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. 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:
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
December 17, 2013 $32,959.53 $4,403.73 16.50% $233 $613 $526
January 30, 2014 $33,318.78 $5002.06 15.85% $476 $983 $739
February 28, 2014 $33,568.54 $5,458.52 15.37% $43 $802 $957
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 17 months into the experiment, we’ve been seeing the expected stream of defaults and chargeoffs for over a full year. 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 15.37% remains 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 on average are recovered, versus going bad. Clicking it with today’s results, I get 12.69% - up a full percentage point from last month, meaning the pool of late loans shrank more than expected.
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 Prime service, which will handle reinvestments automatically for me. Prime will obey your desired allocation across note grades, and you can now even combine it with one of your manual filters. This will be a nice new experiment, and the reduced amount of idle cash should provide a boost to overall returns that may be more powerful than anything I could achieve with 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 over $33,000), 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