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Lending Club PRIME Review and the Difference Between NAR and Actual Returns

by Peter Renton on August 11, 2011

Lending Club PRIME Review August 2011
It has been about four months since I gave an update on my wife’s Lending Club PRIME (link to my initial review) account, so I thought it was time to revisit the numbers. I am going to try and provide these updates quarterly from now on. I think p2p investors can learn several useful things from this review.

Above is the screenshot I took of the PRIME IRA account this morning. As you can see this account is earning a 9.73% NAR according to Lending Club with an account total of just over $60K. My last Lending Club PRIME update in April had my NAR at 10.37% and an account total of $58,577. Every month my account total keeps going up.

The Lending Club Numbers May Be Overstated

Even though the balance goes up every month the numbers Lending Club provide on their account details screen can be misleading. I have written about the difference between actual return and Lending Club NAR before and I am going to stress this again today. You may look at the screen shot above and believe I am earning 9.73% on my account right now, but that number is a slight exaggeration.

To get an accurate picture of your Lending Club returns you need to look at your monthly statements. The numbers there show your actual balance at the end of every month, whereas the account total figure above includess an estimate of your accrued interest, but this interest is not actually yours until the borrower actually pays the interest. You can read a brief explanation of accrued interest here.

Take a look at the spreadsheet below. This shows my actual account balance (taken from my statements) for the last four quarters on this PRIME account. I have also computed my annualized ROI based on these numbers (please note: the October 2010 quarter numbers do not compute correctly because there was a $533 bonus that I backed out so I could compare apples to apples).

QuarterBalanceActual ROI
Jul-10 $53,927
Oct-10 $55,945 11.02%
Jan-11 $57,252 9.34%
Apr-11 $58,424 8.19%
Jul-11 $59,538 7.63%

A few months ago I started recording my NAR every day from the Lending Club home screen to really see how it changed over time. So, I have an accurate number for the three months ending July 31, 2011. My average NAR according to Lending Club during this quarter was 9.84% and yet when you look at my account based on my statement balance the actual return earned was 7.64% – quite a large difference.

[Update: It was pointed out by a reader that I didn't provide an annual ROI figure, just annualized ROI based on quarterly numbers. My annual real world ROI is 9.42% (backing out the $533 bonus) - much closer to the 9.73% stated by Lending Club.]

Why the Difference?

Some of it can be explained by the fact that some money sits in idle cash, but Lending Club is pretty good about reinvesting. They average a reinvestment about every 10 days so the average cash sitting in the account is only around $400. I think the main reason for the difference is in defaults. I had six charged off loans during the quarter with a total principal loss of $496 which reduced my end of quarter account balance. These six defaults reduced my NAR by 1.02% but with a $496 hit in that quarter my annualized ROI was reduced by 3.40%. From my math this accounts for most of the difference between the two numbers.

All these calculations are relatively simple because I had no cash inflows or outflows on this account in the past year. Most people will be adding or subtracting from their account in which case I recommend using the XIRR calculation to work out an actual return.

With several more late notes I expect my annualized real world return to dip well under 7% and maybe even below 6% before stabilizing somewhere around 7-9% by this time next year. For the hands-off PRIME account I think that is a decent return. I will be reporting back here on this account’s progress so you can the progress on this account over time.

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{ 14 comments… read them below or add one }

Charlie H August 11, 2011 at 4:02 pm

Interesting to see how a large portfolio does over time.

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Dan B August 11, 2011 at 6:07 pm

This account has “several” more late notes? That’s like saying that there are “several” good soccer players in Brazil. :)

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Roy S August 11, 2011 at 6:35 pm

(fyi: I use Prosper, where there is no such option that I know and where the process may be slightly different)

That being said, I would be REALLY interested in knowing how they automatically choose which notes to invest in. It would appear as though with this scenario that they would have a greater incentive to invest your money in notes that would otherwise not be funded by the users themselves. Obviously, they want to have investors receive a higher return and fewer defaults so they can generate more business, but that is what their initial screening prior to a loan being listed in the first place is for.

For whatever reason, investors may veer away certain loans. Making a big assumption that after loans are posted to the site investors are better at picking loans which will not default than choosing the loans at random (something you cannot actually verify), it would mean that there are a higher proportion of loans that do not get funded that would end up defaulting than those that do get funded. If this automated process picks loans that would otherwise go unfunded, it means that even randomly choosing loans from this subset will result in a higher default rate. Since this assures that LC will receive its origination commission and at least a few monthly payment commissions, it would be in their interest to fund these loans that would otherwise not be funded after the others have been given a shot at investing in these loans. And after all, they already conducted their initial screening and these loans were posted to the sight so LC feels that these would be good loans to make to begin with.

It would be interesting to see length of time it took for these loans (ones where any part of it was funded by LC PRIME accounts) to fund versus the length of time it takes for an average loan to fund. Default rates between the two subsets would also be interesting.

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Michael August 11, 2011 at 6:41 pm

I think there is additional confusion with annualized vs non-annualized returns. ROI operates independently of time, but virtually every investor thinks of investments in terms of 1 year (annualized).

Take Lend Stats, the ROI results are basically if you buy the loan and let it sit until maturity. I think its a good indication of how to increase returns in general but you have no real idea of what you can expect for annual returns.

I would like to challenge this community to come together and attempt to help me create a definitive portfolio analysis tool for investors that allows them transparency into their portfolio. I’ve already created a tool that helps investors analyze their LC portfolio. We can make it much better!

http://www.nickelsteamroller.com/portfolio

You can use the comments sections located on every page of the website to help improve the system. I will code changes as fast as I can to get your innovative ideas integrated into the web site to help p2p investors.

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Dan B August 11, 2011 at 7:52 pm

For an almost 900 note portfolio, I would have imagined that the automatic reinvestment would occur more often than every 10 days. My manual account has only 530 notes but there’s always enough to buy a couple of new notes every week……………often times more than a couple.

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Peter Renton August 12, 2011 at 6:42 am

Thanks for your comments gentlemen.

@Charlie, Thanks. You might also want to see my update where I included my actual ROI from August 1, 2010 to July 31, 2011. It is 9.42%.

@Dan, They could certainly reinvest every two days if they wanted to but they like to wait until there is enough cash to invest in 8-10 notes at a time. And I think there are more than 22 good soccer players in Brazil…..

@Roy, You bring up an interesting point. With this PRIME account the notes are picked at random within certain parameters: 36 month notes in the grades B,C and D. But with over 99% of the loans funding on the Lending Club platform these days, investors are not really influencing which loans get funded. As for comparing PRIME with smart investor choices that is one of the primary goals of this blog. I present this PRIME example as a benchmark. If you can’t beat the returns here by spending time doing analysis and choosing loans carefully, then you should just choose PRIME and then kick back and relax.

@Michael, I would argue that ROI on Lendstats is an annualized number. It does assume you hold the loans to maturity and provides an annualized ROI based on that fact. As I said in my email to you, I will be exploring your site in more depth next week.

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Dan B August 12, 2011 at 7:12 am

Peter…………..For once I’m in complete agreement.

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Alex August 12, 2011 at 8:24 am

Good Morning Peter,

I tried going through all my statements and figuring out my actual return based on the XIRR function and find that I get a higher percentage then what my NAR says. From the posts I have read it seems I should have found the opposite. I wonder if this is because I am early in this investing and have yet to have a default or I am just calculating it incorrectly. But anyway I am getting a NAR of 12.13% and calculating using the XIRR to about 16%. Any thoughts?

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Roy S August 12, 2011 at 11:35 am

@Peter, It is interesting that 99% of the notes on LC get funded. I am on the Prosper platform and am new to p2p lending in general so I haven’t yet taken a look at LC’s data (I don’t know whether LC’s date is even public). The percentage of funded loans from those listed (from just taking a quick look at the data Prosper provides for the listings that are labeled as “Expired”) is significantly lower (at ~75% over the past year based solely on the percentage of listings marked as “Expired”) on Prosper than 99% you have given for LC. I haven’t taken a look at LC’s stats, but if that 99% funding rate is correct, then I could see that the PRIME program would return about an average return with little to no work and may be an adequate way to invest in p2p loans, assuming you can’t beat the average return of all loans of course.

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Justin August 12, 2011 at 11:47 am

As much as I like Lending Club, I also can’t see myself dedicating that much cash to them. I like to carefully screen each note before I decide to buy it. This “set it and forget it” method of investing doesn’t sit well with me. I’m willing to accept the fact that any note that defaults or gets charged off is due to a mistake on my part, and not the result of some algorithm.

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Peter Renton August 12, 2011 at 8:45 pm

@Dan, There is a first time for everything….:-)

@Alex, With such a large difference in NAR and actual return I would guess there is a problem with your calculation. The most common cause for this is assuming the date that you transferred your money to Lending Club is the same date that your money is actually put to work. There is always a lag and sometimes this lag can be substantial. If you want to send me your calculations to peter (at) sociallending (dot) net I will be happy to take a look at it for you.

@Roy, Lending Club makes all their data available for download – you can see the link on their Statistics page. Prosper does have a lower funding percentage than Lending Club but it is unclear whether this has an impact on returns. Prosper provide access to higher risk borrowers than Lending Club so there is potential for higher returns there. My personal goal for my Prosper investments is greater than a 15% actual ROI. While I do have a Lending Club PRIME account, I still believe that with careful loan selections you can beat the averages comfortably. Which is my goal in my non-PRIME Lending Club accounts.

@Justin, That is certainly one way to invest in p2p lending and it is a technique many other investors use. My main problem with this approach is that it doesn’t scale very well. If you want to invest in hundreds of notes it becomes very time consuming. It sounds like you are comfortable with your current strategy which is great.

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Dan B August 14, 2011 at 11:10 pm

Alex………..Keep in mind that NAR only includes notes that have actually paid you interest. So there is a 30+ day lag. If you’ve started investing in higher paying notes within the last month it is possible that the discrepancy in numbers can be significant especially if your recent investments also make up a large percentage of your total portfolio. Or your math might be off, as Peter suggested.

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Alex August 17, 2011 at 12:29 pm

Thanks for the feedback! I think it was I assumed it was immediately invested.

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Peter Renton August 17, 2011 at 2:07 pm

@Alex, That is an easy mistake to make. I try and use a date that is the approximate mid-point of when new cash gets invested because for me new cash can take 2-3 months (or more) to fully invest.

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