Google announced its purchase of a minority stake in Lending Club in May of 2013. That event opened my eyes to the potential of earning passive income via peer lending. Four years of investing later, Lending Club has delivered consistent returns for my overall portfolio of investments. This Lending Club review will share my personal performance numbers along with my take on the current state of the platform and the widespread decrease in returns.
I’ll also share some initial impressions and a few screen shots of the new Lending Club mobile app.
Some have suggested the lower returns could be a leading indicator of an economic slowdown. But Lending Club has indicated lower returns are a result of mispricing some loans in 2016, a problem that is now corrected.
Whatever the cause, some investors have become more skeptical of the platform and are choosing to put their money into asset-backed investments such as real estate crowdfunding platforms. As I watch my Lending Club default rates increase and my returns decline, I’ve paused note reinvestment to lower my exposure, for the time being.
I haven’t lost faith in peer to peer lending. But before allocating new funds to Lending Club, I’d like to see my personal returns bottom out and begin to recover. The decrease in returns also makes me question how peer lending will handle the next economic downturn.
Lending Club provides a quarterly update on investor returns. In the latest, CIO Sid Jajodia had this to say:
Over the past quarter, delinquency rates across most grades and terms in the existing loan portfolio continued to stabilize. Projected returns on the platform overall are largely unchanged relative to our last update in January 2017. Projected returns remain solid, ranging from 4% to 9% across the platform.
Regarding reduced returns, he had this to say:
We made several changes in 2016 and early 2017 designed to reduce risk on the platform. (Changes included higher interest rates as well as credit policy tightening designed to remove borrower populations with an increased propensity to accumulate debt. We also invested in additional tools to drive collections effectiveness.)
Bad loans take varying times to default. Some default after one month. Others happen months or years later. So there’s a delayed realization of loss. The mispricing of loans last year could continue to default for the next five years.
However, the CIO’s statement seems intended to reassure us that investments made today should perform better. I’d still like to see my personal default rate stabilize before moving forward with new investments.
Retail investors are getting scared about the falling NAR. For retail investors to continue investing on the platform, returns will need to stabilize and increase so they are competitive with stocks and other crowdfunding platforms.
The platform does not rely entirely on retail investors. Institutional investors are a big part of the investing community too.
Peer lending has changed a lot. And with the onset of new regulation and technology startups, the risk/return equation may no match the tolerance of certain investors. Peer lending loans are consumer loans like credit cards. Consumers often default on debts. When notes default, you lose money. That isn’t palatable for many.
Fortunately, Lending Club built diversification into their retail investor model from the beginning. $25 minimums are the norm. Loan defaults are offset by higher interest rate notes, as long as investors broadly diversify.
Lending Club has increased their minimum deposit to $1,000 from $25. You can still invest in notes for $25 each. But to get started, you’ll need $1,000. This should help new investors to properly broaden their portfolio from the beginning. However, Lending Club still recommends 100+ notes to be more adequately diversified, requiring a $2,500 minimum.
How Lending Club Works (Briefly)
Lending Club is now a ten-year-old company. It’s the company most associated with the term “fintech” and helped pave the way for other innovators to disrupt the financial industry status quo by embracing technology.
Peer lending is a simple concept. Borrowers who need money can apply for loans on the Lending Club platform.
Investors like you and me and institutions, lend small amounts of money (as low as $25) to the borrows to fund loans.
The borrower then pays the loan back over three or five-year periods. Interest rates range from ~5% to ~30%, depending on the quality of the borrower and many other factors. Rates for borrows are often lower than credit card or other borrowing facilities rates. So borrowers benefit from refinancing debt through the platform.
Investors can earn from 4%-9% or more by investing in notes. By keeping each note investment small, investors spread their risk over many notes.
The Lending Club technology platform acts as a middle-man, matching borrowers and lenders. It charges an origination fee paid by the borrower and a small fee from investors for each interest payment.
My Four-Year Investment Returns
Below is a current view of my Lending Club Account Summary. Since I opened my account, I’ve deposited $8,900 my account. It’s now worth $10,820.88 when adjusted for expected defaults.
Using the preferred XIRR function to calculate the internal rate of return between May 6th, 2013 and May 29th, 2017, my personal annualized returns come in at 7.75%. That’s below the current NAR of 7.92% as calculated by Lending Club.
This calculation includes adjusting for notes that are currently delinquent based on the statistical likelihood of default. I prefer to always use the adjusted number because it’s less optimistic.
7.75% is certainly an acceptable rate of return and within the estimated range of 5%-9% that was advertised to me by Lending Club in 2013 and over the years. I’ve never sold off any notes.
The keys to my success have been broad diversification, consistent reinvesting of principal and interest, and finding notes that perform. I started investing by manually choosing loans using specific filtering criteria. But last year I switched to an automated selection tool called LendingRobot which analyzes all the publicly available data to predict performance.
Read my complete LendingRobot review here.
See below for my account summary as of May 29th adjusted for expected defaults:
The Adjusted Net Annualized Return (NAR) is the easiest way to measure and track account performance over time because Lending Club calculates it for you. NAR is not a forward-looking performance projection.
I’ve tracked NAR on a monthly basis since I started investing. As you can see from the chart below, this number has been falling since its peak in July 2014 at 13.30%. As of writing, my NAR adjusted for expected defaults is 7.92%.
Lending Club does a good job of setting realistic expectations. It’s normal to see falling returns over time. However, since summer 2016, there’s been a more defined decline that has yet to cease. I’m waiting for this line to flatten or reverse until I start investing new capital again. My cash balance is currently $1,187.65.
Another analysis tool that Lending Club provides is the Understanding Your Returns view. From there you can compare your returns to your peers. The view below displays other Lending Club accounts with 100 notes or more where no note is greater than 0.5% of the portfolio. My account still stacks up well next to peers. But the decrease in returns appears to be widespread.
The New Lending Club Smartphone App
The user experience investing at Lending Club is top notch. The company created and incredibly efficient platform and refined and simplified it over time.
I’ve been happy with both the desktop and mobile user platforms. However, when I was manually selecting notes, the mobile browser interface was insufficient. Since I started automating my note selection, this has been a non-issue.
Nonetheless, Lending Club finally built a mobile app for smartphone users. It has a much different feel than the mobile browser and desktop access.
Below is a view of the Summary tab. This is the welcome page and gives you the basics of your account. Any time you see an orange/brown arrow on the right side, you can tap over to another page for details.
From the Holdings tab, you can look at your notes by Status, Grade, or Term. Below is the first two views which I find to be helpful.
I’m usually only interested in looking at the late notes. These screens make it easy to view the late notes and you can dig into the details of the note.
Two features not available on the app are the Payment History and Collection log from the desktop version. I rarely look at those and have little need to do so on my phone. But it would be nice to have that info.
The Invest tab has two sub tabs, Automated and Manual. Both views are available below. I’ve never used the Lending Club automation tool since I use LendingRobot. But you can make adjustments here if you use the tool.
The manual tab allows you to access your selection filters and sort by some of the common metrics. This is a much better user experience than the old mobile browser version. From here, you can look at the details of each note, just like you would on the desktop. The information is easy to view and evaluate. Click the “+” sign or the Add To Cart button on the details page to invest.
Transfer and Profile tabs
The transfer and profile tabs are basic and do what they are supposed to and nothing else. The transfer tab is refreshingly simple.
The Profile tab gives you a few settings to adjust, FAQs, customer support access and a feedback option. Notably missing from here is Statements, which do not seem to be available on the app.
Conclusion – Lending Club Review for Investors
2016 was a rough year for Lending Club and peer to peer lending in general. Lending Club lost its founder and CEO, the stock fell hard from its IPO highs, and some institutional investors abandoned the platform.
Investor demand seems to have recovered, only for retail investors to experience lower returns in 2017. Anecdotal chatter I’ve seen on the internet and social media show some frustration over lower returns. It’s going to take some fortitude for investors to stick with this platform for the long haul. Many will feel more comfortable once the next U.S. recession is behind us and the platform performs, but who knows when that will be.
For now, I’m letting my current note investments ride while I wait for returns to bottom out. That could take some time. Once it does, I’ll decide how aggressive I want to get putting new money to work. In the meantime, I’m more comfortable putting new funds towards real estate crowdfunding platforms like Fundrise and RealtyShares and towards undervalued dividend stocks.
Have you seen your Lending Club returns decline? Is there a growing skepticism about the platform? What do you think?
Disclosure: The author is long LC stock