Lending Club Update – August 2010 Performance

Time for another Lending Club update… My net annualized return recovered slightly from 9.5% in July (thanks to another charged off loan) to 9.6% at the end of August. It has since creeped a few hundredths higher.

As for my “real world” performance (calculated using Quicken) I closed out the month with a lifetime annualized return of 8.50%. As I’ve noted in the past, the discrepancy between my NAR and my real world return is likely due to the effects of idle cash.

In fact, think that my real world calculations are a bit on the conservative side. The reason for this is that I record all transactions as having occurred on the last day of the month, but money that is transferred into the account gets recorded on the date of the transfer. Thus, even if I invest quickly, Quicken thinks the money is sitting around for a bit longer than it really is.

With respect to ongoing investments, I’ve been focusing mostly on reinvesting the interest and principal repayments that I’ve been receiving. For the past month or so, I’ve done this exclusively on the secondary market, which has worked very well.

If you’re investing with Lending Club, I’d love to hear how things are going.

25 Responses to “Lending Club Update – August 2010 Performance”

  1. Anonymous

    InvJunkie……..I just thought of something. If you or I were to take their 2% bonus offer, invest in low rated 60 month notes at an avg. of 15-17%……..then hold them for 5 months before unloading them at say 1% discount……..we would net 7-8% for the 5-6 months we held the notes…………….. or an APY of 15-16%. ASSUMING of course that nothing goes late in the 1st 5 months. Yes, I agree that’s a pretty healthy sized assumption.

  2. Anonymous

    Nickel…….Yes, I’ve had a few notes go late before the 1st payment as well, but no I don’t have any stats to shed any light on how often that happens. That question was put to LC in various Web Investor conferences (when they used to have them) & they always answered that it almost never happened……..which logically makes sense.But you’re right of course that it’s not possible for something to be charged off before the 5th or 6th month even if no payments are made. And that creates a little opportunity for “fudging” with the stats…….though I have no evidence that it happens. Here’s a somewhat more annoying thing………..Have you noticed that the “default rate” has vanished from the “Statistics” page?
    There used to be a default percentage for every loan grade & then one for the whole of LC. Where did it go?

    Investorjunkie………I’ve thought about that as well & it could work if you dealt with only low to very low rated notes, then sold them at par or at a very slight discount. My gut feeling tells me that the 1% fee on sales, the difficulty in selling all of the notes using the above approach, the occasional “late” that’ll happen early anyway & the difficulty in quickly re-investing funds (to avoid it sitting there) from the above sales will eat up most if not all of the interest made using this approach. Not to mention that manually doing all this can be really labor intensive.

  3. Anonymous

    That could be an interesting investment strategy. Own only notes from 1-4 months, or some other timeframe like that. Defaults peak around 12-18 months according to some stats I saw.

  4. Dan: I’ve had a couple of notes go bad without the borrower ever having made payment so, to me, buying notes that have had at least one payment made is a good way of weeding out the total scammers. Yes, I still run the risk that a note will go bad, but at least I’m avoiding those that never had any intention of paying.

    Do you have stats on the rate of loans going late before month 4? Something to keep in mind… It’s impossible for a note to default earlier than that, as it has to be 120 days late before it’s charged off.

  5. Anonymous

    Yeah, same here……… Actually I think that the reason anyone would unload a note after 4-5 months would be to reduce risk. After all very few loans go late before the 4th month. Though I’ve heard that some investors have anecdotal evidence to the contrary.

  6. Anonymous

    Yes I also like this fact. They want to at least make sure the borrower is legit (at least 4-5 months term you mention)

    I really would need to read more of their SEC statements to speak more intelligently on them. I only did a quick back of the napkin estimates.

  7. Anonymous

    As of June 30th LC holds over $20 million in self funded notes or 15% of all loans they’ve funded since they started June 2007. It makes perfect sense for them to self fund……..since they make 2-4% origination fees on each loan. Then they can collect interest on the loans for 4-5 months before unloading them at a discount. I mean if we could collect that type of fee upfront, we would borrow money to finance funding them too.

  8. Anonymous

    Actually, I doubt that they can get a bank loan at a lower rate because if they could they wouldn’t be borrowing money at 10% like they have with their previous round of financing.

  9. Anonymous

    Also keep in mind the debt their bought can be considered an asset. Unlike other expenses the money didn’t go up in smoke.

    They can sell it in the foliofn market OR could even get a bank loan (at a lower rate) and arbitrage the difference. The worst case, they slow down or stop buying notes also.

  10. Anonymous

    CORRECTION……….Ok according to the last 10-Q from June 2010, their self-funding ate a little over $1 million……so you’re looking at $4-5 million annually. So they should burn through their last round of financing in 2 years.

  11. Anonymous

    So that means it doesn’t include the money spent on self-funding loans. The last time I looked into it, I recall seeing that they fund 15-20% of monthly loan volume. So that’s around $1.5+ million each month right there. Now I know they unload some of that on the trading platform but I’m guesstimating that they’ll burn through that 25 million in financing in 15-16 months at the current pace……..not 3-4 yrs.

  12. Anonymous

    And that is why it’s important to understand all the different risks involved here & not to confuse this investment as being something that is “like” a cd……….which a lot of people do. Also, it’s important to periodically monitor the health of the company which one can do by looking at their 10-Q.

  13. Anonymous

    I am pretty happy with lending club myself with very little invested but the below answer freaks me out of investing with them more money. I understand that like all investments theres risk involved but i dont know if the openess exists in what goes behind the scenes at lending club unlike a equity stake in a opublic company where you have lot of people researching and reporting everyday on financial health. Any thoughts ?

    What happens if Lending Club goes out of business?
    In Investing on December 28, 2009 by carlos Tagged: Lending Club, P2P lending

    A reader recently emailed Five Cent Nickel about what would happen should Lending Club goes out of business. In its prospectus, LC devotes a paragraph to the scenario.

    Q: If Lending Club were to become subject to a bankruptcy or similar proceeding, who would service the member loans?

    A: We have executed a backup and successor servicing agreement with Portfolio Financial Servicing Company (“PFSC”). Pursuant to this agreement, PFSC stands ready to service the member loans. Following five business days’ prior written notice from us or from the indenture trustee for the Notes, PFSC will begin servicing the member loans. If our agreement with PFSC were to be terminated, we would seek to replace PFSC with another backup servicer.

    If Lending Club begins suffering a long, slow drown-out death, you can bet there will be a “borrower run,” where the many of those who owe money will renege on their debts. LC can implement punishments and issue warnings to people who skip payments, but some people will grab any sign that gives them reason to think they can stop paying. And just like a bank run, the dynamic becomes self-fulfilling: As more and more debtors forgo payments, the microfinance entity loses solvency, giving more reason for more debtors to forgo their payments. The Economics of Microfinance says this exact scenario has occurred in countries.

    This would also mean that note owners would start selling off their notes on the marketplace. Supply, provided by creditors wanting to cut their loses or not deal with the unknown PFSC.

    If LC shuts down overnight, and the third party assumes ownership of the debt, then the new third party would likely be cutting their losses on the debts and be willing to settle the debts for a mere fraction of their original value. The new third party would not likely be eager to repay the borrowers.

    Also important is to not confuse being the owner of a LC note as being a shareholder. These notes are not securities; they are not SIPC insured. A note owner has no ownership stake.

  14. Anonymous

    I started to make a transfer into my LC account a while back and noticed a panel advertising a 1-1.5% bonus if you set up automatic monthly investments. I signed up for the program only to find you can’t get the bonus unless you invest at least $200/month. I was annoyed that you can’t see this requirement until you’ve already enrolled your account into the program. Now they send me emails every few weeks asking to finish the process and set up an automatic investment.

    My account is still fairly small. Only 9 notes so far. I’m slowly ratcheting up my investments to $100/month, then see what I want to do from there. I have not had any charge off yet or go late. I’m hoping the trend continues. With my smaller pool of loans a single default will be fairly devastating to my portfolio. My NAR is around 12% according to LC.

  15. Anonymous

    Some comments first………36 month notes are getting very scarce. It wouldn’t surprise me one bit if 60 month notes become 75%+ of notes offered by the end of this year. We’re almost there as it is. I’m not pleased about this development as I don’t like the 5 yr time frame for various reasons, some of them admittedly personal. Regardless, it’s getting progressively more difficult to find decent notes regardless of the term.
    Also, for those of us who keep track of the “little things”, I found it especially interesting to see that LC clearly self-funded a bunch of notes on Sept. 30th. How do I know this? Simple really……….Through Sept.29th, total loans for the month was around 8 million (way below last months pace). By end of the following day Sept 30th, an additional 4 million was funded & the platform was momentarily down to the low 60’s in total loans available. Normally & recently it’s been in the high 100’s to high 200’s. So, clearly LC went in on the last day & did a little window dressing to bring the monthly total up to 12 million (which is what they did last month) I’m not suggesting that they funded the whole 4 million, but I’d eat a bug if their hand didn’t account for a nice chunk of it………
    Performance wise……..through end of Sept. 2010. I’m now at 11 months with LC, though my average note is more like 9 months old. 440+ notes with 1 charged off, 3 currently late. 12.85% return according to LC. I’ve bought 15 of the above on the secondary market & have sold at least 35 there as well……..mostly at a slight discount (under 2%) as they were about to go into “grace”. I’d eat an even larger bug if less than half of those sold didn’t go “late”. Beyond that who knows, but then they’re no longer my problem. Nickel, you’re about 5 months or so ahead of me on the curve, so pls. keep up the updates & give as much details as possible. I’d like to see what might be coming down the road for me. Good luck!

  16. Anonymous

    Nickel, I thought as you did that the NAR included the idle cash, but after emailing a senior manager with LC with that question, this is what he said:
    FYI, let’s discuss how our Net Annualized Return is calculated if you would like. It does not factor cash into the equation so I want to be sure we clarify that for you.
    I’ve been with LC for over a year and have loved it so far. I am slowly making it a larger portion of my overall portfolio. Like you Nickel, I have gotten into purchasing notes on the trading (secondary) market with LC, which enables me to see a payment history, although it can be slightly more expensive.

  17. Anonymous

    Apologies, forgot to hit the “notify me” button below. Wanted to get followups because I have found the LC discussions here following Nickel posts are of great value/interest.

  18. Anonymous

    Investing since January, currently with 70 notes, no secondary trading (so far)…
    64 current
    5 fully paid
    1 31-120 days late
    Lending club estimated NAR of 11.56%. Haven’t done my own calculations in a while.

    My plan for now is to continue to put about $500/quarter into Lending Club, spread over a number of deposits so you are not forced to stretch to find a bunch of notes all at once, and to monitor and reconsider that plan quarterly.

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