I‘ve been investing in Lending Club for several years now, and over the years I've seen my returns go up and down. Despite a few defaults I've never really seen my returns dip below 9-10%. Those kind of returns are nothing to sneeze at.
Lending Club has gone from the new kid on the block with an untested business model, to the biggest player in the peer-to-peer lending arena, being recognized for their revolutionary investing model. In January 2014 they originated over $258.4 million in new loans! Even Google is recognizing their potential as they recently bought a minority interest in Lending Club.
It's been a while since I did an update on my portfolio's performance. Admittedly, it's not as big of a portfolio as I'd like, but now that we've closed on our house and paid our 20% down payment, we're ready to start investing more. Before we jump in, however, let's look at some Lending Club news.
Lending Club #5 On Forbes Most Promising Company List For 2014
Over the course of four months we reviewed hundreds of applications from businesses across the country. The final assessment is based on growth (both in sales and hiring), quality of management team and investors, margins, market size and key partnerships. Then we spoke to each company to make sure we didn’t miss anything. Producing a ranking in the opaque world of privately-held companies is never easy. But we’re confident that many of these are the IPOs and billion-dollar acquisitions of tomorrow.
Lending Club Returns Back Up To 11.46%
In the last year or two my Lending Club returns have had some hiccups, as I've had a slew of charge-offs and late loans.
My returns about a year and a half ago topped out at 12.22%, and since my charge-offs happened the returns have dropped below 11%. Over the past year, however, the returns have slowly been improving to the point where they're now back up to 11.46% as of this month.
If you view the new “adjusted net annualized return” numbers that Lending Club includes, that accounts more for the late and in default loans, I'm still around 11% returns. Still not too bad, and better than my other retirement accounts.
Since I started with Lending Club I've had 11 charged off loans, and have another 5 loans in default or late.
- Net Annualized Return of 11.46%: After being at a high of 12.22% a year and a half ago, and a recent low of about 10.83% last year, my returns are back up to 11.46%.
- Number of defaults. Eleven charged off, 1 in default with 4 late: I've got 11 charged off loans with about $176 in outstanding principal unpaid. There is one A, three B, three C, two D and two E loans charged off. The late loans are three Cs and two Bs, so if you look at the grades of my late and defaulted loans, a majority of the charged off or late loans have been A-C grade (12), while D, E and F grades have only had 4 charge-offs or defaults. Interesting.
- 99 loans have been paid off: 37 were A grade loans, 30 were grade B loans, 10 were C grade, 7 grade D, 10 grade E, 4 grade F and 2 G. 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 consider investing in lower grade loans.
- I’m diversified by investing small amounts across multiple loans: I've had 247 loans since joining (130 issued and current or funding loans, 99 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, and won't be until later. Now that we've closed on our house and will soon have a re-funded emergency fund, we'll be able to get cracking on investments again.
What's Your Actual ROI?
One thing Lending Club and Prosper have been criticized for in the past was that their numbers showing your return on investment were overly optimistic, and that they didn't take into account the age of loans, future default rates, and so on.
Lending Club has recently made updates to their site that means you can now view an adjusted net annualized return that will take past due notes into account, and give you a more realistic number. I think I mentioned that my returns on the adjusted value were 11% instead of 11.46%. So ROI is slightly lower when taking into account those past due notes.
Nickel Steamroller's Lending Club and Prosper portfolio analyzer, has recently been re-designed quite a bit and now allows you to take an in depth look at both your Lending Club and Prosper accounts. It does a much better job of giving you an idea of your actual ROI.
In looking at my returns on the analyzer, my actual return according to the site will be closer to 10.62%.
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 a lot more low grade loans since I've actually seen a better ROI on those loans.
- 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.
Are you currently investing in Lending Club? How are your returns looking? Tell us in the comments!