As 2013 comes to a close, it is time see how December turned out and take a look at the past year for my two Lending Club accounts. This is the first year I’ve tracked my accounts publicly, and it has pushed me to look at them in different ways than I have previously. For those of you that are interested in pursuing peer to peer lending as a possible avenue for investment, I would encourage you to keep following along on my journey, and let me know if you have any questions. I am happy to help and answer those inquiries.
Roth IRA Account:
As I mentioned during my November Lending Club and Passive Income updates, I needed to hit $163.74 between both my accounts in order to hit my 2013 goal. Well, to my wonderful surprise, December turned out to be a gangbuster of a month, by itself beating the required amount by hitting $167.49 of net interest. Without a doubt my highest month I’ve had yet and the timing couldn’t have been better.
While this high level of interest was fantastic, based on some signs, this looks to be due to some luck and timing more than anything. I say this based on the onset of significant numbers of late and in grace period notes. While never a guarantee of loans going bad, the odds are not with me that they will all perform. As I’ve said in every update, this is an accepted part of investing with peer to peer lending and having a higher risk tolerance. The only filter that can prevent all late loans and charge-offs is the one where you don’t invest at all.
I started last month 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 17.28% and is dropped down to 14.13%.
As of the end of December, my weighted-average interest rate for my invested notes increased slightly to 17.95%. I say it every month, but 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.
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.
My internal rate of return (IRR) since opening the account, using Excel’s XIRR function, continued to increase as it went from an annualized 11.12% to 11.66%. With such a strong month in December, my actual IRR really jumped significantly. Over time the movement will lessen, but it is nice to see that in roughly 13 months of being open, I’ve earned approximately 11.5% of real returns. Additionally, in 2013, this account was able to crank out $1,347.47 of net interest, or an average of $112.29 per month. Here’s to hoping that 2014 will be just as successful for my Roth IRA.
Much like my Roth IRA account above, my taxable account had a heck of a December, hitting the highest level of net interest all year, earning $19.30 during the month. Since I cleared my 2013 goal with my Roth IRA account on its own, this additional net interest put me even further over the top! Overall my taxable Lending Club account earned a net interest of $155.56, an average of $12.96 per month, during 2013.
While exciting to have had a successful month, the concern for upcoming defaults and late notes is always present. I’ve had two notes in late status for a couple of months, and would anticipate them going into default within the next month or two. While I can hope for them to return to current status, I am not holding my breath.
With a banner month for net interest, my overall internal rate of return since inception increased from 10.73% to 10.85%. Unlike the past couple of months, my weighted average interest rate did not increase, but instead stayed relatively flat, going from 15.36% to 15.35%. I would expect this to go back to increasing as most of the notes I’ve been investing in have had higher interest rates. Important to note about this account is that it is the smaller of my two accounts. When the best month for a year is $19.30 of net interest, it only takes on default to wipe out the months returns. 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:
Wow, I’m still in shock with how unexpectedly high my net interest amounts were in December. Combined my two accounts earned $186.79 of net interest! This total blows my previous high of $165.46 right out of the water. Needless to say, this was a welcome conclusion to the end of the year. I must temper my excitement however, given the significant numbers of late or grace period notes in both accounts combined. Check out the chart below to see my net interest amounts received by month in 2013.
Isolating the month of December, my overall internal rate of return came out to be annualized 18.04%! This monthly IRR number is extremely variable as my accounts have not achieved a scale where they are insulated against defaults. As I said above, my long-term return projections 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. I’ve added an additional chart (below) tracking my monthly IRR as well as my rolling IRR from the beginning of 2013 through the end of the year.
For all of 2013, my internal rate of return for both accounts combined was 13.08% (seen above) netting me a grand total of $1,503.03 in net interest. At the end of the year, my investments in Lending Club totaled $13,508.46. It will be fantastic to see how 2014 turns out given the age of my accounts and the lack of cash drag from investing a full $10,000.
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.
If any of you are interested, the follow few posts highlight some of the recent changes as well as the tax guide for Lending Club:
- 2013 Lending Club Tax Guide
- Wells Fargo bans employees from investing with Lending Club
- Adding Investor Comparisons
- Adjusted NAR (my opinions have since changed, and I am glad they have added this feature)
Have questions about peer-to-peer lending? Just ask!