If this is the first of my Lending Club return updates that you’ve read, let me catch you up a bit. It all started with a little Lending Club / Sharebuilder experiment. It’s moved on past that, to an ongoing series here at Beating Broke where I share, on a quarterly basis, how the account is doing, the things I’ve done with the account recently, and the things that I might be thinking about trying over the next quarter.
How I invest in Lending Club
Because of where I live (North Dakota), I’m not able to directly invest in fresh loans. I’m forced to use the FolioFN trading platform to buy (and occasionally sell) the notes that I’m investing in. But, based on my returns, I don’t think I’ll be complaining anytime soon. If you’d like to read more about how I select my Lending Club notes, you can read my post on that subject here.
Lazy Lending Club Investing
While I consider investing in peer-to-peer investing to be a nearly passive income source, it isn’t a pure passive income source. What I mean by that is that it does require some active management in order to keep the money invested in loans, and not just sitting fallow in your account. Without meaning to, I put that to the test this last quarter. In February, I don’t even know if I logged into the account. I certainly didn’t buy any new notes. What that means is that for the better part of February, the money that I had coming in just sat in the cash account not doing a darn thing. By the end of February, the cash account was nearly 10% of my Lending Club portfolio. I invested all of that back into notes in March, but it was a lesson in needing to log in and check the account once in a while.
Lending Club Loan Analysis
Analysis might be a bit too strong of a word. At the end of the quarter, I had invested in a total of 62 notes. Of those 62 notes, 19 had been paid off, and there have been no written off loans. There is one that has slipped into the delinquent status column, however, and is showing signs of ending up in the written off column. The balance on principle of the loan is less than 1% of my total portfolio. I might be able to sell it, but it’s far enough delinquent that I’d have to sell it at a significant discount. Honestly, I haven’t decided if I’ll do that or not. I’d rather it just came back around and was paid off, but I’m more of a realist than that. Maybe we’ll be talking about the written off loan effect at the end of next quarter.
Lending Club Return
So this is the part that everyone’s been reading for, right? If you look back at the 4Q12 update, you’ll see that my rate of return (displayed as NAR in the account dashboard) was 14.48%. I screwed up a bit and didn’t record the NAR displayed at the end of March. As of 4/24/2013, it’s being displayed as 14.63. That still includes the one delinquent loan, so it’s likely to go down some if that loan is sold at a significant discount, or if it is written off. The spreadsheet I use to keep track of the numbers shows a a return of 15.86% and 13.26% (adjusted with inflation, which may or may not be necessary).
The cash flow in the account remains pretty good. I had several loans paid off in the last quarter that was reinvested. All told, the portfolio of active (principle remaining) loans grew by 2 over the first quarter. The average amount of money churning back into the account each month is averaging well over $30 a month now allowing me to invest in one new note (at $25/each) each month and then another when the balance grows beyond $25 again. Monthly interest received is teetering around the $10 a month line. I think my next goal might be to get the interest income up to $25 a month. That would be pretty sweet. I’d be investing in a new note each month on just the interest along. If I want to do that anytime soon, however, it means I’ll have to start putting money into the account again. I haven’t put anything into it since November of last year, and I haven’t yet decided when I’ll start putting money into it again, but it will likely be soon.
Embracing Risk, and Increasing Returns
I suppose that somewhere along the way, here, I should mention risk. The notes that I’m investing in all carry a risk of potential default. If they all were to default, I’d lose every penny in my account. The odds of that happening are pretty small. But, the odds of having one or two loans default out of a couple hundred is significantly higher. If you’re going to invest in Lending Club notes, or any investment, you need to know and understand the risks. That’s your warning, and my disclaimer.
Now, take a minute and go look to see what your bank or credit union of choice pays on their savings account. How about their best rate on a CD? Now, even if I were to invest my portfolio into loans with a better credit rating (and, supposedly lesser risk), I could easily be making 6-9% if there weren’t any defaults. It beats the heck out of the rates at my credit union.
One last disclaimer. Please don’t put your liquid (or, emergency) savings into risky investments. You need those readily available, and relatively risk free. Even at a paltry 0.25% in a savings account, it’s in the best place. Every other drop of savings is fair game though. Your money needs to be working for you, not the bank.
If you think Lending Club (or Prosper) is something you want to give a look (maybe you’ll want to try an experiment like I have?) you can sign up at the following links: (Lending Club | Prosper)
I started this blog to share what I know and what I was learning about personal finance. Along the way I’ve met and found many blogging friends. Please feel free to connect with me on the Beating Broke accounts: Twitter and Facebook.
Now that the year has ended, and the new one has begun, it’s time for another Lending Club Update. (Here’s the link to the 3Q2012 update if you care to read it.)
A couple of significant things happened in the final quarter of 2012. My account maintained sustainability and I stopped contributing to the account (temporarily). I’ll go over each in turn, but the first is a milestone that I have been waiting for, while the second was something that just needed to happen because of my personal financial situation.
Lending Club Account Sustainability.
What defines sustainability? For me, I’ve defined it as receiving in excess of $25 a month in principle and interest payments. My account first reached that goal in June of 2012, and has maintained it since. In August of 2012, it came close to dropping below that threshold, but managed to stay above. It seems to have settled in at about $30 towards the end of the quarter, so hopefully as that money is reinvested, that number will continue to increase.
The entire quarter saw the interest payments that I received rise to a little over $9 a month. I won’t likely get rich off of that, but it’s also not an insignificant amount on an account that has a total just under $800. The Net Annualized Return (NAR) that’s being displayed on the account homepage is up .4% to 14.48%, a number I’m happy with. There’s some argument over whether you should really use the NAR as a gauge of the account performance or not. I won’t pretend to understand most of it. 🙂 What I do understand though is that having exact figures is less important to me for this experiment than it is to have a standard metric to measure my results by. So long as the method of calculation remains the same, it should give me a general idea of how the account is doing. (I’m open to learning more about how some of this is calculated. Drop links in the comments!)
Contributions Stopped.
I stopped my contributions to the account in November. If you’ve been reading along with the site, you’ll know that we ended up having some financial difficulties at the end of October. As a result, much of the money that I was using to fund the account ended up getting transferred to my personal account to help dig ourselves out of that rut. It isn’t any reflection on Lending Club, but a reflection on my finances and the need to help keep the ship afloat. We’ve mostly righted the ship, now, so I’ll likely start putting some money back into this account sometime in the first or second quarter of 2013.
My Lending Club Portfolio
My portfolio remains strong. I still haven’t had any defaults. *knock on wood* While this experiment of sorts (it’s gone beyond that, I think) started in July of 2011, I’ve had my account at Lending Club since January of 2010. That’s a pretty long stretch to go without a default of any sort. You might recall that I sold a loan that had gone delinquent in the 2Q/3Q 2012 area. I also had a second loan that had gone late, but it eventually was made current. Currently, my portfolio has 42 loans in it. All of them are current. It also has 13 loans that have been paid in full. Of those, perhaps about half have been paid off in advance. That’s both good and bad. I like that they’ve paid them off in advance because it seems to show that the borrowers are perhaps getting their finances together. It’s bad, because I lose out on some income from interest when they pay them off early. One of the risks of this income stream.
I’m still not able to directly invest in loans, and still have to invest through the FolioFN platform. It’s still not ideal. But, until my state (North Dakota) pulls their head out, and starts allowing it, that’s what I’m stuck with. I’m not holding my breath. I’m not going to complain too much, as I do seem to have found a pretty good method for selecting my Lending Club notes, and it seems to be working.
How are your investments starting off the new year? How’s your Lending Club (or Prosper) account doing?
I started this blog to share what I know and what I was learning about personal finance. Along the way I’ve met and found many blogging friends. Please feel free to connect with me on the Beating Broke accounts: Twitter and Facebook.
Lending Club is a great tool for making some very nice passive income. I’ve been using my account to invest some funds and see what I can do as far as a return, as well as to learn more about the service and what can be done with it. As someone who lives in a state where the direct investing isn’t allowed (state laws that need changing), I use the FolioFN trading platform within Lending Club to make my investments. This eats into my return a bit, as I pay a small premium to the original investor when I buy the investment. However, I’m finding that even with that small premium, my return is still far above what I am making in any savings account. If you’d like to start at the beginning of the year, you can read my 1Q2012 and 2Q2012 updates first then come back to this one.
Lending Club Returns Growing
After the last update, in July, I made the decision that I could increase the risk level a bit on the my portfolio and still safely be in a place where it wasn’t too high. While I don’t have a direct history of working at a commercial lender, I did work in I.T. at a Credit Union. (Also, I did not sleep at a Holiday Inn Express last night.) In my position there, I learned a few things about the way the backend of an institution works. And, what I can tell you is that the credit scores that are getting C and even D ratings on Lending Club would be the average borrowers at a commercial brick-and-mortar institution. What that tells me is that even the C and D rating loans at Lending Club are still a pretty safe investment. After all, if the banks and credit unions couldn’t make money on them, they wouldn’t loan to them. So, I increased my lending in the C and D ranges and have now moved the middle of my portfolio into the C/C- range. It’s weighted a bit riskier, but the reward is a bit higher as well. At the end of 2Q2012, my rate was stated on my dashboard as 13.58%. At the end of 3Q2012, that rate has increased to 14.08%.
A half a percent increase doesn’t sound like much, but it’s twice what my local savings account pays! If I’d have dumped that money into my savings account instead, I’d be making half of just the increase I made last quarter. Sad, no?
Delinquencies and Diversification on Lending Club
If you read the 2Q2012 update, you’ll know that I had two loans that have entered into the delinquency statuses. One of which, I was able to immediately sell on FolioFN for the outstanding principle. I lost the interest, but also lost the risk of it becoming a written off loan. The other had a very low principle balance on it, so I decided to keep it to see what would happen, and to force myself through the collection process should it have gone that far. It did not. The loan went so far as to become 31-120 days past due and then a payment was made that brought it current. It has remained current since then.
This is a good time to talk about diversification too. As you can see from the above screenprint, I have just under $700 in my Lending Club account. Nearly all of that (except the $17.72 in available cash) is invested into loans. All told, I have investments in 37 loans currently. That’s an average investment of about $18.50 per loan. Obviously, some of them are nearing payoff, and others are nearer funding, so the actual amount per loan varies wildly between $0 and $25. I do try and keep each investment to about $25-$30 to maintain that diversification. If any one of the loans were to go into collections and then be written off, I’m only loosing a small fraction of my overall portfolio, and the hit would be minimal.
Much like any other investment, whether it be in stocks, real estate, etc, diversification can greatly improve your risk tolerance. The risk of having one or two loans that go bad is far outweighed by the fact that you’d still have 10, 20, 30, or more loans that are in a current status. I’ll continue to monitor for loans that go past due and then decide individually whether to keep them or to try and liquidate them through the FolioFN trading platform.
Other notes
Over the last quarter, my Lending Club account has reached a point that the principle payments combined with the interest payments exceed $25 a month. What that means is that part of my experiment is complete. I’ve been able to create a portfolio of self-sustaining investments. I can stop putting any new funds into the account, and be able to reinvest the returns each month without having a whole lot of dead money sitting around waiting on me to invest it. At most, any funds from payments should only sit around for a maximum of about 30 days. It’s not ideal, but it’s far better than it could be.
I don’t intend to completely stop adding funds to the account either. I want the portfolio to grow at a slightly faster clip than it would with just the returns and payments, so I’ll continue making deposits into it. I like the way the portfolio is currently balanced, so will likely try and keep it that way. What that likely means is that I shouldn’t expect to see any major movement on the rate of return. I’m happy with the 14% I’m currently getting though, so that isn’t really a problem for me.
How many of you have not invested in a P2P lending account like the mine at Lending Club or at Prosper? Why not?
I started this blog to share what I know and what I was learning about personal finance. Along the way I’ve met and found many blogging friends. Please feel free to connect with me on the Beating Broke accounts: Twitter and Facebook.
