Lending Club Update: August 2012

Well, another 3 months have passed so it’s time for another quarterly progress report for my Lending Club investment.

If you haven’t read it before it, and assuming this interests you, you might want to first read my initial investment strategy, as well as my previous quarterly reports.

It’s not been a full 12 months of investing with Lending Club, and with time I’m continuing to gain confidence that my results will exceed my original goal of a 10% ROI. Let’s take a look at the current results, and then break it down. I don’t think my results will remain as high as what Lending Club currently reports, but I do think it will remain above 10%.

As you can see, my current annualize return comes out to be 14.32%. This is obviously stellar, maybe a little too stellar…  I do expect the results to drop slowly for awhile, before leveling off somewhere between 10% and 12%. This is because I’m working my way through the period of a loan where default rates are highest. During the first few months of a short term loan like this, defaults are typically very low. This is because Lending Club does first level filtering of loan applicants.  They check the borrower’s current assets, loan history, and monthly income (among other things). And in the short term, these things don’t usually change quickly. As the loan continues to age, income may take a hit, or other things in life get in the way, and this puts me at risk of default. The good news is that towards the end of the loan, default rates will typically drop back down since a borrower is more likely to find a way to pay off the loan rather than take the credit hit of a default, when they are so close to paying off the loan.

As you can see in the image above, there are currently 9 loans that are a month or more late. Let’s break this down, and see how this might impact my investments.  For the sake of being conservative, I’m going to assume all 9 loans will default. Now let’s look at the details of these 9 loans, to see where that puts me. Below is a detailed list of the notes currently between 31 and 120 days late:

 

 

The data shows that I currently stand to lose $300.07 in principle assuming all these loans default. Since my current net annualized return (NAR) already accounts for the accrued interest already paid, I won’t take that into account here. And since these 9 loans are between 31-120 days late, this means they will default over the next 3 months, meaning about $100 lost per month. Now, if we assume these 9 loans accurately represent my overall portfolio (and they do) then you can see that the average interest rate is 18.42%. So for my portfolio value of $11, 406, this means my normal interest payments are $175.11 (11406 x .1842). Subtracting the $100/month caused by defaults, I am now only making $75.11/month instead of $175, which equates to about 7.9% NAR.

7.9% isn’t bad, but it’s also not as high as I want it to be. As I’ve said before, my goal is 10% or higher. But that 7.9% also doesn’t take into account a few important factors.  First, that I have no loans that are 15-30 days late, meaning I have no more defaults in the queue (at least for now).  Of course I’ll have more, but that lowers the snapshot default rate a bit.  It also doesn’t take into account that my current NAR is 14.31%, which will take awhile to bring down.

Of course, my default rate could always go up, so this doesn’t come without risk… And because of that, I’ll continue to monitor the defaults closely to look for trends…

A less scientific, but still interesting observation is looking at my NAR over time. In February it was 14.34%, then rose to 15.34% in May, and now is back to 14.32% (although it was closer to 15% just a few weeks ago, prior to a rash of defaults). I find this interesting because it does make an argument that my rate of return is constantly fluctuating, but remains well above 10%.

 

Let me know if you have questions, comments, or advice in the comments below. And, of course, I’ll be back in November with another quarterly Lending Club update.

 

A few items for full disclosure:

1. If you sign up for LendingClub.com from this site, I get $25.  It’s not the purpose for writing the update (I would write the same article regardless of this income), but I want to be open about it.  So far I’ve made $275 in commissions this year.  If you’re one of the people that signed up after reading my results, I’d love to hear about your results!

2. While my personal results are currently good, there is still significant risk in this investment – as with any investment.  Keep in mind that my $10K investment is still only 1% of my overall investment portfolio, so this is still a relatively small personal investment.  I may go up to 2%, but probably not more.


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29 Responses to Lending Club Update: August 2012

  1. Patrick says:

    Help me with the math on the second table…I’m missing something.

    For the 7th loan, the initial investment was $50, you’ve received $10.33 in payments, of which $4.17 went toward principle and $0.80 to interest. Where did the other $5.36 in payments received go?

    • Good catch. I misrepresented that, the “Interest Paid” column should have said “Interest Accrued.” The interest accrued is the current interest accrued and is a running sum (when the payment is made, it goes back to $0). I just checked it now and the $0.80 of accrued interest is now up to $0.82 since another day has gone by. The actual interest paid so far is $6.09.

      Interestingly enough, while I was checking on your question, I noticed that the late payment for that particular loan is in processing, so as long as it goes through then this loan would be dropped from my list of potential defaults. And, in fact, 2 of the other loans are also processing payments for this month. If they go through, then my $300 in outstanding principle will drop to less than $200 in outstanding principle, and the 7.9% return would jump to 11.4%. This is exactly why I still think 10% is very achievable.

      I’ll update the table now, so no one else gets confused.

  2. I’m not sure why many Lending Club investors simply assume that they’re stuck with loans that are late. If you haven’t already, check into the FolioFN platform that’s available to investors on Lending Club. I’ve successfully used it to sell a couple of loans that went past due. Even if you sell the loan at a discount, you at least are getting some of the principle back whereas you wouldn’t if you just let them default. In my case, I was able to sell the loans while they were in the early 31-120 range for the remaining principle. I lost the accrued interest and future interest, but I removed the risk of losing the principle. It’s something to look into!
    Shane @ Beating Broke recently posted..The Higher Education Path Not TakenMy Profile

    • Yes, FolioFN is a great resource to sell off late notes right when they go over the 30 day limit. The only reason I haven’t done that is because I want to keep the statistics accurate and simple for this blog series, and trying to track my total profits & losses while accounting for FolioFN transactions seems difficult. :)

      But still, a great point, and something I’ll mention in my next quarterly update for people that want to use FolioFN in an attempt to maximize returns (of course, there’s always the chance of losing out on money doing this as well).

      • Oh, absolutely. If you sell them off, there’s always the chance that they make the loan good and continue to pay. My personal mantra with that is that I’d rather lose the 12% interest on the money, than all of the money + the 12% interest.

        Yes, the tracking would be a bit more complex. :)

        I just hate to see people lose money unnecessarily.
        Shane @ Beating Broke recently posted..The Higher Education Path Not TakenMy Profile

      • In your experience with FolioFN selling late notes, what kind of discount do you sell it for?

        So, for example, if you have a note that started at $25, is 31 days late, and has $20 in outstanding principle remaining, what percentage of that $20 are you able to get? I’m assuming it’s like a bond market, and so the more likely the loan is to default, the steeper the discount?

      • The ones I’ve sold, were only a few over the 30 day mark. At that point, I was able to sell them for the outstanding principle. e.g. in your example, I would have sold it for $20.

        Keep in mind that if the note is paid through maturity, it’s actually worth something like $23-27 depending on interest, so it’s still a discount, but you’re able to get the principle back out. Now, if it were something like 60 days past, I’d expect to have to discount it further, but I’ve never had one get that far, yet.
        Shane @ Beating Broke recently posted..Happy Labor Day, and #FINCON12My Profile

      • Len says:

        I have been playing around with the trading market for the last 2 weeks and have only been able to sell one of my late 31-120 notes for a 90% discount. My other 3 have been sitting in trading between a 30% to 60% discount. I was actually surprised that my note even sold as the lender had already went into bankruptcy. All 4 of my late notes were past 60 days.
        Have you guys had issues with notes cancelling before their actual expiration dates? I’ve noticed that any notes that i reprice get new expiration dates but end up cancelling on the original expiration dates before they were repriced.

      • From the research I’ve done in the past week, it seems like the safest option is to sell notes that are in the grace period at par. This does seem like a good option to avoid defaults, while continuing to invest in high-interest loans.

        Although I hadn’t planned on using the FolioFN platform with this experiment, I may go ahead and do that over the next quarter to see how I can maximize results.

        Unfortunately, I can’t answer you question about notes canceling prior to the expiration date. Hopefully someone else can chime in on that.

      • Len says:

        Just sold another late 31-120 note at a 30% discount but the other 2 (which are at higher discounts) seem to be sitting tight. I have read on many other blogs and comments that people are able to sell their late notes (16-30 days) at par but I really doubt that is the norm, especially when you can find some current notes at discounts. I have read that because of the volume of notes on the trading platform, that selling off a note is more or less a combination of luck and pricing strategy.

  3. Thanks for the update. I’m getting about 12% at Prosper and expects that to drop to around 8-10% over time.
    So you have 8 charged offs already? Did they impact the ROI much? How much did you charged off?
    Joe @ Retire By 40 recently posted..Say No to DebtMy Profile

    • The 8 loans charged off account for $257 lost. That includes 2 in February, 1 in April, 1 in June, 2 in July, and 2 in August. The 4 in July/August dropped my NAR from 15% to 14%, and I’ve been slowly climbing back up since then.

      The 3/month I have assumed for this article is worst case (assuming all late loans default), but if a few of them don’t end up defaulting then it will keep the trend of 1-2 defaults/month, and I expect the NAR to remain about the same.

  4. Mike says:

    I’m in month three of Lending Club and I’m still impressed. So far, everyone is paying on time and I’m pocketing a cool 19%. Melikes!
    Mike recently posted..Book Giveaway! The $100 Startup by Chris GuillebeauMy Profile

    • I think it’s safe to say you’ll see your returns drop from 19%, especially since you can’t have any charged off defaults until about 150 days (30 + 120).

      But still, that’s a great start. Sounds like you went with all high risk loans. Are you using the same filter as me, or did you come up with your own strategy?

  5. Albert Akashi says:

    Is there a place to find out when (what month) the most defaults occur? Or to correlate what month in which loans are issued results in the most defaults? This may help you determine whether or not to sell the loan, as Shane @ Beating Broke mentioned.

    • That’s a an interesting thought. I’ll download the raw data and see if I can find a trend.

      [UPDATE] The LC raw data only includes the issue date and a few other dates, but not the “charge off” date….

    • I think most of the defaults occur in the first year. That’s why they don’t calculate annualized return until after a year.
      Joe @ Retire By 40 recently posted..August 2012 Cash FlowMy Profile

    • B. Mason says:

      Al, every quarter I create a chart that tracks effective charge off month for vintages of LC loans. Peter Renton at social lending.com published the chart many many blog posts ago. Charge off starts immediately, rises faster in the first year to 18 months and then slows (but does continue to grow) until month 36.

  6. Dan B says:

    What is the average weighted rate of your portfolio? I’m guessing 18%, give or take? If that is somewhere in the ballpark, then I’m guessing that your portfolio is at least 60-65% 5 year loans, am I correct?

  7. Megan says:

    The ROI calculator on Nickel Steam Roller’s site does a much better job of calculating the return that you are getting. the NAR can be very misleading.

    • Thanks for the pointer to Nickel Steamroller, Megan. According to that tool, my “estimated ROI” is 11.10%. Now I need to do a little more research to figure out how they are calculating that. If it’s more valid, I’ll use that in my future updates.

  8. Matthew says:

    I just randomly found your site today – right after I set up my first bank transfer into my new Lending Club account. Interesting to see the results of somebody who’s been at it for awhile. I now know more exactly what I have to look forward to. Thanks for the updates! Now I need to go check out your initial investment post.
    Matthew recently posted..Google’s EMD Update – Setbacks and Moving ForwardMy Profile

  9. Guest says:

    I have just signed up with LendingClub, and have been playing with your suggested filters, but I have run into a few complications. The Minimum Open Lines filter evades me (I can only find a MAX one), the Total Credit Lines only has increments of 10 as options (so 15 can’t be selected).

    And when I do manage to get most of the filters in there, I end up with a handful of notes at best, sometimes as little as 1 note. Can this be right? How is one to diversify?

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