It’s been since last September that I wrote about my Lending Club investing performance. Quarterly reviews have proven to be overkill because not much changes month-to-month. But it is still exciting for me to watch this steadily compounding income stream grow at 11%, adding diversity to my multiple streams of income. So I still want to keep you updated from time to time.
While my portfolio isn’t changing very much, the peer to peer/marketplace lending industry as a whole is.
Since I started investing in May of 2013, automation has increased its role in investing. Lending Club and numerous external services will now execute note purchases for you based on filtering criteria, making this investing activity even more passive. Another big trend is the increase of institutional involvement. Proven returns have continued to attract hedge funds and other large investors.
Also, Lending Club is now partnering with community banks and other companies and organizations. The relationships give access to the Lending Club platform which benefits partners by lowering administration costs and providing access to lower rates. Instead of being strictly a peer to peer lending company, Lending Club has morphed into a platform; a place that is scalable for many uses. Therein lies the opportunity for growth. Some day, mortgages and student loans will be managed this way too.
Lastly, there was the Lending Club (LC) IPO. I wrote fairly extensively on the subject, before and after the event. The stock now trades below the IPO price. As a firm believer in the future of this industry, and Lending Club being a leader, I decided not to sell after the big pop, being fully aware the price could fall as valuation was high. If anything, I’ll be buying more now that short-sellers are pummeling the stock. I’ve also sold some puts against LC.
I haven’t changed my Lending Club investing strategy much, or added external automation yet because I’ve managed to keep my cash fully invested. I still use the same basic lending club filter, and tweak it to suit my needs. I continue to fund my account with $200 per month and reinvest all of the principal and interest I receive.
How Lending Club Investing Works
Consumers can apply for loans via Lending Club for many uses. The most common is to consolidate debt. Lending Club rates are much lower than credit card interest rates. Instead of funding the loans like a bank does, Lending Club turns to investors (like you and me, and institutions), to fund the loans via taxable or no fee IRA accounts. Investors contribute small amounts (minimum of $25) to help fund individual loans. By investing small amounts, investors spread out their risk of default.
Lending Club is the technology platform to facilitate this process, taking on no credit risk itself. That’s an important distinction for stock investors.
Loan applications are done electronically. Once approved, loans become open for investment at rates determined by historic data and proprietary algorithms. A few days after a loan is fully funded, the borrower get the money, minus an origination fee. Loans of up to $35,0000 can be amortized over three or five years.
For an investor, you can contribute automatically or on an adhoc basis. Fees are taken out when you receive an interest payment. They take out 1% of any payment made to the investor. This equates to about $0.01 per note per month if investing with the $25 minimum per note. Fees are transparently disclosed throughout the process.
The Latest Numbers
Here is a screen shot of my account dated June 30th:
If you’re a Lending Club investor, this screen is very familiar to you. If not, I’ll point out a few important items.
First and foremost is the adjusted Net Annualized Return (NAR). This is determined by a complicated algorithm that Lending Club created to give the best estimate of return on investment. My 11.02% NAR is down from 13.03% back in September. At the time, I was still pitching a no-hitter, with no defaults. As you can see in the blue area to the bottom right, I’ve had four defaults and more are potentially in the pipeline. Defaults are to be expected and lower your overall NAR. After two full years of investing, four defaults is quite low. Some investors prefer the XIRR Excel function to calculate returns, but NAR is suitable for my needs.
Also shown here is my Adjusted Account Value and the amount of interest I’ve received since opening my account. Adjusted Account Value is what it’s worth as of June 30th, accounting for deposits I’ve made, interest received, service fees, and adjustments based on the statistical probability that notes that are late or in grace period will eventually default. The Notes at-a-Glance section shows the status of all the notes I’ve invested in.
The pie chart below shows the loan composition of my portfolio. Nearly half of the notes in my portfolio are B-rated, meaning they are earning at rates of 8%-12%. A’s are the top rated notes, G’s the riskiest. I typically aim for B’s through E’s, but have invested in more A rated loans recently due to lack of selection, lowering my NAR and risk.
Next is a snapshot taken from the Understanding Your Returns page of my account. This graphic is provided to demonstrate to investors that returns decline over time.
The chart shows the adjusted NAR of my account (the bigger blue dot) in relation to other similarly weighted and diversified accounts (small red dots) and all other accounts (small blue dots) with more than 250 notes. Diversification is the key to peer to peer lending. The average age of the notes in my account is just over 12 months. As my account ages, the returns should continue to decline into the 5%-9% range.
An 11% rate of return over a two year period is about what I was hoping for when I started investing here, but I had no idea if it would really pan out. Since the selection process has become more automated, I’m not able to compete to get the higher interest rate loans. In the future, I may look into some automation so that I can get my hands on the better loans. This will take some effort to identify a service and lock in my filters.
Is Lending Club the Right Investment for You?
I’ve been investing at Lending Club since before I started this blog, right after Google announced an equity stake. It immediately struck me as another potential income source. For now, I reinvest all the interest I receive. In the future, it could serve as a stream of income to live off of in retirement.
Investing through Lending Club has historically returned 5%-9% over the long-term. Graphically you can see that in the dot chart above. If you’re considering investing in peer to peer lending through Lending Club, you’ll need to keep a few important things in mind. First, you must be a U.S. resident. Second, it’s not legal to invest in these loans for residents of all states. That’s been changing since the IPO, but currently only residents of 30 states can invest.
As of July 2015, those states are Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Kentucky (Accredited Investors only), Louisiana, Maine, Massachusetts, Minnesota, Mississippi, Montana, New Hampshire, Nevada, New York, Rhode Island, South Dakota, Texas, Utah, Vermont, Virginia, Washington, Wisconsin, West Virginia, and Wyoming. Some additional states allow for secondary market trading (when notes are liquidated buy Lending Club investors). Click here for a complete explanation and up to date map and list.
As with most investments, you can lose money. If you lend money to a borrower and they do not pay the loan back, you may lose all of your investment. You can mitigate loses by investing small amounts per note, and in a minimum of 100 notes. I always invest just $25 per note to keep my portfolio as diversified as possible. That way if there’s a default, $25 is the maximum loss.
If there’s another economic downturn led by a lousy job market, these loans are unsecured and could be the first payments that borrowers skip. This industry was tested in the heat of the 2007-2009 financial crisis, but back then it was much smaller than it is today. Since borrowers are evaluated similarly to credit cards and other unsecured loans, the rate of default is similar. However, Lending Club claims their default rate is below the credit card industry because they only facilitate loans to borrowers with a FICO score greater than 660.
That all said, investing through Lending Club may be of interest to some of my readers. If you live in an eligible investing state, click the link below to learn more (make sure to check out the informative video):
You can also visit two of the best websites dedicated to the industry. Lend Academy is the news and industry hub for all things peer to peer/marketplace lending. Founded by lend guru Peter Renton, it also retains ownership in the LendIt conference and NSR Invest, an analytics and asset management company formed through a partnership between the former Nickel Steamroller and Lend Academy.
To learn about the basics of investing, Lending Memo has a number of blog posts, video tutorials, and instructions on how to invest. This well designed, easy to navigate website is a must read for beginner and intermediate peer to peer investors.