The Lending Club Experiment

Can you Really earn 13% Annual Returns These Days!?!

Find out at the MMM Lending Club Experiment Headquarters.

lendingclub_hq

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:

The Lending Club Experiment

The Lending Club Experiment – Four Months Later

This page will document my ongoing results, with results updated roughly monthly.  Since you’re probably a “Show me the Money” type of person, let’s jump right to the results, then do a little analysis afterwards:

DateBalanceInterest ReceivedAnnualized ReturnLate 16-30 DaysLate 31-120 DaysDefault or Charged Off
Sept 24, 2012$10,000$0~13% (projected rate after defaults)000
Feb. 3, 2013$21,060 (note: I added $10k plus received $300 referral bonus)$579.5320.12%$48.46$122.770
March 21, 2013$21,516.29$1,054.9419.84%$24.03$308.900
April 11, 2013$21,721.09$1,245.8019.79%$49.00$169.000
May 13, 2013$21,992.96$1554.1518.53%$0$214.00$73.00
June 11, 2013$22,238.18$1,851.8618.07%$21$257$98
July 13, 2013$32,549.52 (note: I manually added $10k of extra principal over the last month)$2,174.5418.30%$114$302$121
August 14, 2013$32,951.13$2,571.4017.70%$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)$3,368.0017.02%$47$518$353
November 12, 2013$32,552.68$3,884.4416.82%$270$577$421
December 17, 2013$32,959.53$4,403.7316.50%$233$613$526
January 30, 2014$33,318.78$5002.0615.85%$476$983$739
February 28, 2014$33,568.54$5,458.5215.37%$43$802$957
March 25, 2014$33,904.30$5,870.2415.35%$146$766$1023
May 6, 2014$34,131.67$6478.2314.48%$121$848$1361
June 11, 2014$34,500.33$7068.8514.24%$145$726$1678
July 31, 2014$34,837.59$7866.1813.52%$141$819$2075
Aug 31, 2014$35,045.22$8,392.3713.09%$145$730$2404
Sept 30, 2014$35,400.36$8,884.0513.34%$244$809$2523
Oct 31, 2014$35,725.29$9,408.3713.13%$156$1012$2763
Nov. 30, 2014$35,968.71$9898.7912.97%$82$925$3010

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.

Now almost two years into the experiment, we’ve been seeing the expected stream of defaults and chargeoffs for quite a while.  I’ve been looking into defaults individually to search 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 12.97% is higher than forecast, and at last it may have stabilized – we will see as the months go on.

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 on average are recovered, versus going bad. Clicking it with today’s results, I get 11.00% – a number which seems to jump around in the 11-12% range, as the pool of late loans fluctuates. The good news is that this number has been stable for quite some time, so it might be the real answer for our long-term returns.

After analyzing the results so far, I have noticed that my manual note selection is not particularly magical at increasing returns or decreasing defaults. So on January 30th, 2014, I switched the account over to their Automated Investing (formerly called ‘Prime’) service, which will handle reinvestments automatically for me. AI will obey your desired allocation across note grades, and you can now even combine it with one of your manual filters. This experiment has been going well, and the reduced amount of idle cash is providing higher returns and lower stress – no more manual fussing around with notes.

Since beginning this experiment, Lending Club itself has grown significantly, in both scale and reputation. This article in the Economist describes the flood of institutional money that is now pouring in to these notes, and the May 2013 Google Investment in Lending Club was a boost to its stability and credibility as well.

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 about $37,000 accounting for the withdrawal I made in fall 2013), 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:

lc_investor

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:

lc_borrower

(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

  • George Kao October 20, 2014, 8:04 am

    Thanks for sharing your numbers! I’ve been happily investing with LendingClub for just over a year — also using their Automated Investing so it is super easy. Now I’m ready to invest more, and thinking of diversifying by starting a Prosper.com account as well. Have you considered that too? Thanks for an awesome blog. Will be spreading the word.

    Reply
    • Ryan Lichtenwald October 20, 2014, 4:14 pm

      George, have you considered any of the other automated investment tools? I recently diversified into Prosper and have been happy so far although it’s still very early.

      Reply
      • Pete December 6, 2014, 11:15 am

        Ryan,
        Just stumbled across this page hence the late comment. How is your Prosper going? I invested in it (about 1000 per month for a year) way back in 2007, but the best I could do was break even. Perhaps it has gotten better to invest in now, but there were a LOT of loans that were written off…and these were supposedly the A+ quality ones (or whatever their ranking was).

        Reply
        • Ryan December 9, 2014, 11:23 am

          Hi Pete,

          It sounds like you started investing in the early days. There has been new management since you began investing and in my opinion they have turned Prosper around. Prosper nowadays is sometimes dubbed Prosper 2.0 after some of the issues in the early days. I’d say it is definitely worth another look. I felt very comfortable investing with them starting this year.

          As for me, It’s still pretty early and I haven’t even been posting my returns since I don’t think it is an accurate representation. My average rate is around 18% and I haven’t seen anything as of yet that would raise concern. The best thing you can do is look at some of the past performance. I’ll have another update at the end of the year, but here was my experience after two months:

          http://peersociallending.com/investing/prosper-marketplace-investing-review-2-months/

          Feel free to reach out if you have any questions, I’m happy to help new investors.

          Reply
  • George Kao October 20, 2014, 8:10 am

    Also, I’ve taken all my money out of the stock market and plan to put it into peer-to-peer lending. It seems to me that the Stock Market is a giant Ponzi Scheme. Plus, my values don’t align with most of the top corporations whose mission in life is shareholder profit, not employee happiness or healthy communities. Actually it’s not just their mission, it’s their legal fiduciary responsibility. By contrast, peer-to-peer lending is about supporting the everyday person. Gratefully, as you’ve discovered, the returns are likely to be higher than Index Funds…

    Reply
    • Ryan Lichtenwald October 20, 2014, 4:28 pm

      Wow! That is certainly a bold move and this is coming from someone who is a huge supporter of peer to peer lending. I would love to hear more about how this change is going for you – feel free to reach out via my site. I think the important thing to remember is that right now it is possible to achieve higher returns than the average stock market returns. But what happens in different financial times such as a financial downturn, rising interest rates, high unemployment etc? They actually warn you against putting more than 10% of your investments in it. There are still too many unknowns to make that big of an allocation to one company/asset class in my opinion. Peer to peer lending is definitely about helping other people out, but it is becoming less and less of ‘peer to peer’ every day with banks, hedge funds etc. getting involved. Best of luck!

      Reply
    • tim December 19, 2014, 9:41 pm

      peer to peer lending about helping everyday person???? no it isn’t. its about making a profit on your money, which is perfectly o.k. dont pretend youre doing it out of the goodness of your heart if you were you wouldnt want any interest on your money and if youre willing to make interest free loans sign me up but dont hand me the im trying to help my fellow man line of bullshit

      Reply
  • Nearlydawn November 14, 2014, 7:28 am

    Just started up my account! I like the idea very much, and your historical data helped me analyze whether this was a good fit for my personal portfolio. Thanks so much for taking the time to provide the data.

    Reply
  • Vivacious November 16, 2014, 7:01 pm

    Thanks for posting this! Can you clarify if the interest received (column 3) is either (a) interest or (b) interest and principal? Are Lending Club loans fully amortizing? Which classes of investments did you invest in (A-FG)?

    Appreciate the help.

    Reply
    • Mr. Money Mustache November 18, 2014, 8:16 am

      Hi Viv, column 3 is just interest (so your net profit is interest minus all losses). The loans are all amortizing over 3 and 5-year periods, so there is constant rebuying going on automatically with the incoming payments. Loans are mostly in D through G.

      Reply
      • Vivacious November 18, 2014, 10:36 am

        Thanks for the reply MMM! What category of loans do you select in the filters (e.g. FICO score, income verification, etc)? Any best practices, learnings on what loans you don’t like? -Viv

        Reply
      • Jason November 27, 2014, 10:36 am

        I’m curious as to how you’re filtering today. Do you have an update on how you’re filtering for automated investing? I can’t imagine you’re deploying cash very quickly unless you’ve opened up some of your criteria? Have you moved to 60 month notes to get D through G interest rates? The filter you mentioned in previous articles is showing mostly A grade notes, occasionally B. D through G is basically non-existent.

        Thanks!

        Reply
  • YzTufo November 18, 2014, 5:43 am

    Are there any p2p lending programs for non us citizens? I have an account in the US but no social security number (with a ridiculous .25 interest rate). I live in Colombia and I have yet to find a site like Prosper or Lending Club.

    Reply
    • Ryan November 18, 2014, 8:16 am

      I’m not aware of any specifically in Columbia, but there are a couple of Bitcoin p2p lending companies that are open to investors/borrowers all over the world. I still think they are in there infancy and there are additional risks, but it could be an option. I wouldn’t compare them at this point to the likes of Prosper and Lending Club.

      Reply
  • Trilby November 18, 2014, 1:08 pm

    I tried Lending Club in 2009 and was very disappointed. To me, the fly in the ointment was their toothless “collection” procedures. They send the borrower an email. the another one. then they say, Oh well! And charge it off. Ridiculous. I was happy to get out without about 2% more than I put in, after 2 years.

    Reply
  • ben November 21, 2014, 10:21 pm

    Is there any concern about the time horizons involved? I understand there is a secondary market for exiting loans before they mature; any experience to relate? I am intrigued by Lending Club but I want to make sure I could exit quickly if needed.

    Reply
    • Ryan November 22, 2014, 7:45 pm

      Hi Ben, here is an excerpt from one of my posts on the subject:

      RE: Peer to Peer Lending Investments are Illiquid

      It’s true, you can’t simply cash out your entire p2p lending account as you would with a stock or a fund. However, there is a secondary market and with enough patience you will be able to sell your notes and I’m aware of others who are trying to solve this issue. For now, I’d like to offer another viewpoint from a reader of mine:

      Lending Club notes are essentially short duration bond surrogates. The very shortness of their duration provides liquidity. If people need funds immediately there is FOLIO. (I know they may take a slight “hit” but in an emergency the liquidity is there).

      Remember, you receive both P&I payments monthly.

      Reply
  • Fred Jones November 22, 2014, 6:54 pm

    Everything I’ve read about Lending Club sounds positive and I have just opened an account with small portion of my portfolio. Aside from prudence at investing in something new I have a big question that hasn’t been answered. These returns are high relative to a normal savings account. If, as suggested by you above, this has drawn institutional interest then, presumably, the supply of funds available to the Lending Club should increase tremendously. If that happens then the supply of lending funds available should, at some point, outstrip the demand for the loans. That should reduce returns down to normal levels. Why will this not be the case?

    Reply
    • Mr. Money Mustache November 23, 2014, 7:58 pm

      You got it, Fred – that has been happening for years now. Lending club has occasionally run short on loans, meaning that not everyone can get exactly the grades and types they are searching for. A bit on that here:
      http://www.mrmoneymustache.com/2013/08/26/the-lending-club-experiment-at-one-year-the-gravy-train-grows-crowded/

      On the positive side, LC has been plowing advertising into publications where indebted people tend to hang out, and wrestling away billions of dollars of the business that would normally go to credit cards and other lenders. So their supply of available loans continues to rise along with the supply of investors: https://www.lendingclub.com/info/statistics.action

      What they haven’t done is drop the interest rates too much. Since the rates are set by LC rather than a bidding process, they are able to keep these wherever they want, rather than letting supply and demand dictate them. The downside is if the rates are too high, they end up with excess demand and not enough supply of loans.

      Reply
  • MKHM November 23, 2014, 10:38 am

    With an annual household income of less than $50,000 and less than $250,000 in assets, Lending Club is off limits for us. Do you know of any similar opportunities for low-income investors? We do have about $100,000 in assets (not including home, car, etc) and no debt to speak of (other than about $95,000 left on our mortgage). So, although our income is not very high we have plenty to live day to day with some left to invest. For years now, we’ve just watched our saving account grow since neither me or my husband had any experience investing, but I finally decided it was time for a new strategy. I moved my retirement accounts to Vanguard ETF’s, bought a few dividend stocks, and was planning on moving the majority of the rest of our savings to Vanguard ETF’s until I learned about PTP lending. It sounded like a great place to put a few thousand dollars. I’m disappointed to learn that we are “too poor” to participate.

    Reply
    • Ryan November 23, 2014, 1:38 pm

      I don’t want to suggest breaking the “rules” (http://www.mrmoneymustache.com/2013/10/22/theres-something-you-need-to-know-about-the-rules/)

      But! I will say that I was never asked for proof of income or net worth when I started investing in p2p lending. There might be a few options out there, but in my opinion none with the track record of Lending Club/Prosper.

      Reply
    • MRB December 17, 2014, 10:23 am

      I would say that Lending Club is NOT out of the question at your level. I make $60k a year with zero assets (no home, no car, no other stocks) when I started with Lending Club.

      Reply
  • Vivacious November 25, 2014, 3:48 pm

    Tl;dr: you’re actually getting a half or less of what they advertise on Lending Club.

    Ok, after modeling out the monthly cash flows on a Lending Club loan, I’ve realized that Lending Club is kinda of a sham. First, for the sake of round numbers, let’s say you’re investing $100 at 10% over 36 months. You’d like to think you’re getting a 10% or $10 yield per year, given the rate, but you’d be wrong. You are getting more like $8 year 1, $5 year 2, and $2 year 3 because of amortization (explained below). Therefore, you’re getting back approximately $5 per year for three years. After taxes and 1% management fees and 5% defaults, you’re making $2 NET per year at most. Basically, you’re taking illiquidity risk and not getting paid much for it. For example, you could have purchased STWD stock (a real estate REIT), got paid a 8%, or 4x the amount, and have full liquidity.

    (By the way, LC’s reported 5% default is actually horrible. A typical junk bond’s default rate is WAY less than that:
    http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245331026864)

    So, why can LC advertise 10% but only pay you 5%? My second major point: amortization. Amo means your principal gets paid back with each payment. Each payment of principal means you have to REINVEST those dollars into other loans. So each year, when you’re getting “paid” back $10, half of it is interest, half of it is principal, on average. The 10% assumes you re-invested that principal you got back. IT is IMAGINARY unless you reinvest. The concept to realize is, amortizing loans AREN’T interest only loans, which pay you 10% interest per year and your FULL principal back at the very end. You can argue amo is better for risk, etc., and that is true, but on the flip side, amo is MUCH worse for your return. Amo works for banks because they originate loans for 30 years, etc.

    Therefore, the payments you get from lending club loans constantly need to roll forward. So if you’re feeling like the economy is going to poop, and you want to get out, too bad, you’re stuck on what you’ve already put out because you rolled those loans forward 36 or 60 months.

    In short, lending club is only a half as great as people think. And less than a quarter as great as people think net of taxes, fees, and defaults;) Actually, a 2% yield for all that risk and work is pretty horrible :( Hope that helps.

    Reply
    • Rob December 4, 2014, 11:17 pm

      Yes but it also means you are getting the money back as well. It isn’t all locked up for the entire period. So when you only get that $2 at the end, that $2 may be be 2% of $100 but you no longer have $100 in that particular loan. Besides, most people will be reinvesting it for a while, but it is definitely something worth noting, it is a very different structure with different risks and rewards.

      Also, the defaults are included in their numbers(5% is the total amount, not each bracket is the same so a loan at 10% would have a much lower default rate), that is why the loans with 20% borrower interest still have an expected return under 9% for investors.

      Reply
    • Frank Frugal December 8, 2014, 10:28 pm

      Wow! Vivacious Thanks for the insight. Your post summarizes my previous research.

      I will not invest in Lending Club company.

      Thanks,

      Frank

      Reply
    • Mr. Money Mustache December 9, 2014, 10:29 am

      Vivacious, I have to respectfully disagree with your analysis. Return percentages for all investments are calculated on the amount of money you currently have invested, not the amount they have handed back to you!

      If you turn on LC’s “automated investing” feature, you keep 100% invested at all times, which keeps the return at 100% of promised value.

      Also, while the interest rates for individual loans are indeed gross figures, the overall advertised rates on the LC website are NET of defaults and fees.

      So in my table of returns above, I have so far earned just under 13% net (gross is closer to 20%) Factoring in the future defaults on the currently healthy notes, the forecast return is more like 11%.

      An 11% yield for virtually zero work is pretty good. But I admit that the risk is yet to be determined, since I haven’t held this account through a serious recession yet.

      So 11% is the real return I’ve seen so far -

      Reply
      • RAnn December 17, 2014, 3:06 pm

        A popular way to more accurately track p to p returns is the XIRR method, which you can do with an excel spreadsheet or you can do online here: http://www.lendingmemo.com/xirr-calculator/ It is true that the return isn’t as high as it would first appear. You deposit money. You wait four days. Then you can start to invest. Assuming you can find enough notes that meet your criteria that first day, you then wait. At least 1/3 of them aren’t going to issue, which may take a couple of days, or may take almost two weeks. Your money is tied up until then, earning nothing. Then you have to pick new notes to take the place of those which weren’t issued. A month after investing $5000 in LC and $5000 in Prosper, I have $400 pending for each of them (notes selected but not yet issued) and about $50 cash. Both accounts are set on automatic with some filters.

        I’ve been investing in LC for five months now. I’ve bought a lot of notes on folio, many at a premium. I’ve had some pay off early. I’ve sold some that were late. While LC says my returns are 11% annualized, XIRR says about 5.5%. I expect that to climb as my money gets invested and stays invested (two months ago is when I broke even on my first $1550) but I don’t expect my real returns to equal what LC says they are, because of the cash drag.

        Reply
    • tim December 19, 2014, 9:54 pm

      i dont know if your math is right. i opened my LC account in february so didnt receive any interest until march. i opened with $2500 and made a few 5,000-10,000 deposits between april and august making my total deposits $32000. i have gotten $2026 dollars in interest so far this year- that does not include repayment of principal and i have reinvested all payments. i use a different criteria for lending than MMM and so far (knock on wood) have zero defaults and a 10.29% return. my only turn off with LC is i think they shouuld provide more information on borrowers. for example- are they married/ single? do they have a single income household?, what city do they live in? (they recently began omitting this and wont respond to my emails regarding an explanation for this change), whats the borrowers age? etc etc. overall im pleased with LC as an investment. i think its a decent diversification tool but am probably more likely to withdraw funds than add funds to it.

      Reply
  • Anne November 30, 2014, 5:40 pm

    Hi – I am looking at investing with the Lending Club, and am curious about what “spread” or choice of loan grades you chose to optimize returns and not defaults. Obviously higher than just As; but how many Bs or Cs or beyond?

    many thanks for publishing your data -

    Reply
    • Ryan December 3, 2014, 2:59 pm

      Anne, I can’t speak to MMMs choice of loan grades, but one of the great things about LendingClub and Prosper is the (relatively) openness as far as data goes. I suggest you check out NickelSteamroller and do your analysis on loan grades vs. defaults. You can likely get an idea of the ‘sweet spot’ for interest rate vs. defaults. Keep in mind this is historical data and it doesn’t guarantee future results, but it gives you an idea. Also be aware of/adjust the filters accordingly since 2014 returns will obviously be stated higher due to the notes not being seasoned. You can start here:

      http://www.nickelsteamroller.com/#!/stats/lendingclub

      Reply
  • Travis December 8, 2014, 9:02 pm

    How does this interest income affect taxes? I don’t want 9% returns turning into an effective 5ish% return due to a higher tax bracket plus state income tax instead of Capital Gains only reducing it to an effective 7%. That could also hurt doubly on an early retiree Roth Conversion Ladder strategy. Thoughts?

    Reply
  • Mike December 9, 2014, 10:55 am

    My experience with Prosper is that it takes a lot longer to fulfill a given automated order because they don’t have as much volume of loans going through relative to demand. I have a conservative automated selection (top 4 tiers and only physical assets or credit card debt) but it took multiple months to buy $12,500 worth of loans vs. one month for lending club.

    Reply
  • Bob Derek December 10, 2014, 9:04 pm

    Actually your chart is a little scary. You’ve gotten about $10,000 in interest less $3000 in write offs, so say you’ve gotten $7000 back so far, over a number of years, is that right? And of course there are fees. The gain has to be deflated somewhat. But you still have about $32,000 at risk, over four times what you’ve gotten back, so are the gains paper gains that could be wiped out by a meaningful default? That is for your annualized gains to hold up things would have to keep going the way they are. Not sure — Just askin.

    Reply
  • Tim Krik December 10, 2014, 9:10 pm

    Lending Club IPO nets VC investors 60x, 80x, 40x: cnbc.com/id/102249780

    Reply

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