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The “Discrepancy” in Lending Club’s Monthly Statements

by Peter Renton on May 5, 2011

In the next couple of days Lending Club will be releasing investor statements for April. But  did you know that your account balance on your statement will not match your account total you see when you login to Lending Club. How can this be?

I have been recording the daily account balance of all my Lending Club and Prosper accounts (I now have six total accounts) for the last couple of months. So, when I checked my March statements a few weeks ago I was surprised to see in some cases the balance was off by several hundred dollars. To give you an example, with my wife’s PRIME IRA account, at the end of day on March 31 I recorded the account total displayed on Lending Club’s site as $58,398.19. But when I looked at my March statement the next week the balance was $57,953.84 – a difference of $444.35.

Accrued Interest is the Culprit

The reason these numbers are off is because of something called accrued interest. When you open an account at Lending Club and start investing in notes you start earning interest on those notes immediately. Every time you login and view your account summary you will see a steadily increasing account balance (unless you have a charge-off, then your balance may go down).

Lending Club accrued interest example

This is because Lending Club accrues interest in your account even before you actually get paid for that interest. I started investing in my brand new Roth IRA account almost two weeks ago. As soon as my first loan went into current status, the very next day I noticed I had gained one cent in interest. Now, just eight days in I have “earned” 32 cents in interest. But as you can see in the screen shot above this interest is not really available yet, as in it is not reflected in my available cash.

But the Lending Club statement does not reflect this accrued interest. For this account above, I know my April statement will reflect a balance of exactly $5000.00 ignoring the few cents in interest I have earned. The statement will reflect cash, loans in funding and principal balance, accrued interest will be nowhere to be seen.

Prosper Does it Differently

Prosper takes a slightly different approach. While they do statements the same way as Lending Club, on their site they don’t post interest into your account until a payment has been made. So, when you first open an account at Prosper you won’t see a change in your balance until payments for your loans start rolling in. Prosper also doesn’t provide an account total figure like Lending Club, instead they have Principal Value and Cash Balance numbers. These numbers should correspond on your monthly statement and on their website on the last day of the month.

Which Approach is Better?

I don’t think one approach is any better or worse than the other. It is all a question of how you view the accounting. Let’s take an example of someone who makes a $500 monthly payment, and for round numbers we will assume that it is $400 of principal and $100 of interest. In reality this $100 of interest doesn’t suddenly appear on the payment due date, it accumulates throughout the month and the $100 total is paid on the due date. The question is this: halfway through the month have you earned $50 in interest or not? Lending Club say you have accrued that money and therefore they add it to your account total that displays on their site.

So, I don’t think there is any real discrepancy between the statement and the account total displayed on the screen at Lending Club. They are just two ways of looking at the same numbers. One includes accrued interest, the other does not.

One final point. If you want to work out your actual real world ROI, then you will want to ignore accrued interest. The easiest way to do this is to just use the numbers from Lending Club’s monthly statements.

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Lou May 5, 2011 at 9:46 pm

I think I like prosper’s way better. With Lending club, loans that are 31- 120 days late are driving that value up by accruing months and months of interest that you won’t see until they start paying. Yes, you’ve earned it, and it is still technically accruing, but displaying it is a bit misleading. Counting chickens and all…
Which also brings up the question do they suddenly remove that accrued interest when it goes into default or chargeoff, or does it keep accruing until the term is up (because technically, it is still accruing until the term is up and they are no longer required to pay on it)?

Peter Renton May 6, 2011 at 5:27 am

@Lou, My understanding of defaults is that they hit your NAR when the note moves from late to default, and then they deduct your accrued interest (and thus your account total) when the note moves from default to charged off. From then on no more interest is accrued on the note.

Jason May 6, 2011 at 11:01 am

I just wanted to say thanks for doing the work you do. This blog is an excellent resource for myself and the people I drive toward P2P lending. I have two Lending Club accounts, a 2 year old college/rainy day fund for my toddling son and relatively new IRA funded with rollover from my tanked 401k. I’ve been happy with the results so far, but I’ve felt alone in the wild.

Until finding this site, I hadn’t found anyone that discussed the merits and pitfalls of P2P lending with the clarity and regularity that you do. So I want to say thanks for doing this and please keep it up.

Jason

Peter Renton May 6, 2011 at 11:25 am

@Jason, Thanks for joining the conversation, I appreciate your kind words. To be honest, I am surprised there are not more people like me. When I first looked at getting involved with this blog I was surprised to find there was absolutely no one in this country blogging exclusively about p2p lending on a regular basis. There were a ton of people 3 or 4 years ago, but all of them have stopped blogging regularly.

This has already started to change, with a few more people jumping in. I actually hope we see many more bloggers in this space as time goes on.

Dan B May 6, 2011 at 1:36 pm

Jason, welcome. Although I join with you in praising Peter for the work he does, it’s also important to note that there are others here who consistently provide some, shall we say, balance to the discussions. Though we’re often not as diplomatic as Peter & may not always preserve the niceties, our absence would quickly turn this place into an echo chamber of positivity.

As innocuous as that may sound, there would then be no one to raise the types of questions…………….. such as the whether it’s really that wise to place college/rainy day funds into this type of investment. Just something to think about.

Peter Renton May 6, 2011 at 3:13 pm

@Dan, No doubt if Jason has been reading this blog for a while he will have read your insightful and sometimes provocative comments. While it is true I am fully sold on the p2p lending concept, I do still try and provide a balanced view of everything.

@Jason, Rest assured if Dan ever feels like it is not balanced enough he is always sure to let me know. As for Dan’s comment about the college/rainy day fund. I don’t see anything wrong with that. If you need the money any time soon then p2p lending is not the best choice, but you say you have a toddler so it will be a while, presumably, before you need it. Dan is pointing out that p2p lending is still a high risk investment. I agree with that and I always stress that it should only ever be a small percentage (say 3-5%) of a person’s overall investment portfolio.

Jason May 6, 2011 at 9:17 pm

There was a time I might have thought p2p lending was a truly risky proposition, then my expensive managed 401k portfolio lost 40% of its value. I watched in disbelief as the incredible earnings in my online brokerage completely disappeared. As a result, I have a deep cynicism for most investments tied to the market. I’m in Colorado and if 529s weren’t tied to the stock market and offered a decent growth rate, I’d be willing to participate in them.

I look at Lending Club as a very long term investment with little or no correlation to the stock market. Get rich slowly and all that. The college fund is meant to be a long term growth vehicle with decent returns. This is the closest I’ve ever been to being the bank in a fundamental way. Defaults are inevitable but the risk is spread so far and wide that they’re bearable and I still make a healthy profit. Plus I get to help people. How cool is that?

The only better performing investment in my portfolio is gold, and who knows how long this rally will last? My biggest fear is Lending Club going away.

Peter Renton May 7, 2011 at 6:12 am

@Jason, I agree that p2p lending is a far less volatile investment than almost any other asset class. If you are diversified into a broad range of notes, you should expect consistent returns. But you hit the nail on the head with your biggest fear.

To me, the only major risk with p2p lending is that something will happen to the major players, Lending Club and Prosper. Now, with Lending Club their volume is increasing pretty much every month and they should break even early next year. But until they show they can make a profit then we can’t say with complete confidence that the business model works. Prosper is further behind but also showing strong gains in recent months.

Having said that I have $100K between all my accounts in Lending Club and Prosper and I am continuing to put new money to work in both companies. So, I believe that while there is still some risk, investors are being well compensated for that risk. And I think that risk (in Lending Club’s case at least) will go away next year. Then I expect the floodgates to open as many investors are sitting on the sidelines waiting until they become profitable.

BTW, I am also in Colorado – whereabouts are you located?

Dan B May 7, 2011 at 9:46 am

@Jason………I’m not even going to ask you what entry & exit points you must be using to calculate in order to get a loss of 40% off of a stock portfolio in the past few years.

@Peter………..We’re only supposed to allocate 3-5% of our investment funds to this? Why didn’t you tell me this before I deposited all my CD money? :)

Seriously though,………….I don’t think one should understate the “liquidity” issue, or lack thereof. As someone who uses the LC trading platform daily I can assure you that the market is not as liquid as it was even 2-3 months ago. Clearly there are many more current notes on sale there & so far that increase has not been balanced out by a similar increase in buyers. Stated another way, one could say that buyers on the secondary market are less willing to pay a premium for notes today as compared to months ago or that they simply have more to choose from. None of this is necessarily important unless you want to get out of this investment immediately…………….like if you’re using this as a “rainy day” fund, for example. In all fairness, I don’t have much experience selling notes at a discount so I can’t speak to that specifically. Needless to say I will be keeping a close eye on this whole issue going forward.

On the other hand I’m less concerned now about the “profitability” issue at LC than I was say 6 months ago. I’m more confident that they will continue to attract an increasing amount of investment money, a lot more confident that they’ll attract the necessary ongoing funding & enormously more confident that the loan demand will continue to increase month to month. In fact the loan demand for a doubling of volume is there today if you really look at the numbers. In many respects the lack of profitability &/or the road map to profitability at LC appears to be somewhat of a “managed” or strategic/measured choice on their part. Bottom line is that I think the brass at LC have made a choice as to when they want to show profitability & I’m confident that they’ll meet that date.

Ed D. May 8, 2011 at 9:06 am

Hello and thanks from a distant reader of your blog. I’ve got 18k into LC and so far so good. One idea I keep running around my head as far as liquidity is for LC to allow for whole portfolios to be bought and sold. The seller could describe the methods used to buy the notes and the entire group of notes would be sold in one transaction. All LC data on those notes would of coarse be highly visible and easy to make sense of. Intelligent loan quality ratings that look at a number of post funding variables could really add value to such a system. The seller could choose to include under-performing notes or not depending on their strategy and time line. I guess I’m just not a fan of the current trading platform. I think the current clog of notes and overall liquidity of P2P systems could really benefit from some well thought out bulk trading options. I’m sort of thinking out loud here!

Peter Renton May 9, 2011 at 9:43 am

@Dan, Interesting point about the trading platform. I am only an occasional user of Foliofn so I appreciate the heads up on that. I have always been surprised about the large number of buyers there anyway because the platform is so inflexible from a note buyers perspective.

I feel the same way about the Lending Club profitability issue. My rep there even told me that if we wanted to increase the speed at which they become profitable they could, but the focus is more on growing the business right now. So I think your point about managed road map to profitability is an accurate one.

@Ed, Interesting idea. I wouldn’t mind betting that as p2p lending matures that something like this comes along. It would provide much needed liquidity from an investors perspective and a way to bypass the trading platform. There should be a way to trade a basket of notes (if not the entire portfolio), rather than add them all individually on the trading platform. Not sure of the regulatory hurdles, there may well be some, but I see this as a natural evolution of the investment vehicle.

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