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Lending Club PRIME Update – April 2011

by Peter Renton on April 11, 2011

Two months ago I reviewed Lending Club PRIME sharing my thoughts and results after opening the account in April 2010. Now I am coming up on a year since the account was opened and I still remain very happy with how it is going.

As you can see in the graphic above my NAR is now 10.37% as compared with 10.48% two months ago. The account has increased in value by $663 since my last review, but I have had two more defaults which bumped my NAR down a bit. I have been tracking my NAR daily just to see the impact of the defaults – both these new defaults came in the same week and my NAR dropped from 10.70% down to 10.17%. I have a few more loans that have slipped into late status so I expect some of these loans will end up defaulting and my NAR will drop further.

My Actual Investment Return

More interesting to me than NAR is the real world return. Over the six month period from Sept 30, 2010 to March 31, 2011 the actual increase in the value of my account was 4.53%, or an annualized rate of 9.06%. Now, this is lower than the NAR because of way the that formula is calculated. This is why I always recommend that investors calculate their actual return instead of relying on the Lending Club NAR number. I am still very happy with a 9% return, particularly when I consider this is a PRIME account which means it is a completely hands off investment.

Below are the loan details. Lending Club has added a net 76 new loans to the portfolio and if you compare the breakdown with last time it is pretty much exactly the same.

For a detailed explanation of how a PRIME account works you should read my initial Lending Club PRIME Review.

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C. Jensen April 11, 2011 at 1:34 pm

I really wish that with the IRA option (which is also a PRIME account if I understand correctly), Lending Club would let the investor still specifically choose their loans. I realize that this would take some time because the amount of money some people have would be significant, but why not offer the option? This is the single thing that keeps me from opening up an IRA with them.

What are your thoughts? Since you have both types of accounts, I’d be interested to know if your goals are the same and if so, which one has been performing better.

Peter Renton April 11, 2011 at 1:45 pm

@C, thanks for your comments. Lending Club does let you have an IRA account that isn’t PRIME. In fact, I just opened one in my name – my other IRA accounts are my wife’s – and I will not be making this new account a PRIME account.

As for my goals. My taxable account is primarily focused on B and C grade loans whereas with my new IRA I will be focused on D-G grade loans. With my wife’s PRIME account I have chosen the medium grade risk and as you can see from the graphic, it is B-D mainly.

So my goals are more conservative on the taxable account, medium on the PRIME IRA account and my new IRA I am going for broke on the riskiest loans.

C. Jensen April 11, 2011 at 4:33 pm

@Peter: Thank you for clearing that up for me. Time to get my Lending Club IRA cooking!

Dan B April 11, 2011 at 5:05 pm

Are you planning on adding new money into this account? Do you know how many of the “31-120 late” notes are making payments?

So is anyone interested in a winner take all contest?? How about this Peter……………..Each entrant sends you say a $100 entry fee together with their email address & online name & then publicly states right here their best guess as to what the NAR on this IRA Prime account will be on July 31st 2011. You hold on to the “pot” & publish your NAR on July 31st, then forward the entire pot to the entrant that comes closest to the correct number. Obviously this would not be open to any employee of LC or Peter himself, his family etc. Entry deadline end of April? What do you say Peter? How many legal no-nos would this infringe upon?

Peter Renton April 11, 2011 at 6:41 pm

@Dan, I will run it by my team of lawyers in the Social Lending Network legal department and get back with you…

So do you want to publish an initial guess?

Dan B April 11, 2011 at 10:31 pm

Sure, I’d be happy to go first. after you get back to me on…………… Are you planning on adding new money into this account? Do you know how many of the “31-120 late” notes are making payments?

Peter Renton April 12, 2011 at 12:15 pm

Ok @Dan, I am not planning on adding any new money to the account. Of the ten 31-120 late notes two are on payment plans (one other has made a partial payment in the last month but is not on a plan), and of the four 16-30 late notes one has just signed up for a payment plan. Interested to hear your analysis.

Dan B April 12, 2011 at 12:46 pm

I’m holding off on my pick & analyses until we see how many people take up my challenge but here’s something to consider in the mean time.

My NAR on my only LC account is 9.91% today. I have approx. 500 notes & $11.6k in it. Without adding any new money or withdrawing any money, my NAR on July 31st, 2011 will not only DEFINITELY be higher than this account Peter but I’m willing to give you 10-1 odds on any figure you’d care to wager that my NAR will be AT LEAST 1% higher than this accounts’ NAR. What do you say Peter?

Peter Renton April 12, 2011 at 1:21 pm

@Dan, I am not going to take your bet for many reasons but mainly because I agree with you. I expect my NAR will be between 9 and 9.5% on July 31, 2011 and yours will likely be much higher.

For the record I am going to predict my NAR for this account on July 31, 2011 will be 9.19% with another 7 defaults. Any other guesses?

Dan B April 13, 2011 at 3:44 am

Considering that the average age of the notes are approx. 11 months & that this is a hands-off account I’d say that you have good reason to be rather pleased with the results to date. The thing that surprises me the most about this account is the low number of “lates” you have at this point & the slow pace in which that number is increasing. Of course this goes a very long way in explaining your stellar default numbers to date.

One possible explanation for all of the above could be that you have a substantial percentage in 60 month notes? It’d be logical to assume that the default cycle on those would peak at or around the 28th-30th month as opposed to the 18th month on 3 year notes. No one really knows whether that’ll be the case since 60 month notes have only been around since May 2010 which was only 11 months ago.

@Peter………You’re wise not to take my bet since it’s highly unlikely that I’ll suffer any defaults between now & July 31st…………….. given that the only 2 notes I have that could default have both been making regular payments for months now :)

Peter Renton April 13, 2011 at 6:37 pm

@Dan, This PRIME account is 100% invested in 3 year notes so that doesn’t explain it. But there are fewer defaults than I expected, even fewer than the average. The funny thing is I have another PRIME account, which has a much smaller balance (it is a ROTH IRA), and percentage wise it is doing even better on defaults (around 0.5%). This other account was opened at the same time, but has a younger average age of loans because money was added just six months ago.

Maybe this is an anomaly or maybe the default numbers are going down… Of course, it is also possible that defaults may accelerate soon.

Dan B April 13, 2011 at 11:36 pm

@Peter………. That is surprising & yes I think it is an anomaly because default numbers are not going down.

Peter Renton April 14, 2011 at 2:04 pm

@Dan, I just had another default today, so who knows? I may return to the mean. Will be interesting to see where it is at in a few months.

Dan B April 14, 2011 at 4:06 pm

@Peter……………..Did it knock down your NAR by 0.3% or thereabouts?

Peter Renton April 14, 2011 at 10:41 pm

It knocked the NAR down from 10.39% to 10.23%. I am guessing it was less than the normal knock down because it was a newer $75 note (the other defaults were all $100 notes), so it had less of a total impact.

Dan B April 15, 2011 at 12:51 am

Wow that’s a really small decline. That’s one advantage of having close to 800 notes.

Peter Renton April 15, 2011 at 4:01 pm

Not only that, the other advantage of 800 notes is that any default just knocks my total account value down for a short time. Within 4 or 5 days my total balance is back above where it was before the charge off.

Simon Dixon April 29, 2011 at 2:56 pm

This is very interesting to see these companies grow. I just posted a blog on how I see the peer to peer industry gradually replacing banking.

Would love to hear your thoughts.

Simon Dixon

Adam Moe April 29, 2011 at 7:00 pm

I’ve been interested in peer-t0-peer lending also. Another site that takes a look at Lending Club.

Peter Renton April 30, 2011 at 6:07 pm

@Simon, I have read your blog and I am very intrigued by what you have to say. I think it might take a while, as in a couple of decades, but it clear to me that the banking system will likely be very different in a few years. And that change is only just starting.

@Adam, Thanks for the heads up on your blog. I am now a subscriber.

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