Lending Club – 2014 First Quarter Update

After a full year of posting monthly Lending Club updates, I decided to pare it back to quarterly. This allows me to write more non-update posts like recent trades, pursuing freedom with wild abandon, and how I’m reporting my Lending Club charged-off loans. But that isn’t to say that these updates are any less important. Written quarterly, they will provide a smoother look at how my accounts are trending and aging. With that being said, let’s see how the first quarter of 2014 turned out for my two Lending Club accounts.

Lending Club – Roth IRA Account:
Lending Club Roth IRA - Main Screen - 2014 First Quarter Update

Click for larger image

After a strong ending quarter to 2013, the first quarter of 2014 has been rough for my Roth account. This however is entirely expected as my account has crossed into the “seasoned” part of its life with an average note age of almost 11 months. Now that the account is maturing, I would expect things to settle down over the next couple of quarters and continue to grow as payments get reinvested as time goes on.

Over the last quarter, my Lending Club Roth IRA earned $317.30, an average of $105.77 per month. Unfortunately, the net interest has declined each of the last three months culminating in a low of $63.28 in the month of March. Much of this decline is from late notes defaulting and being charged-off as the overall account ages. For those pursuing a fairly risky loan profile, this is par for the course.  As you can see from the below chart, my overall NAR, both normal and adjusted, reflect the relative position of my portfolio in relation to other investors. Unfortunately, this comparison is only effective for my Roth account given the amount of note trading I’ve done historically in my taxable account. For more information on this investor comparison, you can check out the post I wrote when this feature was released.

Lending Club - Investor NAR Comparison - 2014 First Quarter Update

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Lending Club Roth IRA - Adjusted NAR - 2014 First Quarter UpdateI started last year sharing my adjusted net annualized return (NAR) for this account, which is a modification of the NAR seen in the screen grab above. The modification attempts to project the anticipated loss of capital for notes in grace or late status. For my Roth IRA, my traditional NAR is 15.82% and is dropped down to 12.85%.

As of the end of March, my weighted-average interest rate for my invested notes decreased to 17.86% from 17.95% at the end of December. This decrease is expected as the average interest rate of notes I’ve been able to invest in lately are less than 17%.

I am a realist when it comes to my long-term returns for my peer to peer lending accounts. There will be defaults, charge-offs, and expenses associated with this investment which will adversely affect my returns. I expect my long-term returns to stay in the 12-13% range, but would not be disappointed if I only earned a 10 or 11% return every year.

My internal rate of return (IRR) since opening the account, using Excel’s XIRR function, has flattened out as my net interest earned has declined, going from annualized 11.66% in December to 11.60% at the end of March. After roughly 16 months since opening my Roth IRA account, I’ve earned approximately 11.6% in real returns. Not too shabby at all.

Lending Club – Taxable Account:
Lending Club Taxable - Main Screen - 2014 First Quarter Update

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The first quarter of 2014 has been very different in my taxable Lending Club account than my Roth account. In January, I saw a negative interest amount as I had a charged-off loan, however since then, I’ve seen rising net interest amounts. Overall, for the quarter I earned $35.53 of net interest, or an average of $11.84 per month. I will likely be adding some capital to this account and my Prosper account at some point in the next month.

Lending Club Taxable - Adjusted NAR - 2014 First Quarter UpdateAs I mentioned above, I do not review the investor comparison charts for my taxable account. Since the comparison only compares buy and hold investors and doesn’t not currently have the ability to incorporate the discounts and premiums for those investors buying and selling on the secondary market. I can share my overall adjusted NAR for my account, which at 11.76% is only slightly below the 12.41% shown above.

My overall internal rate of return since inception remained relatively constant, going from 10.85% to 10.79% since the start of the year. Additionally, my weighted average interest rate also stayed about the same at, going from 15.35% to 15.38%. Important to note about this account is that it is the smaller of my two accounts. At its current size, it only takes one default to wipe out the months net interest. This is a clear example of why note diversification is tremendously important as you can overcome defaults through sheer volume of notes and net interest income.

Lending Club Summary:

I do not actively trade notes in either of my accounts at this time. Some folks out there utilize the secondary markets to recapture some of the potential losses from late loans prior to default assuming the amount the sell the note for is greater than the overall principle returned prior to default. I do not pursue this strategy as I am attempting to make this as passive of an investment as possible once invested in a note.

Overall, this wasn’t the most successful quarter for my Lending Club accounts as my Roth IRA continues to age and the returns begin to reflect a more seasoned portfolio. Even with that, combined both accounts earned $352.82 for the quarter. A far cry from where they need to be to hit my goal of $1,950 for the year. I’m hoping some additional capital and some steady returns allow me to catch up and make that goal happen. Below is a chart showing the net interest amounts received by month in the last 12-months.

Lending Club - Rolling 12-Month Net Interest - 2014 First Quarter Update

Isolating the first quarter of the year, my overall internal rate of return came out to be annualized 11.15% across both accounts. This IRR number is variable as my accounts have not achieved a scale or age where they are insulated against defaults. As I said above, my long-term return goal for my Lending Club investments is in the 12-13% range as defaults, late loans, and uninvested cash drag the returns down from their weighted average.

Since the beginning of 2013, my internal rate of return for both accounts combined is 12.69%. The chart below shows my monthly IRR as well as my ongoing trend line since the beginning of 2013.

Lending Club - Internal Rate of Return by Month - 2014 First Quarter Update

I have updated my Lending Club page with this information. Please note when tracking my balance and return I do not include the accrued interest in the account, only the interest actually received net of fees, charge-offs, and defaults. Additionally, if you’re interested in seeing how the criteria I am using to invest in these accounts, check out my 2014 Investment Criteria.

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Comments

  1. A bit of a lower trend there, WYOR. Still a good annualized return rate.

    Best wishes
    R2R

  2. W2R,

    It looks to me like you’re still rocking along pretty good here. A lower rate, but still very attractive.

    Keep up the great work! :)

    Best wishes.

    • Things have certainly dipped, and will continue to dip as the returns stabilize and the accounts age. I’m not too worried about my ability to maintain over 10% returns with my Lending Club and Prosper accounts.

      Thanks for stopping by DM!

  3. I’ve thought of P2P before with Prosper or Lending Club. With your returns, you make me want to go jump in since you make it look pretty easy. Do you recommend starting off with a certain amount?

    • I wouldn’t say it is easy, but having a realistic understanding of your long-term returns is important. With a little bit of filtering you can reasonably expect to receive in excess of 10% fairly consistently. Much higher takes a bit of work, but is possible over the long-term. Also knowing that you will have notes go belly up if you aren’t trading them on the secondary market is another important realization. Not easy seeing it happen, but is part of the understood risk of P2P lending. Managing expectations is key prior to making an investment.

      To answer your question, I would recommend you start with at least $2,500 as that will give you the ability to invest in 100 different notes at $25 per note. This gives you a strong base for diversification and will help protect your overall principal when a note goes sour. Ideally you contribute enough, and with reinvesting your monthly payments, to hit 200 or so notes fairly quickly. This all but assures you will, at a minimum, see positive returns, which is a great.

      Let me know if you have any other questions Richie and thanks for stopping by!

  4. Overall, how would you rate your overall experience with p2p lending? I have thought about it over the last few years, but haven’t had the guts to jump in.

    Great work though! Looks like a healthy return on the amount of cash invested.

    • So far I’d rate my experience a 10 out of 10. I’ve been investing in Lending Club for five years now and have followed the industry for six. As with any investment, manage your expectation, do your due diligence to see if it makes sense for you, and determine what your commitment will be, if any.

      Feel free to let me know if you have any other questions. Appreciate your support ILG!

  5. Are you investing in any 60 month notes at this time? It appears that to get the lower grade notes, you need to include 60 month notes in your portfolio.

    I was only buying 36 month notes, but had a hard time getting E – G notes (that met my filtering). While I am not that comfortable with 60 months due to a short track record, I have decided to take a 10% overall position with the 60 month notes.

    • My overall diversification is roughly 50-50 between 36 and 60-month notes. While the 60-month notes have not yet fully matured, like other amortizing loans, including the 36-month ones, you can get a feel for the overall performance by tracking the return curve as the notes age. Given the return curve so far, I am comfortable investing in 60-month notes with Lending Club at this point. I will add that I do not invest in 60-month notes with Prosper as I do not believe their underwriting, and related note-performance, supports the premium I require to lock up my money for an additional two years.

      Again, thanks for stopping by and good luck with the addition of 60-month notes to your portfolio.

      • Thanks for sharing on your 60 month note position!

        I read quite a few blogs and follow Peter’s site daily. I see many super simple filters that people share and these days it is hard to get a great lower grade note without the 60 month option. As you know, it has not been this way all of the time.

        I appreciate your reply!

  6. Still nice returns…you’re still beating savings, money markets, cd’s by leaps and bounds. Have you considered the possibility of using your somewhat liquid peer-to-peer account as your emergency fund? Once I build my account to a certain level, I plan to use it as an emergency fund.

    • Personally, this will not ever represent any of my emergency savings. Sure I am earning far better returns than can be found in a savings account, but maintaining complete liquidity and flexibility with my emergency reserves is important to me. However, that is obviously a personal decisions and everyone can certainly invest in a manner that fits their personal risk tolerance.

      Appreciate your question and best of luck with your accounts!

  7. Great job W2R, i wish we had something like prosper or lending club up here in Canada, seems like a great idea. I haven’t heard too many horror stories with this stuff yet but how are things like defaults managed?

  8. That is still a really good return that you are getting. I am really excited to jump into this market in the future once I build a bit more net worth. I’m thinking I am still about a year out from making the leap into p2p which gives me plenty of time to follow your progress and learn more about the industry. Thank you for sharing.

    • I can’t complain about the returns thus far and will continue to invest and add capital as appropriate for my overall investment allocation and plan. Feel free to let me know if you have any questions as you look to begin investing down the road. Thanks for stopping by and for your support!

  9. Hey writeyourownreality,

    I’m a great admirer of your thoroughness with p2p lending. Here in the UK it’s a fairly new industry as well and there are talks for it to become a possible vehicle for tax sheltered investments like the IRA’s in the US. When this happens I intend to include p2p-lending in my investment strategy.

    At that point I will definitely come back and re-read all your great insightful posts regarding this kind of investments. Thank you, keep it up and congratulations on a very attractive annual return!

    Best,
    DividendVenture

    • I certainly think the advent of tax-sheltered accounts for UK investors is big news and should provide a tremendous amount of investor support for the industry.

      Best of luck if you decide to start an account!

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