Steadfast FinancesLending Club Update: Earning 15.6% NAR on Peer to Peer Lending Investments

Lending Club Update: Earning 15.6% NAR on P2P Lending Investments

Filed in Banking , Investing 101 , Lessons Learned , Peer to Peer Lending 24 comments

~ ~ ~ April 2011 Update: Shutting Down My Lending Club Investments over Q&A Change ~ ~ ~

 

My Lending Club investment portfolio is continuing to look fairly impressive as we close the books on 2010.

Summary

  • Net Annual Return is up to 15.64% NAR. My highest observed NAR was 15.69%, but as of today, I’m up 61 basis points or 0.6% from last quarter.
  • Zero defaults or charge offs. However, the day is certainly fast approaching (one Ch.13 bankruptcy filing, 5 notes 31 to 120 days late, 1 note 15-30 days late). Plus, no one likes a show off.
  • Risk has increased slightly to the more risky, high grade notes. The number of 15%+ notes has increased by 2% (based on the percentage of Grade D notes and higher) from last Lending Club update.
  • The 5 year vs 3 year note percentage has increased slightly to 62% vs. 38%, up from last quarter numbers of 55% vs. 45%.
  • Lending Club “investment club” has ~45 people.

Detailed Analysis

For those who want to look under the hood and kick the tires a little bit, here’s a more detailed look at the what’s, where’s and how’s.

  • Investor Performance. Based on Lending Club’s metrics, I rank in the 91% percentile of investors in the $5,000 to $10,000 range. For how long this performance lasts, I have no idea considering a few defaults and/or charge offs are lurking around the corner, but a 90%+ NAR performance is personally rewarding since I spend quite a bit of time on the LC database running filters, asking borrower questions, going above and beyond in the due diligence arena, etc.
  • Account Balance. The total balance is up around $2000 because I invest anywhere from $100 to $150 per week. This is a hedge against my optimism surrounding P2P lending because I feel if I dump too much money into the platform too soon, I will settle for notes that might not meet my conservative criteria. Therefore, I am only investing in the “cream of the crop” notes each week that are in 15%+ NAR spectrum. If I can’t find 15%+ notes, I dip into the 10% to 15% group.
  • Portfolio Composition: Term Length. The 5 year notes present a bit more risk due to the extended terms of repayment (i.e. time to total repayment), but based on my metrics, I see little to no added risk due to the type of borrowers I’m selecting. Based on my strategy of job security, a borrower who keeps his/her job presents little difference in 3 year note or 5 year note default rate. Plus, I get an added bonus of a 0.5% to 2.0% bump in my ROI. (Note: I could be 100% wrong making these assumptions.)
  • Maximum Diversification. Per my original Lending Club investment strategy, I’m only investing $25 per note. Put simply, I put as few eggs into each basket as possible. I can think of little reason to put more than $25 into a note other than you’re high net worth investor with $20,000+ to quickly deploy.
  • Portfolio Composition: Grade. Based on the last quarter decision to focus on 15%+ NAR notes, I’ve seen a slight uptick of 2% in the percentage of Grade D, E, F and G notes. This doesn’t mean that I’m buying the super risky in Grade G notes as one might first suspect, but it means I continue to find some great borrowers in the higher Grade D through G range, if you base your investment decisions on job security as I do (e.g. a registered nurse with 5 years of experience is superior to a retail store assistant manager with 5 years on the job).
  • Late Payments / Defaults / Charge Offs. I’ve consistently had a few late payers every month, but until now, the borrowers I’ve invested in righted the ship within 30-60 days. Obviously, now that my portfolio is becoming more seasoned and I’m approaching the 300 note mark, the zero default/charge off streak was bound to end sometime. To give some description of what’s happening with the 31 to 120 days late category: 1 note is a Chapter 13 bankruptcy filing where no court ruling has been issued as of yet (borrower only made 3 payments), 2 notes are on payment plans beyond the due date, and 2 are late with no explanation and contact cannot be made with borrower.

If you have more specific questions or you want further explanation of data that I failed to include, don’t hesitate to ask in the comments section below.

Lessons Learned

I often get questions about how I invest or tips/hacks that aren’t widely published in the blogosphere.

Here are a few quick tips I’ve learned the hard way:

  1. Don’t invest too much too fast. I know the temptation of investing in something new and cool is difficult to fight, but as with most things in life, exercise some patience by easing into P2P lending. Learn the ropes, get comfortable with the concept of investing in P2P lending before investing $10,000 into your account and end up investing $1000 per person. In my opinion, that’s the wrong way to go about it.
  2. A faster way to review Lending Club notes. The LC database and filters allow investors to screen notes very quickly and are of tremendous value. However, if you are an Excel junkie as I am and you want to see some very specific data without clicking on each individual note your filters churn out, try downloading the active Lending Club loan spreadsheet method.
  3. Beware the perpetually indebted. Borrowers with a high revolving credit balance (> $25,000), borrowers with 6+ credit inquiries in last 6 months, borrowers with a leverage ratio (high debt to income), and borrowers who find themselves in a cash flow crunch. These are the borrowers who have a high probability of skipping payments, missing payments, and if too many debts pile up too quickly, the chance for a default/charge off is increased.
  4. Not all government employees are safe bets. Contrary to public opinion, a government job no longer implies more job security than a private sector job. Most municipalities across America are experiencing revenue shortfalls, and in response, they are cutting costs where they can. This means everything from teachers, police officers, firefighters, etc., are all on the chopping block. So just because you see a loan from a police officer with 5+ years on the job, he or she is not a sure thing.
  5. Anyone can file for bankruptcy protection. I mistakenly believed that certain professions would avoid filing for bankruptcy more than others. My first bankruptcy filing (a Chapter 13 bankruptcy) was actually filed by a dual income couple of law enforcement officers. I thought that law enforcement would have never filed for bankruptcy unless absolutely necessary, but being that they filed after making 3 monthly payments out of 60, it makes for an interesting “they knew how to game the system” conversation.

If you have a lessons learned experience to share, please let the group know.

The Lending Club Investment Club

As a few of you know, I head up a pseudo “investment club” via an email list where a few of us (e.g. around 45 investors to date) share ideas and highlight individual notes that we believe will pay off in full plus interest. This isn’t an official investment club per se, but it’s a quick and easy way to use groupthink and crowdsourcing to hash out ideas, expedite the investor learning curve and identify notes that a single individual might miss.

If you wish to be a part of the investment club, please let me know in the comments section below or send a quick email using the contact page with whatever questions you may have.

 

Quarterly Lending Club Investment Portfolio Updates

April 2011 Update: Shutting Down My Lending Club Investments over Q&A Change

December 2010 Update: Currently earning 15.6% NAR on Lending Club investment portfolio.

September 2010 Update: Currently earning 15% ROI on my Lending Club investment portfolio.

June 2010 Update: Currently earning 14.2% ROI on my Lending Club investment portfolio.

March 2010 Update: Currently earning 13.6% ROI on my Lending Club investment portfolio.

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Posted by CJ   @   30 December 2010 24 comments
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24 Comments

Comments
Dec 30, 2010
4:19 pm

Great work Matt. You certainly are thorough which is why you have had such great returns. This is super helpful for the entire p2p lending community. I would be curious to know how much time you spend on LC every week and how long it takes you on average to decide whether to invest in an individual note or not.

Dec 30, 2010
4:39 pm
#2 Matt SF :

Thanks Peter. Right now, I’m probably spending 1-2 hours minimum each week screening loans, asking questions to borrowers, etc.

My decision making process is fairly simple once I find the notes I like. I’ll bookmark them, and then rank them based on how well I like them. The top ones make the cut, and the rest are deleted.

The problem that I’ve ran into was trying to deploy $1000 investments (to qualify for cash back bonus awards) in the summer of 2010. I stretched myself a bit thin, and 3 of those 5 late payments are from borrowers I probably wouldn’t have touched with my current 4-6 notes to week strategy. It helps to know your weaknesses, so deploying too much money over too little time appears to be one of mine.

Dec 30, 2010
5:03 pm

I know what you mean. After a $500 test, I started with $10,000 and deployed the money in a day, so plenty of loans up to $250. I had one default at $250 and another at $200. Now, that eats into your returns. Only $25 loans for me from now on.

Dec 30, 2010
9:09 pm
#4 Matt :

Congrats on the high NAR! You sure have me beat.

Dec 30, 2010
9:46 pm
#5 Matt SF :

Thanks Matt. I’m sure the NAR will come. There is a 3-4 month time delay between your NAR to catch up to your portfolio’s “weighted average”. (You can find this when you checkout all of your notes via the summary screen.)

Once the borrowers begin the repayment process, you’ll see the NAR number tick upward… if you’re investing in higher NAR notes of course.

Dec 30, 2010
10:23 pm
#6 Dan B. :

I’m not using the NAR for reasons I’ve gone into previously & also because it doesn’t reflect any gains/losses on the trading platform.

As of 12/30/2010…..526 active notes (85% 3 yr term)
Current……………522
Late 31-120………..4 (2 of them on payment plan)
Charged off in 2010…….4 (totaling $83)
Account balance 12/30/2010…….$11,686
Average monthly balance for 2010…..$8750

Interest earned in 2010……..$886
Trading platform net earnings….$49 (126 notes sold)
Bonuses earned…………..$100
TOTAL EARNINGS 2010………$1,035
Less Chargeoffs………….(-$83)
Less LC Service Fees……..(-$44)
NET EARNINGS for 2010…………….$908
REAL WORLD RETURN……………….~10.4%

Dec 31, 2010
8:55 am
#7 Matt SF :

So a default or charge off doesn’t affect your NAR? I haven’t gone over the actual Net Annual Return equation yet, but if it doesn’t account for a “true” return on investment (ROI) it might be time to come up with our own.

Don’t want to upset the powers that be of course, but Lending Club is pretty responsive to suggestion.

I was thinking something like: theoretical annual return vs. real world return. The former calculates what happens in the realm of Never NeverLand where everyone pays their bills on time, and the latter takes into account for real world defaults/charge offs.

Much like a chemist calculating theoretical yield vs. experimental yield, such calculations are incredibly useful for process improvement, process development, six sigma investigations, etc. (Totally just let my biochemist geek flag fly with this one.)

Dec 31, 2010
10:11 am

Matt/Dan,

The NAR does take into consideration defaults. I know this from experience when my NAR went from 9% to 3% overnight in the early days of my investment with a $250 default. Here is the paragraph that explains their NAR:

Net Annualized Return is the output of a formula where the numerator is composed of interest received, plus late fees received, minus the 1% service charge paid. If a Note does not get paid, the interest received that period will be zero. If a Note is in “default” status, we subtract the entire principal amount of the Note from the numerator. Next, we divide this result by the outstanding principal amount of the Note for that period. This yields a fraction for the period.

My understanding is that the only reason that NAR doesn’t correspond with the real world return is that it assumes you are 100% invested in notes all the time. But there is always some cash in your account earning 0% and that is what skews the actual return.

Dec 31, 2010
12:27 pm
#9 Dan B. :

I know that NAR takes defaults into account……..I never said it didn’t. NAR DOES NOT take any gains or losses on the trading platform into consideration nor does it take into consideration the effect of idle cash, funding time, bonuses earned etc. All of the above are facts that I’ve confirmed with LC. LC contends that they are legally required to calculate returns in the exact method that they do. I’m not disputing that.

All I’m saying now, & what I’ve said in the past, is that the number isn’t remotely “real world”. I’ve said this exact thing to LC directly & no one at LC disputes my statement either……..because there’s nothing to really dispute.

As for my own method of computing returns, please keep in mind that I got a D in the only accounting class I was ever forced to take. No offense to accounting types, but I would have rather be boiled in oil.

Nevertheless, my personal numbers are all factual with the exception of the last one, which is my estimate. I’m way more concerned with what I “earned” minus fees & defaults than any ROI type number regardless of how one calculates it. But it doesn’t take more of a quick eyeballing to see that my real world ROI will fall somewhere between the 9-11% range.

Dec 31, 2010
7:51 pm
#10 David :

Dan-

It’s not really necessary to mess with calculating your trading returns or interest returns or Lending Club fees or anything like that. All the data you need is the value and date of every deposit and withdrawal you made to your account, and the account’s value as of now. You can then just plug it into Excel and use the XIRR function. Excel then calculates the your ROI for you. Here’s a sample Excel sheet some people use with their Prosper accounts (the principle is obviously the same with Lending Club accounts):

http://www.prospers.org/wiki/images/Prosper_XIRR_and_Loan_Age.xls

Jan 2, 2011
12:58 pm
#11 Dan B. :

Thanks David.

Jan 2, 2011
2:10 pm
#12 Ben :

Dan, I’m curious, how do your NAR and the number calculated using this spreadsheet compare to the 10.4% you calculated above? Is the difference really that large?

Also, is the profit you made on the trading platform due to buying and then selling at a higher price, or just selling loans that you invested in at a profit? Do you have any tips for using the trading platform based on your success?

Jan 2, 2011
3:47 pm
#13 Ben :

Matt, could you give us a more detailed picture of the loans that are late or in bankruptcy? Looking at the original loan descriptions, do there seem to be warning signs? Did they answer lots of questions, were they evasive or incomplete in some way, etc.? I’d be curious to see those loan ID’s.

Jan 2, 2011
4:44 pm
#14 David :

Hey Ben, I’m (obviously) not Matt, but in the majority of cases I’ve seen there is an obvious warning sign either in the original loan description, or in the first 6 months of activity (plummeting credit score, lender contacting Lending Club multiple times, multiple grace period and/or late payments, etc). There are a few “out of the blue” cases as well, but I wouldn’t say much more than 10-20% of defaults are these.

I would highly suggest browsing through defaulted loans with the loan search engine available at http://lendingclubstats.com/tools/loan-search

It’s quite edifying to browse through descriptions of already defaulted and charged off loans, to accustom yourself to the common “warning signs” of possibly unreliable borrowers.

Jan 2, 2011
4:45 pm
#15 Dan B. :

I haven’t used the spreadsheet above yet. My LC NAR is at 9.85%
The profit on the trading platform was from selling notes bought regularly at an average 2% premium. Most of the notes I sold were 6 months or older with declining credit scores……..so yes I was as surprised as anyone that it was easy to unload & make a small profit.

Jan 2, 2011
8:33 pm
#16 Matt_SF :

Looking back, yeah, there seems to be a few indicators to watch out for. (I included the link to note as an example of what I’m talking about.)

1) Borrower admits cash flow problems. Monthly income from primary job is a little low.
https://www.lendingclub.com/browse/loanDetail.action?loan_id=542243

2) Nothing seriously wrong with this one; borrower forgot to pay late fee and is still “late” until account is corrected.
https://www.lendingclub.com/browse/loanDetail.action?loan_id=465434

3) Borrower touts himself as a “trustworthy management professional”, and also had 3 delinquencies in past. Seems like the type to check their mail twice a month and/or avoid calls.
https://www.lendingclub.com/browse/loanDetail.action?loan_id=561707

4) Firefighter who has been late several times, but nothing really sticks out. Hoping it wasn’t an on-the-job injury or something.
https://www.lendingclub.com/browse/loanDetail.action?loan_id=516282

5) Chapter 13 Bankruptcy filing (no court ruling as of 12/31/10). What does stand out is the amount of reassurances and verbose descriptions going on in the Q&A section. The phrase “The lady doth protest too much” might be apropos because if a borrower becomes a salesperson rather than letting the metrics speak for themselves, that seems like a red flag, in my opinion.
https://www.lendingclub.com/browse/loanDetail.action?loan_id=521368

Jan 4, 2011
11:35 am
#17 Matt SF :

Just an update… but 2 of the 5 notes that were 31-120 days late are paid up and moved into “current” status.

Jan 17, 2011
11:19 pm
#18 Kim :

Please include me in the lending club investment club. I have had a lending club account for two years. I have had one delinquent note and 5 that have paid off early. I am interested in learning more and increasing my returns. I also live in Arizona and as such I can only buy on the trading floor. That limits my choices. I am hoping I can pick up some pointers to increase my returns. Thank you.

Feb 5, 2011
5:54 pm
#19 Mike :

Nice work here. Please sign me up for your ‘investment club’.

Feb 25, 2011
2:39 am
#20 michael :

Very interested,please sign me up or send my info so i can get invested.

thank you
Michael

Feb 26, 2011
1:34 am
#21 michael :

Im interested,Please send me more info thank you

Mar 9, 2011
2:22 am
#22 Jon :

Great writeups. Please sign me up!

Mar 9, 2011
12:50 pm
#23 Matt SF :

You got it.

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