It’s been a bit over a year since I started investing with Lending Club, so I thought I’d put together an overview of my experiences. For those that haven’t been following along, I first set up two test portfolios focusing on low risk vs. high risk loans.
For these test portfolios, I let Lending Club auto-select the loans. In the time since then, I’ve continued investing by selecting my own loans. Overall, I’ve invested in a total 289 notes, 20 of which have been paid off early.
Thus far, my results have been quite good, though it’s still too early to say for certain, as all of my loans have a 36 month term. As such, there’s still a lot of time for my borrowers to get themselves into trouble.
Rate of return
I’m currently earning a “net annualized return” (NAR) of 10.83%, though that number’s a bit generous, as it doesn’t consider the effects of idle cash.
According to Quicken, my “real-world” performance has been about 2% below my NAR, meaning that my actual annualized return has been just short of 8.90%. That’s still a nice return, but not quite as high as Lending Club would have you believe.
In terms of my relative performance, I’m in the 48th percentile, meaning that 52% of Lending Club investors have a higher NAR than I do.
Of course, you need to be careful when interpreting such statistics, as the numbers are likely skewed upward by the large number of new(ish) loans that have been issued, and which haven’t had time to go bad.
Defaults and delinquencies
Speaking of loans going bad… I’ve had exactly one borrower default since I started. This note was part of my auto-selected, “high risk” portfolio. To date, I haven’t experienced a single default on a hand-selected note, though I suspect that will change soon.
Overall, I currently have four notes that are 31-120 days late, though one of these borrowers is on a modified payment plan and has been making regular, albeit partial payments. I fully expect that loan to get back on track, but I’m less optimistic about the others.
I’ve dabbled with selling questionable notes to reduce risk, but have had mixed success. While I’ve been able to sell some notes, others have been impossible to unload, even with a fairly steep discount.
While defaults and delinquencies are frustrating, they’re part of the territory. Lending Club is very upfront about the fact that a small percentage of your notes will likely default. It remains to be seen how accurate their estimates are, but you shouldn’t let a small number of defaults chase you away.
Thoughts on the future
The primary downside to investing with Lending Club is the time commitment. Sure, I could just let them auto-select notes for my portfolio, but I’m just not comfortable with that.
Adding to this problem is the fact that I like to keep my notes small to reduce risk. Thus, I need to find a relatively large number of acceptable borrowers on an ongoing basis. Again… This can be a rather time-consuming process.
This problem has been exacerbated by the fact that Lending Club has recently started offering 60 month loans. While the rates on these longer-term loans are somewhat higher, I’m not crazy about the idea of stretching out the repayment period any longer than it already is. Thus, I tend to avoid such loans, further shrinking my pool of candidates.
Of course, the “low risk” portfolio that Lending Club assembled for me back at the start is performing admirably, with 100% of notes being paid on time. Thus, while I like to think that my loan picking efforts are worthwhile, maybe I just need to get over myself and rely more heavily on the auto-loan selection tools…
What about you?
If you’ve been investing with Lending Club, I’d love to hear about your experiences. How long have you been doing it? How many notes do you have? And how is your portfolio performing?
There seems to be a large number (over 100) of current notes selling at substantial discounts (>4%) right now. They appear to be LC owned notes as they only come in 3 or 4 different denominations. Just FYI in case anyone still reads this.
I’m running a $200K portfolio of nearly 4000 notes since Feb 2009 and gets 13.2% by their count. My own calculation for cash returns inclusive of fees and defaults, exclusive of accrued interest, is about 11.5%. I do risky loans, and has had about $700 in losses with just north of $5K in all late notes. I expect to do about 11% – 12% long term. I managed to liquidate about $18K of A’s & B’s on the secondary market over two month as a re-balance act. All of the loans sold were current and marked at par – but sold in a few weeks, which implies a small discount when sold. I bought about $5K worth of notes on the secondary market, at about 4% discount on average, and has since sold them at close to par in about a month. I continuously tune my portfolio and plans to grow it and keep it at $250K. The money is actually borrowed at the floating rate of 4.5% (don’t do this unless you know what your doing – I have a CFA charter and manage a pension fund for work) I’m also managing three other LC portfolios for other investors. I have confidence the platform will be the future in consumer lending, and that LC will continue to maintain their credit standards for borrowers.
Julie,
You’re doing really really well. My average note is only 8 months old (w/12.9% avg rate) & though I have close to 400 notes, I currently have 5 in grace period, & 1 late. This does not include the 3 I’ve sold through the trading platform just this month at a slight loss (2 of which are now late with their new owners)It also doesn’t include the, at least 10, that I’ve sold at 2%+/- discounts in the past months as they were about to get into trouble…………at least 4 of which did go “late” with their new owners. So whatever you’re doing you’re hitting the nail real squarely. If there was a way to PM you I would & you could teach me what you’re doing & I can teach you how not to buy notes on the trading platform from people like me. 🙂
I’ve been with LC for one year. Currently have 148 notes w/NAR of 14.29; 2 paid off early and the only one in any trouble is one of the ones I initially hand-picked (at 19.47%). It is currently at 31-120 and making some smaller payments. My inital order was hand-picked, but I’ve done a couple others which I let LC auto-select….hand-select is too time consuming for me. I’ve also stuck with the 36 month notes and would like to figure out how the trading platform works next.
BC,
You’re right, I too would like that option but I think that it is in fact changing as we speak. Because last week I noticed for the 1st time a number of identical “just issued” notes of $25 apiece selling at a small discount. Now I don’t visit the trading site more than twice a week maybe, but I’ve never seen these in amounts under $100 in the past.
Just finished 9 months with LC, now with 28 notes, 1 paid in full, none late, no defaults, and NAR of 13.58%. I hand pick all the notes, and reinvest asap. Seems ok so far.
Dan B., I have noticed the difference between premium/discount and yield to maturity, but not quite sure what causes that ? I understand that as a loan matures, more of the payment goes to principal rather than interest….but what else is at work ? Thanx
Dan B – It is interesting that LendingClub is the seller of the high-priced notes with the 2%+ discount. I’m surprised that they list them with such a high principal balance ($200+). If they would list in $25 traunches, I would buy them all day long at those discounts (or even a smaller discount).
The comments re: the “true” default rate are interesting and correct. For a 36 month loan portfolio, according to a traditional consumer loan default curve, the defaults should max out around 18-21 months into the term. This is enough time post approval for the problems to materialize and for the loans that will go bad to go bad. After about two years, the remaining notes in the portfolio are usually fine and your yield will improve again. So if you are investing in C notes (average interest rate of approx. 13%), you will see your return decline to about 8-9% around the 2 year mark and then see it improve to about 10-11% by the end of the 36 month term. People who fail to understand the consumer loan default curve may jump to the wrong conclusions when some of their notes go bad. You need 300+ notes to spread your risk — if you have fewer than 100 notes you are not diversified enough and could have significantly different performance due to random nature (better or worse). My strategy is to keep my portfolio of notes “fresh” using the trading platform to avoid the dip in the consumer loan default curve. I target good payment history and keep my portfolio of notes in the 34 to 24 months remaining range. So far so good.
Appreciate the comment, Dan B.
It’s important to note that selling at a discount & yield to maturity are 2 separate things. You can have a note which is seling at a discount & yet have a yield to maturity lower than the initial interest rate.
Also it’s not unusual for LC to list “just issued” notes at a 2-3% discount. These are notes that they themselves fund & then divest through the trading platform. Keep in mind that according to LC they fund around 25% of the total money that is loaned out. Why? So that the loans get as fully funded as is possible. Why? Because LC makes from 2-4% of the amount loaned as soon as the loan is issued. Bottom line is that this is where LC makes their bread & butter…….not the 1% they take from interest. Just food for thought & something to watch for to make sure that the underwriting standards don’t slip.
Just jumped on to the trading platform for the first time. Surprised at the wide disparity of premiums/discounts on similarly performing notes, even the same note. Just to give it a test, listed 2 notes, both with 29 payments remaining and both with “never late” status. Both with no credit change score. Priced them with a 1.6% premium. Neglibile return for me after the 1% service charge. I will post the results. There does appear to be a number of well performing notes with no change in credit score selling at a discount…which is intriguing !
What I’d like to see from LC is the status of all their loans that are into their 3rd year, the default numbers on loans of that age………..& then compare those numbers with the claimed 2.2% per annum default rate. Because I think it’s worth repeating that LC is an extremely young company & the simple fact is that they’re just estimating & projecting their future default rates. And their projections are based on someone elses portfolio & on credit card portfolios. It’s a bit of a stretch & not to be taken as gospel.
Just as a matter of record I finally am logged onto my account, so wanted to correct/clarify my status. LC lists me at a 11.17% return, their calculation so idle cash, etc. I currently have 45 notes. 1 is paid in full, 1 is 16-30 days late but on a plan scheduled for automatic transfer on 7/27 (we shall see), all the rest current.
My breakdown, fwiw, is 5 A, 23 B, 10 C, 5 D, 1 E 1 F.
I have only had Bs go at all late, which statistically makes some sense because I have so many of them.
Dan B I tend to agree with you that I don’t expect my default luck to continue. Because I am sure it is a lot of luck. But that is why I am only putting in $500/quarter and watching it develop and learning from the experience. Time will tell…
I usually start by filtering for loans with no more than 33 or so payments left (which means they’ve made at least 3-4). I don’t know how I’ll deal with this now that they have 60 month loans, but that’s an aside. Then I sort by highest discount rate.
Then I look at the actual payment history. If they’ve made all their payments on time, I’ll jump on that. If there’s some late payments I’ll delve deeper into the original loan to see what the circumstances are. If I’m not comfortable at that point, I move on.
MITBeta: How long of a payment record do you look for when selecting loans?
I just stopped counting at 300 loans that are current and selling at a discount. That’s plenty enough for me.
I’ve purchased 18 notes so far in about 11 months. 3 have paid off early, one has been late but is now current, the rest have always been current. If I had more money available I would certainly buy more notes.
MITBeta,
I understand why were miscommunicating now. I define “quality” as someone with 2+ yrs of employment, no public records, no delinquencies in 5 yrs, a DTI of under 15%, etc etc. whereas you’re looking at their payment track record. Regardless, even by your definition I’d be a little reluctant to categorize the number of current loans selling at a discount to be ‘plenty”. Then again what is plenty? 20, 30, 100? How many current notes have you purchased though the trading platform, & in what time frame? I’m not doubting you. Hell I’ve sold 2 current loans at a small discount just in the past 2 weeks. Maybe you own them now 🙂
How do you define “quality”, Dan? I define it as a note with a consistent payment record. There’s plenty of notes selling at a discount with a consistent payment record that are also current, else I would not be able to buy them.
Perhaps these notes are priced at a discount by people who don’t know any better, I don’t know. But I can say for sure they exist in large enough numbers to be significant.
MITBeta,
I hear what you’re saying but I’d love to see the raw numbers from you. One would be hard pressed to find 20 quality notes on the secondary market at a discount that are current at any given time, from what I’ve seen. Very hard pressed! Unless you’re duplicating or just buying the large $100-$200 notes that are pretty clearly LC funded notes that they’re reselling. However you;re absolutely correct regarding the funding time.
Lou,
I’m very surprised at your results with the “late” loans. It’d be interesting to have this conversation again a year from now to see how many of those that had gone late for you have gone late or worse again. Pls. don’t misunderstand, I’m not wishing anything negative for you. It’s just that I get rid of problem loans & don’t normally keep track of them beyond the month I sell them. It sounds that we started around the same time though I’m certain that your 10% return reflects a much higher quality portfolio than mine which is at 13%. So perhaps that’s part of the explanation as to our very different experiences. Thanks & best of luck.
Dan
Dan B…
I have 43 notes, all new funded investments (no purchases), in place since December or so. I have had a number (5-6) go late in that brief amount of time and all but one of them has come back to current or on a payment plan. The other one is still outstanding. Very small sample size and very early, of course, but so far they have been effective. The remaining one is my only late at this moment, and I have had no defaults (mostly Bs and Cs in the portfolio, but a few As and some lower scores).
FWIW I don’t have my rate of return in front of me (don’t log onto finance sites from my work computer), but I believe I was just above 10% before, minus whatever cash is uninvested at any given time. Overall I continue to be curious but cautious, and committed to my original plan to invest $500/quarter to slowly watch how things develop. My next step is to purchase loans, but my hope is to avoid selling except when absolutely necessary.
I’m with BC above. My state is not on the LC approved list, so I do all my investing on the secondary market. In my opinion, this is WAY better than buying new, unseasoned loans for a number of reasons: 1. Seasoning: I can see the loan history and whether the loanee has been paying, on time, etc. 2. Less idle time for my money. When I buy a loan, it typically funds the next day. Sure, I still have the accumulation down time, but I don’t have to wait for loans to fully fund. 3. Higher overall interest rate for the same risk. I made the mistake initially of buying a couple of loans at a premium, but learned that there’s no reason to do that when so many great notes are available at a discount.
If my state joined the approved list today, I don’t think I would change how I use LC. Thanks to all of you who are seasoning loans for me…
One other comment I wanted to make & perhaps someone else would care to expand on……….LC makes a deliberate point in sating that they’re able to get over half ( I forget the exact number) of the late loans back to current. None of us individually can disprove that, but I suspect the claim to be so far off the mark that I just had to mention it. Any comments?
Doing it since Nov 2009 with the bulk of loans purchased Jan-Feb 2010. Currently at 350+ loans at $25 each, 80% of which are B, C & D. The rest are A’s & E’s. I’m returning 13% according to LC. I’ve been pretty aggressive in getting rid of loans that look like they may be heading into trouble. I’ve unloaded 4 just this month & at least 12 since I started. It’s difficult to sell notes once they get into the “grace period” & almost impossible once they get to being late……..or so it seems. I tried on the first 2 when I waited til they went late. Big mistake. What you got to do is sell them just as they are about to get into the grace period or you’d have to discount heavily, I suspect THere are ways of course of doing that but it would require you to be pretty attentive to your account. So far I’ve been doing all this but don’t know if I’d be interested in keeping it up year after year. So………I don’t have defaults & just 1 late using the above approach.
I am also concerned that this could be a perfect ponzi sceme. I have about 30k invested and have had about a 9% return over 18 months or so. I stopped reinvesting and now remove whatever available cash I have.
My Lending Club update. Been investing regularly since Dec. 2009. Currently hold 168 notes which remarkably is the exact # of notes (on average) held by investors of between 5k and 10k. (from the “compare” feature). No defaults to date, and only a few late payments however in the past 4 days four notes have entered the grace period. Which hopefully is not a trend ! LC pegs my return at 10.18% I calculate it as 8.94% with the impact of idle cash.
Nickel,
I’ve been an investor in Lending Club for a little over a year. I keep investing a chunk of money every time a special bonus offer comes along, and I’m up to about 46K in about 700 loans. My “official” NAR is 12.89% at this moment (this doesn’t include the 2-3% bonuses), but I have a habit of selling off loans that I think might or in fact are going to head down hill, usually at a small loss. After all of these are factored in, I’m still at about 12%. With 700 loans, I find that at any given time about 3-5 are late, and a half dozen are in grace period. I attribute my high return to hand-picking every single loan, and to selling off shaky ones early.
Larry
I started small just to learn the ways of LC. I currently have 8 notes, with $200 invested. Not a big enough sample to talk about trends, but all are hand-picked. My first note went into the grace period on the second payment, then paid off in full. Other than that every payment has been on time.
My LC NAR is 11.9% and my account is worth ~$240 counting the $25 bonus.
Great article. Very interesting read. Thank you for sharing.
Nickel,
Since transferring funds to my linked account takes about 45 seconds to complete, I suspect that anyone who owns an appreciable number of notes (and thus would really be impacted by the effect of idle cash) could sweep money into their account on a frequent schedule.
I’m not going to take the time to calculate my “real” NAR because the difference between the reported and “real” returns on my $1,000 investment is too small to be worth the time.
@Nickel: correct I just added $500 to the account near the end of June. I’m currently at $14. I know it’s not 100% accurate # they give you, but it’s close enough to help understand my returns. I should put it in Quicken but that is also an “opportunity cost” for the time to do it 🙂
I agree about opportunity costs. The thing is if you have say over $500 sitting in your LC account, you should move it out to another income producing account. Though at current rates for other fixed income how much are you really going to earn on say $500?
The best 6 month CD is at 1.50%:
http://nowcdrates.com/6-month-cd/
Which with $500 will earn you a total of $3.74 for that six month period. With a 12% return invested in lending club you would easily recoop the difference lost in other fixed income assets.
Investor Junkie: Your screenshot shows $167 sitting idle. In other words, roughly 6% of your total investment was earning 0% when you captured that image. Sure, your checking account doesn’t pay much, but that’s not the point.
This is an investment, and you’re re-investing those funds. If you were using this as an income stream, then I could see your argument, but you’re not.
The time your money spends earning 0% waiting to get enough to buy another note, or waiting for the note to issue, reduces your return. Investment vehicles like a plain vanilla index fund don’t have the same limitation, as your money typically goes to work immediately, and your reinvested dividends likewise go back to work immediately.
The overarching point is that it’s inaccurate to say that you have a 12% return when you actually don’t. I encourage you to go back over your statements and calculate your real return. Perhaps you’re doing better than me in terms of keeping that NAR vs. real-world gap small, but you might be surprised.
Bottom line: Costs matter, and the opportunity cost of uninvested money shouldn’t be ignored if you want to make a meaningful comparison against other types of investments that don’t suffer the same sort of limitation.
@Nickel: you are correct but for a (almost) $3k portfolio, if I have $25.00 idle it’s 0.83% of my total portfolio, so at worst case it’s decreasing my return approx. 0.12% (I just did a quick off the top of my head estimate). Keep in mind also if this money is another account (ie checking) it wouldn’t count, so why should it count if it’s in your lending club account? Granted it would be nice that they put the money in a MM account while sitting there but rates are so low and of course they want you to invest in other notes.
Investor Junki: Yes, you reinvest, but if you have to wait (say) a week to accrue enough to reinvest, and then it takes (sometimes) on the order of two weeks for a loan to fund, you *are* taking performance hit. After all, some of your money will be sitting around earning 0% for upwards of three weeks. Unless you have a huge portfolio value relative to your amount of idle cash, it’s a non-trivial difference.
Hi I just updated my 1 year performance with Lending Club:
http://investorjunkie.com/2550/lending-club-performance/
Now currently at 12.09% APY according to the lending club performance. I reinvest any idle cash so the lower APY really doesn’t apply to my measurement. After the three term I plan on ending the reinvestments.
I have been hand selecting my notes since I started about six months ago. So far, so good. I feel like nickel that although I can hand them auto select low risk loans, I like to have a little diversity in what I’ve chosen. I am, however, concerned that sometimes I am trusting myself too much. I have also been putting very small amounts say ($25) in each one of the loans to spread diversity. One thing I like about LC is that it is not as liquid as say buying/selling a stock/fund/etf. Since it takes effort to sell and everything, I am more likely to just stick it out and stay with the loan. It could be frustrating though to have loans like nickel that are impossible to unload, even with steep discounts. Thanks nickel for your experiment and keep us posted!
It’s BC from Michigan – my active approach continues to pay off. I only buy notes at a discount and put every note I own up for sale at a premium. My real rate of return exceeds 20% as I have sold over 50% of notes originally purchased. I have over 200 notes. I use a lower mark-up for notes with a credit deterioration and a high mark up for notes with credit improvement. Using the trading platform intelligently is a must. I will be adding more money.
I stopped investing and reinvesting interest and principal. 338 loans over 36k invested. 26 paid off. 1 default, 7 charged off, 10 late 31-120 days. My 7.92% NAR will be a lot lower when all the late loans are charged off which is over 52% of my interest gained. The auto invest was stopped when I realized they purchased large notes which went late and then never paid. I earn about 1K a month p and i and pull out every 100 bucks that goes to avail cash. This is starting to look like a ponzi with them offering ever increasing bonus amounts for new investors. I will see my return results after I have pulled all my investment out. None of my late payment notes ever returned to good status after 30 days late. I find that people say anything to get the loan and then skip out never paying the first payment.
Storch: Yes, I agree that it’s easy enough to move the money around, but even having money sitting there earning for a month can have a substantial impact. Of course, as my portfolio has grown, the impact has dropped proportionately, but it’s still there.
Have you calculated your own “real” rate of return? If not, you should. You might be surprised as to the impact.
Just be glad you didn’t do business with prosper. I just finished up a 10 loan test portfolio ($500) and fully 5 of them will have defaulted. Two were AA loans. Definitely feels like a scam.
I’ve had a 40-note portfolio for approaching 1 year, all hand-selected with an eye toward getting above 10% interest on borrowers with no history of defaults.
My experience has been mixed at best. One borrower defaulted after making exactly one payment. Currently 3 notes are late 31-120 days, and only one borrower appears to have accepted a payment plan so I have low levels of optimism on the other two. 4 notes have been repaid in full. My NAR is currently 7.99%, but I expect it will drop precipitously if/when some of these late notes get charged off.
As of now, my experience has not been positive enough to convince me it’s worth investing more.
Nickel, one thing you always talk about with Lending Club is the effect of idle cash. My practice is to log into my account at least once a month (usually to check on my favorite late borrowers to see if they’ve communicated with Lending Club). If I see any appreciable amount of cash, I transfer it to my online savings account. It seems to me that with just a very small amount of consistent effort an investor can keep his or her money earning interest.
tom: How old are your notes?
I’m not sure what exactly I did wrong, but currently I am at a 3% NAR, with a majority mix of A/Bs, handful of Cs, and a few D/E/Fs. I had about 60 loans total ($2,000 invested).
Of those 60 loans, 2 were paid in full, and 4 defaulted!!! 2 of the 4 were A loans, 1 was a B, and 1 was a C.
I’m now trying to sell off my remaining notes. Hopefully at a small profit.
After reading several of your posts about it, I decided to give LendingClub a shot. I started about 9 months ago, and so far, I have about 50 loans. My current NAR (as stated by LendingClub) is 15.35%. I took some more risky notes, but scrutinized the details a bit. I have had one loan default, but that one was funded by the sign-up bonus, so I intentionally took a very high risk, high yield note. It did pay out about $5 or so before defaulting, so I guess it wasn’t too bad of a loss.
Anyway, so far, so good for me. I’m enjoying it. I wish they gave referral bonuses to the referrers as well, because I have talked several friends into signing up.