Lending Club had another great year in 2011, reaching a variety of milestones. They reached 400 million in loan originations in November (pushing 500 million now) – only a couple of months after reaching 300 million. They were also recognized as a World Economic Forum 2012 Technology Pioneer, a Forbes Top 20 Most Promising Company, 2011 Webby Award Winner, Top 300 Startups at 2011 fundedIDEAS and continued to receive great mentions in the mainstream media. They're becoming more and more mainstream. The word is out!
While Lending Club had a good year, the returns I saw last year were good as well, better than I saw in my retirement or savings accounts. I think Lending Club and social lending in general are a great way to diversify your savings and investments especially in turbulent times like we're going through right now. You can also open an IRA with Lending Club as well if you want to make this part of your retirement plan.
Interested in my original Lending Club Review? check it out below.
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Returns Increase To 11.23% Despite Charged Off Loan
As I begin preparing for my taxes and looking at my Lending Club taxable earnings for last year, it's clear that Lending Club had another good year. Yes, my account had it's first default and charged off loan this year, but it was the first since I started Lending Club a couple of years ago. I'm surprised I dodged that bullet as long as I did.
- Net Annualized Return of 11.23%: Up from 11.03% in November, 10.93% in September, 10.76% in August and 10.53% before that. That puts me in the 62nd percentile. My returns are higher than 62% and lower than 38% of all investors. Note: The compare feature in Lending Club account is gone from your account page now because of some problems in how it's calculated, but you can still find it here if you're interested.
- Number of defaults.. no longer zero: For the past two years I've defied the odds and I've never had a single loan default or get charged off. This past month, however, I had my first default and charged off loan. The funny thing is that the charged off loan was a Grade B loan for someone who originally had very good credit. Just goes to show that the higher graded loans aren't always the best bet.
- Twenty two loans have been paid off early: Nine were A grade loans, six were grade B loans, five were C grade, and one grade E and F. Looks like grade A loans, while they're more likely to be paid back, may also be more likely to pay of early – reducing returns. Another reason to look at including more higher grade loans.
- My account balance still going up: I currently have $2,663.59 in my account, with $231.14of that ready to invest.
- I’m still diversified by investing across a large number of loans: I've had 148 loans, with no more than $25 in each loan. That way when you have defaults like I did this month, while my returns may go down somewhat, the risk is minimized.
NOTE: Did you know that 100% of investors who have invested in 800 notes or more had positive returns. Not too shabby, not everyone in the stock market can say that!
How Do You Measure ROI?
One thing that is often talked about in the peer-to-peer lending world is how you can determine a more accurate way of knowing your true return on investment (ROI). Some have complained that the numbers on the Lending Club and Prosper sites will give an overly rosy view of what your actual or projected ROI will be, and the ways that they calculate your ROI are not standardized. They don't take into account future default rates of your loans, how young or old your portfolio is, and other things that may be a factor. It's basically a take or leave it when it comes to accepting their stated ROI on your portfolio.
One site that tries to take into account more factors when calculating actual ROI is Nickel Steamroller's Lending Club portfolio analyzer. 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). In looking at my returns on the analyzer, my actual return according to the site will be closer to 10.26%.
I think my returns are showing lower than in LC in part because I've had one charged off loan now, and a number of my loans are still relatively young. We'll see how it pans out though.
Lending Club Strategy
Here's the basic strategy I've been using with Lending Club over the past couple of years.
- 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!