Lending Club Investment Update – October 2011

I’ve now been investing with Lending Club for almost 4 months.  Around that time, I wrote about my Lending Club investment strategy. Basically, I used historical analytic data to filter out loans that I believe will return a significantly higher return than the average.

When I began investing in Lending Club, I decided I would invest $10,000 to see what kind of returns I can get.  If, after 1-2 years I find my returns to be sufficient, I’ll increase my holdings to $20,000.  I doubt I’ll go beyond $20,000 in Lending Club, but I’m not completely ruling it out.  It’ll depend on my returns, as well as what other opportunities for investment that I find.

My stretch goal is to achieve a 15% CAGR, although I consider anything over 12% a big success.  10% CAGR is a passing grade, and anything under that will be considered a failure.  Given the inherent risks of P2P lending, I won’t be satisfied with a return of under 10%.

4 months later, I’m happy to report that with my initial investment strategy for Lending Club I’m returning 15.67% net annualized return.  This puts me in the 91st percentile of Lending Club investors.  But before you get too excited, let me provide a caveat: This value will likely go down rather than up.  The reason for this is because I have 0 defaults on 221 loans.  This is to be expected, given that very few people default in the first few months of a loan.  In fact, the most common time to default on a loan is between 1/3 and 1/2 the loan duration.  It’s at this time that I’ll see the true test of my strategy.  Unfortunately, that’s a long time away.  People don’t default early because they have good foresight into their expenses and income in the near future.  They don’t default late because they have too much invested.  But at 1/3 of the way through the loan, they are most tempted to default.

Still, I’m happy to see that all my loans are on schedule.  Lending Club reports loans that are 14-30 days late,and those that are 31-120 days late.  While most in the 14-30 category do eventually get paid (25% default rate), the ones in the 31-120 day category have a significantly higher probability of default (45%) – see here for details.  Luckily, I don’t own any notes in these categories.

One thing I’m seeing with my strategy is that it takes patience to get all my money invested.  Because of my extensive filters, I generally only have about 6-7 notes per week that I can buy.  At $25/note, that’s $150/week.  Trying to invest all my money will likely take more than a year.  One thing I may consider is increasing my loans from $25/note to $50/note.  If I do, I’ll let you know.

I know a few people have jumped into Lending Club (I know this because I was paid a small commission) – I’m curious how you guys are doing. Let me know in the comments.

Note: As mentioned above, if you invest in Lending Club after clicking from my site, I do receive a commission.  Lending Club is obviously a service I use, and so far it’s a product a support.  If after sufficient time I decide I no longer support the service, I will remove any affiliate links which pay commission and I’ll notify my readers of my reasons why.

15 Responses to Lending Club Investment Update – October 2011

  1. Nice job! I’ve used Prosper for years and loved the return.

  2. Anthony says:

    Thanks man, your Lending Club posts are insanely helpful. When I sign up, I’ll make it a point to use your affiliate link. Much appreciated.

    • It’s good to hear that this posts was helpful. When I finished writing this post, I almost didn’t publish it because I wasn’t sure how useful it was. But I also want to keep people informed on my own progress, so they can best judge whether to jump in or not.

  3. Thanks for the update! I’ve signed up with Prosper but I haven’t gotten into it yet. Maybe I’ll try Lending Club. Any thoughts on the comparison?

    • I don’t know much about Prosper. When I started looking into this 4 months ago, I found horror stories online of people losing 5%+, but these stories were all 3 years old before Prosper underwent significant changes.

      I do know LendStats.com also has data for Prosper, so you could probably try similar filters to see how it performs.

  4. Neo says:

    Lending club seems very interesting. I certainly understand that there is a certain level of risk mitgation through diversification. But I think you may find that the correlation effect might override the benefits of diversification. I have not looked at the credit rating model that is used to gauge the credit risk of each of your borrowers, but let’s hope the AAA’s are really AAAs… If so, you will come out on top

    • Yes, the correlation effect may very well override the benefits of diversification, but if that’s the case it does no harm. Better same than sorry with a new investment.

      I’m probably overdoing the diversification at this point, which is why I’ll likely switch to $50 investments.

  5. Thanks for sharing your progress with Lending Club. We have talked about the possibility of investing in Lending Club at some point in the future, so it’ll be great to keep up with your experience.

  6. acroyear says:

    i did this experiment already .. wasn’t impressed – here’s my experience (w/ Prosper).

    From Mar 6 2007 to Apr 28 2008, I made loans on Prosper.com .. total of 45 notes (all 3 yr term), ave note was $80. Credit grade of borrowers ranged from AA to B (10 AA; 16 A; 19 B). In 2008, I stopped lending (economy was cracking up). 3 years later, the last note was paid off .. here are the dismal returns :

    8 notes were charged-off (went to collections and/or BK filed) (equal parts AA,A,B failed to repay). Total loaned : $3,585 Total repaid (with interest) : $3790. If I had invested $3,585 all at once and rec’d this return, the ave annual return rate would be 1.86% – not too good since the loans ranged between 7% and 12% interest (i thought I should get somewhere around 3% annually).

    • From what I’ve read, Prosper entered a quiet period in October 2008 to get their act together. At that point, they improved their auditing of loan candidates – and were then audited by the SEC.

      My understanding is that the default rate was astronomical prior to this because Prosper was focused purely on marketing and loan origination, not on vetting candidates to ensure low default rates.

      So your experiment might have been a case of bad timing… I’m hoping that’s the case, anyways, because I’ll be pretty disappointed with 1% returns.

  7. Squirrelers says:

    That’s an enticing rate of return. I’ve thought about this in the future, so it’s always interesting to see tangible results like this. Yes, there are inherent risks, but that’s a good percentage return. There are inherent risks in the stock market too, as we know, and that historically pays several percentage points less than that.

  8. Shane says:

    Can you explain the tax side of p2p lending? I have heard horror stories that come tax season it is a document per note and quickly becomes a headache.

    • This is what I’ve heard as well. My understanding is that starting in 2008 Lending Club sends a per note 1099 on notes that earned more than $10 in 1 year. Unless you are buying notes of greater than $100 you are unlikely to get a 1099.

      Because of this, I will have to look through my reports, calculate the interest paid out, then deduct any fees (as investment expenses). Although somewhat inconvenient, I also won’t worry about getting it correct down the the penny if it’s confusing – since there is no 1099 then it’s not very auditable. In fact, you could likely get away with paying no taxes (illegal), but that’s not what I plan to do.

  9. jump says:

    Just came across your blog from MMM. I’ve been experimenting with LC for about 2 years now, with a small amount of money. Annual ROI: 11%.

    I’m only invested in 10 active loans right now (3 paid off early) and if one defaults it will kill my ROI to the point of hopefully breaking even. I’ve resorted to just re-investing in A and B loans with any interest/principal payments I make. So far, after 2 years I haven’t had any defaults, although 1 loan missed a payment which makes it always show up as 30 days late. Risk would, of course, decrease with 200+ loans, but I still see ROI taking a big hit if there is a default. LC now has approved loans, which I always add to my filter as well.

    All in all, not a terrible investment strategy, but not one I don’t see myself putting large amounts of money into.

  10. […] this interests you, you might want to first read my initial investment strategy, as well as my previous quarterly […]

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