Reviewing My Lending Club Results

by Kevin on January 22, 2014

Many years ago I opened a Lending Club account and was given some bonus money just to try out the P2P company. I invested in a handful of loans and over time they were paid back. It was like sticking my toes into the water to test the temperature.

Peer-to-peer lending was an interesting concept, but something I wasn’t entirely comfortable with. With P2P lending someone with a high credit card balance comes to the site, puts in a request for cash, the P2P company does research on the person in terms of verifying income, looking at their credit report, and so on, and then determines with kind of interest rate they can offer that person. The borrower agrees to the rate, and the loan request is released to the public where investors can login and agree to fund a portion of the loan.

With this tool someone trapped in a 20% interest rate credit card might be able to get a fixed-term loan of 36 months at 12%. An 8% swing in interest rate might not seem like a big deal, but that mixed with it being a fixed term loan like an auto or home loan will help that person eliminate the debt in a reasonable amount of time. The borrower wins due to getting out of debt in 3 years and the investor wins because they can earn a high rate of return compared to savings accounts, CDs, bonds, and even sometimes stocks.

Starting with Lending Club

This year I decided to start putting my feet a little deeper into the water. I dedicated to sending $100 per month to the company. Unfortunately I can’t set up my investing in Lending Club as an automatic process due to the state I live in. I can make the contribution of the $100 automatic, but not the investment. I live in Tennessee and for whatever reason Lending Club isn’t allowed to have investors lend directly to borrowers in the state. (That is anticipated to change soon.)

I’ve also been impressed with what others have done with P2P lending. For example, Jeff Rose of Good Financial Cents has a great post called “The Prosper vs. Lending Club Experiment” where he pulls back the curtain on his returns with the two companies.

So what I have to do is to go the “Note Trading Platform” to buy notes from other investors. This makes the process a tad more complicated because I have to make sure I’m not being charged a premium to invest in the loan, but I don’t find it to be too much of a hassle. This highlights another feature of P2P lending: you can sell the loans you invest in. This makes liquidating your investment possible if you price things correctly. You aren’t stuck for 3 or 5 years in your invested loans.

So how have my results been?

Well… that’s where things get a little tricky. You are receiving interest each month from the notes you have invested in, but just like any other loan the front end of the loan carries more interest than the back end. That’s one way your results can be skewed.

Another huge issue that skews results are loans that get charged off. Lending Club (and competitor Prosper) don’t reduce your returns by the amount of a bad loan until it is completely charged off. A charge off can take months, and all the while your returns act like you don’t have a bad loan in your portfolio. When that loan finally is charged off it brings down your returns. I haven’t had a charge off yet (crossing my fingers!), but I have had a few go into the grace period to make their payment.

The last issue is how returns are calculated. For Lending Club it is “Net Annualized Returns” or NAR. This means your returns, if less than a year, are annualized to reflect a full year’s of investing. If you started investing today with a $25 loan into one 10% note, your one month of returns would be annualized over 12 months to reflect a 10% net annualized return. This is okay if you have one note that stays good forever… but otherwise it isn’t 100% accurate. Your portfolio of notes is going to ebb and flow, the interest rates are going to change, and your returns will be impacted by bad loans.

One last issue: cash sitting in your account. If you send Lending Club $100 today and don’t invest it for a month, you’ve lost out on potential interest either through Lending Club or just a regular savings account. This isn’t reflected in the NAR because, well, that gets complicated as to identifying what interest you’ve missed out on. (As a quick example, if you put $100 into one note at 12%, but waited one month to invest, your returns for the year would be 11% not 12% since you missed 1/12 of the year not being invested.)

My Lending Club Returns

As of right now my average note age is 7.6 months and my NAR is 11.62%. I’ve had 75 notes, and 9 of them have already been paid off. My NAR should drop a little as time goes on, but I’m looking at healthy returns either way.

When you login and look at your account it shows how much you’ve received in total payments (principal and interest combined) plus how much just interest you’ve earned. Thus far I’ve received $87.35 in interest and $497.48. That calculation gives a return of around 17.5%, but again my note portfolio is a young “age” at just 7.6 months and all of the interest is on the front end of the loan. As the loans age and get closer to being paid off I’ll be receiving just principal which should bring that number back in line with my Net Annualized Return.

Do you use P2P lending? What has your experience been?

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