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

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 13.34% 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 11.56% – 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 over $36,000 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
  • 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

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