Can you Really earn 13% Annual Returns These Days!?!
Find out at the MMM Lending Club Experiment Headquarters
In September of 2012, I started making a series of investments in the relatively new field of peer-to-peer lending, choosing a company called Lending Club as the destination. The goal is to see if the higher returns really are attainable without luck or amazing analytical powers. It all started with these two articles:
This page will document my ongoing results, with results updated roughly monthly. This will allow curious people to see how the return rate is looking, as well as monitoring late and defaulted loans.
The latest news:
July 13th, 2013: I’ve completed the investment of another $10,000 into this account, bringing the total source capital up to $30,000.
June 1st, 2013: An article in the Economist describes the recent growth of Lending Club and Prosper, pointing out that up to two thirds of the money flowing in is now from institutional investors like sovereign wealth funds and insurers. This is turning into a pretty interesting trend, as it is prying a big source of profit away from banks and into the hands of other investors – many of the readers of this blog among them.
May 2nd, 2013: Google announced that they have backed Lending Club by buying a $125 million stake in the company (which implies a $1.6 billion valuation on the company as a whole). I believe this is a significant boost to LC’s credibility and stability, which reduces the risk of the company vanishing – one of the main concerns I originally had with this type of investment. It’s probably worth another article. And another round of investment on my part.
Remember, the whole idea of Lending Club is making higher-risk loans in exchange for interest rates that are far higher than what you get in a guaranteed spot like a savings account. But along with high returns come some financially unstable borrowers, so it is inevitable that a certain percentage of loans will go bad. That’s all factored in to your expected rate of return.. but the million-dollar question is: Will the default rate end up being much higher than what Lending Club predicts?
I have seen many arguments on both side of this issue. So far, the more sophisticated ones (in my view) still seem to come down on the side of “projected returns are likely to be accurate”. But the good thing about this experiment, is that we get to find out for ourselves.
Without further delay, let me present the results:
Date Balance Interest Received Annualized Return Late 16-30 Days Late 31-120 Days Default or Charged Off
Sept 24, 2012 $10,000 $0 ~13% (projected rate after defaults) 0 0 0
Feb. 3, 2013 $21,060 (note: I added $10k plus received $300 referral bonus) $579.53 20.12% $48.46 $122.77 0
March 21, 2013 $21,516.29 $1,054.94 19.84% $24.03 $308.90 0
April 11, 2013 $21,721.09 $1,245.80 19.79% $49.00 $169.00 0
May 13, 2013 $21,992.96 $1554.15 18.53% $0 $214.00 $73.00
June 11, 2013 $22,238.18 $1,851.86 18.07% $21 $257 $98
July 13, 2013 $32,549.52 (note: I manually added $10k of extra principal over the last month) $2,174.54 18.30% $114 $302 $121
August 14, 2013 $32,951.13 $2,571.40 17.70% $347 $320 $262
October 8, 2013 $32,478.25 (note: I withdrew $1100 last month for another investment - transfer to bank worked well, about 2 business days) $3,368.00 17.02% $47 $518 $353
November 12, 2013 $32,552.68 $3,884.44 16.82% $270 $577 $421
Now 14 months into the experiment, we’ve been seeing the expected stream of defaults and chargeoffs for over half a year. I’ve been looking into each default individually to look for patterns. As a group, new loans seem to experience a wave of defaults, while people who have established a pattern of payment seem to continue paying. But the behavior is still lumpy. After accounting for all defaults so far, the annualized return of 16.82% remains much higher than forecast.
There is a very handy new Rate Adjuster feature on the LC dashboard: click it and it will automatically calculate a more conservative rate of return for you by writing off a portion of your late loans for you based on the percentage of those loans that will be recovered, versus going bad. Clicking it with today’s results, I get 13.56%
So, I remain positive about this experimental investment and I will continue to keep you up-to-date. With a healthy $30k invested (which has already grown to over $33,200), I plan to hold the investment steady now, so we can monitor it without a big supply of new loans complicating the picture. Incoming payments will still be reinvested, however, since that’s what you do to create the magic of compound interest.
If you are interested in starting your own Lending Club investment account, you can do so here:
If you are a borrower looking to consolidate higher-interest debts (and them pay them off forever), there is of course a borrowing side to Lending Club as well, and you can check it out here:
(if you use these particular links it will help support the MMM blog, and thanks!)
* Note that Lending club actually does revive a fair portion of late accounts, see the second article above for more details