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