Lending Club has now been around for just over 5 years, and as of November of 2012 has originated over $1 billion dollars in personal loans given to borrowers. That's quite the meteoric rise for a company and investing platform that didn't even exist a few years ago!
Now that Lending Club has been around for a few years we're starting to see some trends when it comes to performance of Lending Club investments versus the performance you'd see in the stock market. In a recent post Lending Club compared their average returns with those of the S&P 500 over the past 5 years, as well as a representative High Yield Corporate Bond ETF.
What you can see from the data is that Lending Club Notes have had higher total returns, higher average returns, and higher minimum returns than the S&P 500 and a representative index of high-yield corporate bonds.
True, there weren’t any massive one-year returns with Lending Club Notes, but neither were there any one-year slumps. Instead, over the past five years, Lending Club Notes have provided consistent returns for investors from 8.5% to 10.1% annually.
In fact, 93% of Lending Club investors with 800+ Notes earn net annual returns between 6% and 18%, and 100% of investors with 800+ Notes have experienced positive returns. (800 Notes can be purchased with a minimum investment of $20,000).
After A Bad Few Months, Lending Club Returns Now Near 11%
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.
So how have my returns been doing since my last update a few months ago? Last summer my Lending Club returns topped 12% for the first time. At one point my returns were north of 12.22%, definitely better than any returns I've seen in my 401k or other investments over the past few years.
After I topped 12.22% in my net annualized return last fall, however, I started to have a few loans go late. I knew that with my investing strategy of investing in more low grade, higher interest loans I should expect to see a few charged off loans here and there. Up until a few months ago, however, I'd had only one loan go bad over several years. I guess I was lucky, because in the past few months I've had several all at once.
First, I had one of my borrowers die, and his loan was quickly charged off. Then a glut of 4-5 others went late. I'm now at a point where I have a total of 7 charged off loans. I guess they come in bunches.
Even with the defaults, I'm still seeing decent returns and my losses were somewhat mitigated in that several of the charged off loans had much of the balance paid off already.
- Net Annualized Return of 10.83%: My last few Lending Club reports have showed increasing returns with my Lending Club account, and since my last report I had several charged off loans. So my net annualized returns have gone from 12.22% last fall to 10.83% today. My returns are still up from the 10.53% it was a year or so ago.
- Number of defaults. Seven charged off, with 2 late: I've got 7 charged off loans with about $109 in outstanding principal unpaid, mainly on a couple of the non-aged loans. There is one A, two B, two C a D and an E loan charged off. The late loans are a B and a D, so if you look at the grades of my late and defaulted loans, they seem to be pretty spread out. That doesn't give me much reason to get away from my strategy of investing in lower graded loans, especially if the higher graded ones are almost as likely to default.
- Fifty loans have been paid off early: Nineteen were A grade loans, fifteen were grade B loans, nine were C grade, two grade D, three grade E and two 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 consider investing in lower grade loans.
- I’m diversified by investing small amounts across multiple loans: I've had 198 loans since joining (139 issued and current loans, 50 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 when we've finished saving up a down payment for a home.
What's Your Actual ROI?
When 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, which has recently been re-designed a bit, 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 9.93%. 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%. I'm sticking with some of them for now, but down the road I may lean more towards the lower grade loans in my portfolio.
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.
Are you currently investing in Lending Club? How are your returns looking? Tell us in the comments!