towards a certain level of risk.
B. Loans in the Approval Process with Ranking
This is a slightly more sophisticated approach to the first option. Rather than delaying allocation, Auto-lend would look forward into the approval process and reserve funds for the highest ranked loans. If only low priority loans are available, Auto-lend would only contribute if there weren’t higher priority loans in the approval process.
Similar to option A, there is still a risk of bias within whatever scope is available.
C. Percent of Total Lent
Capping percentages would allow a hard limit on contributions to lower priority groups. This would avoid the risk of bias from the previous options.
A simple cap requires careful rebalancing with the per loan allocations. Setting the per loan value too high would guarantee that Auto-lend would constantly max the cap.
D. Minimum Available Funds
Setting a minimum of available funds for Custom Plans would prevent lower priority plans from activating, until a certain balance is reached. This would allow lower priority groups to act as a pressure release, leaving the remaining available funds for the preferred groups. If the preferred groups are available often enough, all funds would be allocated to them.
If set too high, lenders could end up with excess balances stuck as available funds.
E. Weighted Average Gross Yield (WAGY)
This probably the most automagical option. Lending Loop’s dashboard already displays our current WAGY. Allowing us to set a target WAGY, in the Shared Settings, would enable a nice heuristic comparing current against target:
- If Current > Target, then invest in any loan.
- Else, if Current <= Target, then invest in loans with rates >= Target.
The system would then share the same focus of lenders, the overall yield. We would still want to use the current per loan settings, to manage our exposure to each loan.
Which one to Choose?
While it is possible to create a Frankenstein’s monster of multiple ideas, I expect they will try to keep it simple for lenders. My preference would be for one of the last two, as they are the closest to matching my goals.
If you don’t already use Lending Loop, and would like to try the platform, they have a “Refer and Earn” program we can both benefit from. If you sign up using my referral link, and decide to lend at least $1,500 in 180 days, we each get $25. I recommend double-checking the terms and conditions, which are refreshingly brief, to make sure nothing has changed.