Google announced its purchase of a minority stake in LendingClub in May 2013. That event opened my eyes to the potential of earning passive income via peer lending. Five years after making my first note investment, my LendingClub holdings are back to providing reliable returns after some turbulence over the past 18 months. This LendingClub investor review shares my personal performance numbers along with my views on the platform going forward.
After very good returns (10%+) during the first three years of investing on the LendingClub platform, returns started to decrease rather sharply at the end of 2016 through 2017. This time last year, my returns were on a downward trend.
Fast forward to today, returns have stabilized for my portfolio. I have, however, stopped investing money into new notes to help simplify my finances and to focus on investments backed by real estate on the Fundrise and PeerStreet platforms.
That leaves my current LendingClub note portfolio, which I stopped contributing to in March of 2017, in payback mode.
Every month, I withdraw the principal and interest earned to invest elsewhere. For a while, it helped to carry our family through an unemployed period.
LendingClub survived the ousting of its founder and CEO and is still dealing with class-action lawsuits. But borrowers and lenders have mostly forgotten. The bigger problem for LendingClub now is competition from other online lenders, primarily Goldman Sachs and their Marcus platform among a few other companies.
How LendingClub Works (Briefly)
LendingClub is now an eleven-year-old company. It’s the company most associated with the term “fintech” which 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 LendingClub platform.
Investors 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 a three or five-year period. 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 cards and other borrowing facilities rates.
So borrowers benefit from refinancing debt through the platform.
Investors can earn from 4%-6% or more by investing in the notes. By keeping each note investment small, investors spread their risk over many notes. LendingClub notes are unsecured, meaning if the borrower defaults, the principal of the loan will unlikely be collected.
The LendingClub technology platform acts as a middle-man, matching borrowers and lenders. It charges an origination fee paid by the borrower and a fee from investors (about 1%) for each interest payment.
LendingClub Investor Review – My Five-Year Investment Returns
Below is a current view of my LendingClub Account Summary. Since opening my account, I deposited $8,900 which was invested and interest and principal was reinvested up until March 2017.
Before then, I stopped investing new money and I’ve since withdrawn $6,815 over the past year.
My account value is now worth $3,831.86 adjusted for expected future defaults.
Using the preferred XIRR function to calculate the internal rate of return for my portfolio between May 6th, 2013 and May 20th, 2018 (accounting for cash withdrawals), my personal annualized rate of return for the five-year period comes in at 5.76%.
That’s down from 7.75% at this time last year and is close to my current net annualized return (NAR) of 5.60%, the annual return calculated by LendingClub.
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.
5.76% isn’t a bad rate of return over a five-year period. However, returns were much higher during the first three years. Returns have declined overall since a vintage of mispriced notes were available to investors back in 2016. These mispriced loans led to significant defaults resulting in losses for investing.
Considering that my 5.76% returns happened in a low-unemployment economy and the notes are unsecured, I feel the risk of investing in unsecured notes is too great to chase sub 6% returns. If the economy turns sour, I fear defaults will increase again resulting in further losses.
Many original investors were scared off and stopped investing over the past two years. My heaviest investment losses came from notes purchased via LendingRobot, a robo-advisor for buying notes. LendingRobot put my money into higher risk notes compared to my manual investing strategy. Many notes purchased during that time were mispriced and defaulted, though most of those notes are still performing just fine.
With LendingRobot, you put your faith in an algorithm that analyzes historical data, which is still the preferred method of investing because it removes emotion. Note investing is not like stock investing. Interest rates and returns are based on historical performance of similar borrowers. So you can rely on past data, which LendingClub provides to investors.
Read my complete LendingRobot review here.
See below for my account summary as of May 20th, 2018 adjusted for expected defaults:
The Adjusted Net Annualized Return (NAR) is the easiest way to measure and track account performance over time because LendingClub calculates it for you. NAR is not a forward-looking performance projection. It tracks past performance.
I’ve tracked NAR on a monthly basis since I started investing. As you can see from the chart below, this number has fallen since its peak in July 2014 at 13.30% which is normal.
As of writing, my NAR adjusted for expected defaults is 5.60%.
It should be noted, if I was investing new capital or reinvesting cash into notes, the NAR would be trending higher. Investing in newer loans at higher rates would inflate the NAR, much like it did in the first 12-months in the chart above.
Underwriting standards were improved after the 2016 mispriced notes, so I would expect higher returns if I was still investing. But I cannot quantify that without actually investing.
LendingClub does a good job of setting realistic expectations. It’s normal to see falling returns over time. So the chart above is typical for a five-year investor. Current return projections for new investors are in the 4%-6% range.
I’m confident the recent bottoming is stable because the remaining notes already have a good chunk of principal paid off. Now, when a note defaults, instead of losing close to $25, it’s usually around $10-$15 so the impact is less dramatic. Also not surprising, if these notes have performed well thus far, there’s a good chance they will keep performing.
Another analysis tool that LendingClub provides is the Understanding Your Returns view. From there you can compare your returns to your peers. Despite the 2% drop in NAR since last year at this time, I’m still in the ~25th percentile of top portfolios.
Why I am No Longer Making New Investments on LendingClub
As I alluded to earlier, I am no longer adding new money to LendingClub and I am withdrawing the interest and principal I earn every month.
I’m not disavowing the platform. I still recommend the platform love the concept and implementation of this technology. It’s a unique way to earn passive income from direct consumer lending, an asset class elusive elsewhere.
But I’ve determined that after five years of investing, it’s no longer for me.
The primary reason is I’m trying to simplify my financial life. Taxes become more complicated with LendingClub investments. The interest gained from lending to borrowers is easy to report. But deducting losses is arduous.
On top of all that, the money is relatively illiquid. You can sell notes on a third-party platform called FolioFN, but that complicates things further. Instead, I’m choosing to allow these notes to mature over the next four years. Hopefully, loses will decline and my tax reporting will be easier each year.
Another reason I’m withdrawing is that since the founder/CEO was ousted under duress for numerous reasons, there’s been a lack of product innovation.
I’m still a believer in the LendingClub loan products and the investing platform and will continue to own the stock. It’s one of only a handful of speculative investments in my portfolio. I still recommend the platform to new investors with long-term income objectives with the caveat that your taxes will increase in complexity and economic volatility may result in lower returns, similar to other asset classes.
LendingClub vs. Marcus by Goldman Sachs
LendingClub is an investing and borrowing platform for consumers. You cannot invest on the Marcus platform, only borrow.
So to invest in this asset class, you must use either LendingClub or Prosper.
Years ago, there was speculation that a large bank would takeover LendingClub because of its innovative technology platform and regulatory position. Goldman Sachs has deep pockets and was always mentioned as a potential suitor.
Instead, Goldman Sachs decided to build its own platform from scratch. Now that Marcus is live, it’s obvious why they chose this route. Goldman Sachs underwrites and funds all of the loans on Marcus.
This allows them to avoid some of the burdensome reporting that is required by LendingClub. Their deep pockets can easily handle the loan volume and they’ve built the platform to automate much of the underwriting process.
Marcus has also started taking bank deposits from consumers and pays a high interest rate on savings, competing with leading online savings accounts paying more than 2.00%.
Marcus, therefore, operates like… well… a bank… paying interest on deposits and lending the money out at higher rates. The difference is known as the spread, which is as old as banking itself. Just now it’s online and automated lower their operating costs.
As a LendingClub stockholder, I fear that Marcus by Goldman Sachs is quickly becoming a formidable competitor. Instead of charging borrowers a loan origination fee, Marcus makes money via the spread, potentially making it cheaper to borrow.
LendingClub Investor Review – The Smartphone App
The user experience investing at LendingClub has always been top notch. The company created an 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 stopped new note selection, this is a non-issue.
Nonetheless, LendingClub built a mobile app last year for smartphone users. It has a much different feel than the mobile browser and desktop access. I typically use it to check my balance and returns and to transfer money out of my account at the end of each month.
Below is a series of screenshots from my personal account to provide further detail for this LendingClub investor review.
Note: The following mobile investing screenshots are for illustrative purposes only. The dollar amounts are no longer current.
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 LendingClub 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.
Many readers have invested on the LendingClub platform to earn passive income from this relatively new asset class. I’m not the only one who is unwinding my investments. LendingClub’s troubles in 2016-2017 gave investors a lot of reasons to leave.
However, my returns have been solid regardless of the past turmoil at the company. If my investments were more liquid and tax reporting was simpler, I’d probably continue.
Instead, I’ve chosen withdraw any cash produced in the account for other investments. This strategy should eventually simplify my finances.
Even though I’m withdrawing my own funds, I still recommend the platform for others who are looking for an alternative passive income stream, have a time horizon of more than five years and don’t mind the illiquidity.
Thanks for reading this LendingClub investor review. How are your notes performing? Are you considering investing on the platform? Please leave any questions you may have in the comments section below or contact me with your inquiry.
LendingClub Investor Review
Disclosure: Long LC stock
* All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
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