Monday, May 29, 2017

Am I Making Money With Lending Club?

I have been investing via Lending Club since July, 2014, or for almost three years.  If you check out my other Lending Club posts, one thing you will notice is that my returns have steadily decreased.  It is time to take another look at whether I am making money with Lending Club.

What is Lending Club?

Lending Club is a "peer-to-peer" or marketplace lender.  People who want to borrow money apply with Lending Club, which then reviews the application and, if it approves the loan, assigns an interest rate.  Then, instead of giving borrowers its own money, Lending Club makes the loan available either to institutional investors or to individual investors via its website.  Investors can invest in as little as $25 per loan, and Lending Club advises retail investors (us normal folks) to diversify--to invest in a lot of loans for a little money rather than a few for a lot.

As borrowers repay loans, investors have their principal returned, along with interest.  It is expected that some borrowers will not repay the loans in full and the chance of that happening is supposed to be reflected in the interest rates charged.

What Return is Expected With Lending Club?

When deciding to invest, most people want to know what the expected return is, on average.  We've all heard about how if we had only invested a few dollars in facebook or Amazon all those years ago, we'd be rich now.  However, over the long run, history has shown that on average stocks return about 7-8% per year.  

This chart provided by Lending Club shows that my adjusted return, which takes into account a hypothetical write-down for past-due notes, is about 5% and that for accounts the age and size of mine that invest in notes with the interest rates I've chosen, I'm doing about as well as can be expected.  Peter Renton is considered to be a Peer Lending expert and his experience is similar to mine.

These charts from the Lending Club website show that, as things stand now, getting more than 7% or less than 3% is difficult if you have over about 300 notes, and that most people should expect returns of about 5%.  When I posted on his subject two years ago, the norm from which it was hard to stray was 8%.  Clearly something has changed.

How Am I Doing With Lending Club?

According to the charts shown above, if you take anticipated defaults into consideration, my net annualized return is 5.67%, which doesn't sound too bad.  However, the figure is somewhat misleading.  

First of all, the figure reflects the life of the account, not current conditions.  If the average interest rate of my notes is 20% and the first month all the borrowers pay, then my net annualized return is 20%.  As borrowers stop paying the net annualized return falls but it takes some time for it to stabilize even assuming that both the interest rates and the default rates remain constant, which they do not.  Put simply, the return for this month is likely to be much lower than the return for month one, but the NAR averages them, and all the other months during which the account has been open. 

Another problem with the NAR is that it does not account for "cash drag", for money that has not been invested in a note yet or which has been invested in notes that are still being processed.  If you look at the chart above, you'll see that I have $166 that is not currently earning interest and because of the way Lending Club is constantly returning both principal and interest, that figure is pretty close to what it is most days. To Lending Club's credit, they have decreased  processing time so that figure is lower than it was a year ago.  

A method of computing returns that takes into account "cash drag" is XIRR and a calculator is here. Using this calculator, my returns are 5.54% since the inception of the account.  A year ago that figure was 6.75%.  While this gives me a good picture of the account over its lifespan, it doesn't tell me how things are going right now.

On December 31, the adjusted value of my Lending Club account was $19,804.36.  Since that time I've withdrawn $2712.66 because we needed the money.  My adjusted value is now  $17273.72, giving me returns of $182.02 so far this year.  If you annualize that, you get about 2.55% per year.  While I'm not losing money, I'm clearly not getting rich.  

What Will Happen in the Future?

Who knows?  Lending Club has increased rates several times in the last year so hopefully that will help overall returns.  On the other hand, if we enter a recession and unemployment increases, defaults likely will too.  

What Are My Plans for My Lending Club Account?

Right now, my plan is to hold the course.  If we need to withdraw money from an investment account for current needs, getting over $1000 per month for a few months is easy and penalty-free.  If my current returns do not increase in another year or so, I will probably move this money into the stock market.  

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