My Lending Club Investment Portfolio Performance

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~ ~ ~ Update: Currently earning 14.3% NAR on my Lending Club Investment Portfolio ~ ~ ~

Back in September 2009, I began investing in the social lending space with a well thought investment strategy at Lending Club.

Being a fairly conservative investor when it comes to alternative investments, I waded into the P2P Investing space very cautiously. Like many people, when I don’t fully understand the details or have little experience in esoteric investments, I approach them with an appropriate level of caution.

As the world’s favorite investor once said:

Investment must be rational; If you don’t understand it, don’t do it. – Warren Buffett

So I studied. I memorized the personal finance metrics and credit application (e.g. loan approval) jargon that I needed to know.

As you will see, I’m glad I didn’t let my preconceived notions impair my logic.

My Lending Club Return on Investment

After six months into my social lending experiment, my Lending Club ROI is 13.60%.

While I could probably squeeze out another point or two by selecting high yield, but higher risk, promissory notes, I’m quite happy with my ROI at this time.

Sticking to the Original Investment Plan

By in large, I’ve stuck my original Lending Club investment strategy reasonably well. However, there are the occasional outliers where I found the potential ROI too enticing to pass up.

No loan defaults. Check! Thus far, I have no defaults. I have had one note completely paid off by a borrower, and one borrower is habitually late with his monthly loan payment, but other than that, it’s been smooth sailing.
Outperforming the Lending Club Average Return of 9.6%. Check! I’m beating the Lending Club average ROI by 4%. I’m very proud of this performance metric, and even though it’s still early in the experiment, but I’m going to enjoy my good fortune as a “diversipicker” while it lasts.
Diversification. Check! I’ve resisted the temptation to invest $50 or $100 in what I consider the “really good notes”. I’m also shelving the idea that I need 100+ loans to be truly protected against defaults because I believe (right or wrong) that the notes I’m buying have a less than average chance of default. Only time and the borrowers willingness to repay will prove me correct.
Sticking to the investment strategy. Check minus! I’m probably being overly analytical, but around 4 out of 13 Lending Club notes did not meet all the rigorous criteria I set in the beginning. Some of the borrower metrics were just too good to pass up (e.g. 750 FICO, never missed a payment, but had a credit line utilization rate > 50%), so I deemed them an acceptable risk. Especially when paying 15.3% interest! The only note that stands out as a blatant violation of the original strategy is a “startup capital” loan at 16.35%, which was taken out by two borrowers who agreed to repay the note together. In other words, the loan had an unofficial cosigner. Both had 750+ credit scores and excellent cash flow, so I got lucky and spotted a gem that might have deserved a higher grade than a Grade E note.

Even though I’ve had good success with my Lending Club portfolio thus far, the education I’ve gained about lending money and assigning creditworthiness probably outweighs the monetary gains.

If you do this correctly, you’ll learn just as much about yourself and your own personal finances as you will about making money.

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Posted by Matt SF @ 22 March 2010 8 comments

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Mar 23, 2010
8:23 am

#1 Ariel :

Thank you for sharing the details of this, I was considering investing in Lending Club, but having worked at a bank, understood that there is more to it than simply an A through D score. I love the concept of removing the ‘middle man’. To a well educated investor such as yourself, it sounds like you do the research like you would for any stock or other investment. I would love to hear more detail about how you made your choices to invest based on which investment criteria.

[Reply]

Mar 23, 2010
11:02 am

#2 Matt SF :

Thanks Ariel. You’re correct, I do research each loan like a stock or bond, but after a while, you can quickly assign a Yes or No vote just by looking at the numbers. I imagine loan managers can do this in seconds after years of experience.

First I look for ability to repay (paycheck, employer, type of job, job history), and then take a look at the loan applicant’s finances (FICO, Debt to Income, Revolving Credit Utilization, etc.).

I wrote up a fairly detailed Lending Club investment plan when I started, but if that isn’t enough detail or you can’t follow my logic, just let me know.

[Reply]

Mar 23, 2010
10:22 pm

#3 MyFinancialObjectives :

Wow that’s awesome! I really like this post because I WANT to participate in the lending club, but my state does not allow it:(

Glad to see you are doing so well! Man I wish I could get in on this!

[Reply]

Matt SF Reply:
March 24th, 2010 at 11:16 am

That sucks. Not sure how you can fix that kind of problem. Maybe write to your state government official and ask why they don’t.

[Reply]

Daniel Reply:
May 17th, 2010 at 2:34 pm

FYI, lending club has to go through a registration process with each state. They have submitted filings in every state, however, some are slower than others.

[Reply]

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