Searching For Better Yields? Lending Club Could Be The Ticket In Tough Economic Times: Returns At 12%

I was reading some other blogs this morning when I came across some interesting facts and figures about the P2P lending arena in general, and about Prosper and Lending Club in specific.  Here are a few of them.

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  • In August 2011 Prosper and Lending Club issued $29.9 million in new loans. Just one year later in August 2012 those two same companies have shown big growth and issued $84.4  million in new loans. P2P lending is here to stay!
  • Institutional investors are taking notice of Lending Club. Over $200 million in new loans have been issued to institutional and larger investors over the past 18 months via LC Advisors.
  • In May of 2012 Prosper and Lending Club passed $1 billion in loans given.  In October of 2012 Lending Club will surpass $1 billion in loans originated by itself. As of the end of August LC has issued $892,346,900 in loans.
  • Over 98.9% of all investors with 100 or more Notes have experienced positive returns, while 86.23% have returns between 6% and 18% as of August 14, 2012.
  • 71.85% of Lending Club borrowers report using their loans to consolidate debt or pay off their credit cards.

What the stats show me is that peer to peer lending continues it’s steady growth, and most investors are going to see a positive return – almost 99% of investors with 100 or more notes  are making postive returns. Not everyone in the stock market can say that. Even the institutional and larger investors are beginning to take notice of this fledgling industry, and I’m sure more of them will be jumping in on the P2P bandwagon.

20 Things About P2P Lending

Peter Renton of Social Lending put together a great 5 minute presentation for the Ignite event at FINCON12. It was pretty entertaining so I thought I’d share it here (wish I could have seen it live!). It’s called 20 Things You Didn’t Know About P2P Lending.

Lending Club Returns Now At 12%

A couple of months ago I was happy to report that for the first time my Lending Club returns had topped the 12% number that I had been trying to breach for some time now.  For the past couple of months they’ve been up above 12%, and things were looking good. This past month, however, we had a bump in the road.

I had one new charged off loan (for a total of 2), as well as having 4 other loans go late, or continue to be late. Luckily the loan that got charged off didn’t have a ton of principal left to repay, so my losses on that one are somewhat minimized. The other 4 late loans have a bit more principal to pay off, an average of about half of the principal when all four are combined. I’m hoping those ones get back into a payment schedule and don’t get charged off!

Lending Club Returns

  1. Net Annualized Return of 12%: Returns are down from 12.02% in July and 12.06% in June.  They’re still up from 11.98% in May, 11.61% in early April, all the way back to 10.53% in July of last year.
  2. Number of defaults.. Two charged off, with 4 new late: As mentioned above I have a new charged off loan.  Wouldn’t you know it, it’s another high grade A loan!  It seems like all the loans I’ve had trouble with have been A or B loans. Strange.   Outstanding principal was $8.32. I also have four late loans in my account, accounting for $50 in outstanding principal Of the 4 two are grade B loans, and two are grade D. The one with the most outstanding principal, $22.82, is a D grade loan that just started making payments. Ouch. Let’s get back on track guys!
  3. Thirty five loans have been paid off early: Eleven were A grade loans, ten were grade B loans, nine were C grade, one grade D,  three grade E and one F. Looks like grade A and B loans are more likely to get paid back early, reducing returns. The earlier a loan is paid off, the less likely you are to be making money, and in some cases you may actually lose money! Another reason to invest in  lower grade loans.
  4. I’m diversified by investing small amounts across multiple loans: I’ve had 184 loans since joining (143 issued and current loans, 35 paid off), with no more than $25 in each loan. In other words, I’m diversified across a decent amount of loans, lessening my risk from any one loan going into default or getting charged off. Of course to be fully diversified I believe Lending Club recommends 800 or more notes. I’m not there yet.

NOTE: Over 98.9% of all investors with 100 or more Notes have experienced positive returns. 100 Notes can be purchased with a minimum investment of $2,500.

What’s Your Actual ROI?

Lending Club Loans MapWhen you’re looking at the numbers on the Lending Club and Prosper sites, it has been pointed out time and again that their numbers are overly rosy view of what your actual return on investment will be. The ways that they calculate the ROI isn’t really standardized, and they don’t take into account how old your loans are, possible future default rates, or other things that may become a factor. The numbers they show are just something you have to take or leave.

Nickel Steamroller’s Lending Club portfolio analyzer does a better job of giving you an idea of your actual ROI.  Basically the analysis tool with give you an estimated ROI after you download all your notes from your Lending Club account and upload the .csv file. It will go through you notes and give sell recommendations, show duplicate notes and highlight notes that are below Lending Club’s average return (so you can sell them on the secondary platform). It will even give you a fun little map showing where your loans are (see mine above).

In looking at my returns on the analyzer, my actual return according to the site will be closer to 10.68%. It also gives me quite a few sell recommendations, particularly on some of my older lower interest loans that I did when first starting out. Those particular loans tend to be grade A or B, and have interest below 8%.

lending club analyzer

Evolving Lending Club Strategy

Here’s the basic strategy I’ve been using with Lending Club since I started investing. The strategy has changed a little bit over time to include more low grade loans and a few loans with higher balances.

  • Less than $10,000: I believe I’ll still be sticking with mostly loans below $10,000. Lower amounts mean higher likelihood of payback of the loan.
  • Zero delinquencies: Again, I may fudge slightly on this one, but I still want it to be very few or zero delinquencies.
  • Debt to income ratio below 20-25%: I like to invest in loans where the borrowers have a lower DTI ratio, and preferably have higher incomes. I’ll try to keep this as is.
  • Good employment history: I like loans with a decent employment history of at least 2 years, and a decent income.

So that’s what I’m doing with my Lending Club portfolio right now, and how I’m investing.

Not ready to invest, but looking to consolidate debt or pay off a high interest credit card? You might want to consider borrowing from Lending Club. Check out my post on borrowing from Lending Club.

lending club signup

Are you currently investing in Lending Club? How are your returns looking? Tell us in the comments!


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Last Edited: 10th February 2014

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Comments

    Share Your Thoughts:

  1. Jebidiah says

    In my opinion, silver is the best investment out there. There are dozens of reasons why I believe this, but here are a few:

    The natural ratio of silver to gold within the earths crust is 16:1. This is what it has been through most of history. If silver were to ‘correct’ today, the price would skyrocket to ~$111/oz. Silver is historically underpriced right now at a 54:1 price ratio.

    Silver is consumed, where as gold is used only for currency. Silver is used in electronics, photography, solar panels, and other industrial uses. Because of this silver is often ‘thrown out’ and never recovered, thus shrinking the silver to gold ratio even further.

    The majority of central banks are going through some form of easing. The devaluation of paper money leads to an increased value of precious metals.

    And so on, and so forth…

    • says

      Silver is somewhat an investment but more a form a money. You are mistaking an adjustment in the exchange rate (because of debasement) as a way it’s increasing in value. While it’s great to own and for it to go up in price, it’s not a return in the sense of a stock increasing in value.

  2. Noah says

    I highly recommend checking out LendStats.com to check out the past trends among all borrowers. Using it I have constructed a fairly strict filter that usually only presents me with a dozen or so loans among all possible loans when I have enough to buy another loan. Using this formula, I haven’t had any defaults (one loan did go into past 31 territory but came back into current) out of 135 loans. I’ve also managed to keep the rate above 15% for the last 3 months.

  3. Noah says

    I see that the majority of your loan balances have been paid off. What was your maximum LC rate? I know that interest rate is amortized and so 15% of $25 is much different than 15% of $1 toward the end of the loan.

  4. says

    Individual investors need to realize these are unsecured loans the equivalent or lower than junk bonds. They are untested, having never gone through a major economic downturn, delinquency rates could soar in a recession or depression. Lender beware!

    • says

      Ken,

      They certainly have gone through a major economic downturn. What was 08-09? Related to this subject please expand your statements with data to prove this statement is false. The historical data shows otherwise and is available on lendstats.com

      Otherwise please stop repeating the same comments related to Lending Club every time someone writes about them. It’s fine you have an opinion against them, just back up your opinion with facts on the matter.

      • says

        I didn’t mean to offend anyone. In my opinion, peer to peer lending was too new and not enough loans to be be counted as “going through a major economic downturn”. I believe investors should should understand there are risks to these loans. Apparently, that offends some people.
        I’m not saying someone should not invest in these loans. Sometimes it is appropriate to invest in junk bonds; I do. I just think people should understand the risks. These are unsecured loans; that is the facts!
        I apologize to Peter, who runs a great blog, for apparently causing a problem with some that don’t like hearing a opposing opinion.

  5. says

    Those returns are great! I’ve been itching to jump into Lending Club and I think I will here in the next few months. I was going to start taking a percentage of my online income each month and throw it into there. However, we’re trying to go on a small vacation next month and therefore I will be using the funds for that. :) Hopefully in December or January I can start though!

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