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Lending Club PRIME Review

by Peter Renton on February 14, 2011

Lending Club Prime Acccount

Lending Club offers two kinds of accounts, standard and PRIME. I have both types of accounts, and today I am reviewing the Lending Club PRIME account. This week marks ten months since we opened our PRIME account so I thought it was a good time to provide a review. I opened a PRIME IRA account in April 2010 in my wife’s name when I rolled over and consolidated some of her old work 401k’s.

What is Lending Club PRIME?

[Update: In late 2011 Lending Club increased the minimum investment to open a PRIME account from $5,000 to $25,000]

PRIME is a “full service” account for investors with at least $5,000 $25,000 to invest. It is a special kind of account where Lending Club does all the work for you. Basically, you choose the rough interest rate of the loans you want to invest in, which equates to high, medium, or low risk loans and then Lending Club does the rest. There is no screening or filtering of loans, Lending Club just puts your money into a diverse group of loans based on your chosen level of risk.

How a PRIME account works

Once you designate an account as PRIME and you have transferred your money in, that is about all the work you will need to do. If it is an IRA account like this one, you don’t even need to worry about taxes. Lending Club will also reinvest all your principal and interest repayments for you. After the account has been open over a month you will notice regular emails from Lending Club as they are constantly reinvesting your repayments in new notes. I have found with our account we average an email from Lending Club about a reinvestment every two days or so. They don’t let much cash sit idle in your account and they keep you fully informed.

You can still login to your account at any time and check your returns and the notes in your portfolio. Everything is the same as a standard account except that you don’t do any investing. One important point to note: there is a one time charge for setting up a PRIME account, it is 0.8% of the balance. You just pay this charge on your total initial investment, the reinvestment of cash carries no charge.

My experience with a PRIME account

Lending Club PRIME account details

While the 0.8% charge definitely gave me pause I decided to go ahead with the PRIME account and I am happy I did. I chose the medium level of risk and as you can see in the chart above (click on the graphic for a better view) I am invested in over 700 notes with an average interest rate of 12.3%. These notes are producing a return of 10.48% as of today.

With my initial investment of just over $52,000 Lending Club took almost three full months to fully invest this money. The average amount invested per loan was $100, so I ended up with a very diversified portfolio. Now, as I said Lending Club is reinvesting the available cash two or three times a week and they have dropped the amount invested to around $75 per note now.

One word of warning about all Lending Club accounts, including PRIME accounts. Your Net Annualized Return (NAR) will likely be much higher initially than your long run return. This is because it takes defaults a minimum of five months to show up as a loss on your account. To give you an example, my NAR started off at just over 12% (it corresponds very closely with the average interest rate of your loans) and it has dropped with each default to around 10.5% now. I expect I will end up with an NAR somewhere between 8% and 9%.

Is a PRIME account for you?

According to Lending Club the average PRIME account has around a $100,000 balance. An account of that size will generate roughly $200 a day in principal and interest repayments depending on the terms of the loans. To keep that account fully invested could be a lot of work. For those people who have at least $5,000 $25,000 to invest and want the good returns of peer to peer lending without any of the work then a PRIME account is for you.

Almost by definition a PRIME account will net you average returns. If you want to earn higher than average returns and you don’t mind spending the time trying to achieve that then stick with a standard account. You may dislike the 0.8% service charge of a PRIME account, in which case you will have to take charge of your investment yourself. Either way, you will have the opportunity to earn the high returns enjoyed by most p2p investors today.

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Phillip McFarland February 14, 2011 at 7:28 pm

Great insight for the different accounts. I have always heard and wondered the difference. I still feel like I want to be in charge and essentially control my fate but this is definetely a viable option.

Dan B February 15, 2011 at 1:44 am

What’s the breakdown between 3 & 5 yr loans in your account?

Peter Renton February 15, 2011 at 10:12 am

@Phillip, Thanks for your comment. As I said it is not a good option for everyone, only for those who want their investment on auto pilot.

@Dan, This account is 100% invested in 3 yr loans because it was setup before 5 yr loans were available. I will probably direct LC to start adding them into the mix soon.

Dan B February 15, 2011 at 2:00 pm

An account starting at $52,000+ with a return listed at 10.4% percent…………….& yet at the end of the 12 month period the total interest received for the entire year will be about $4500. Doesn’t sound like a 10.4% return, does it? Well, that’s because it isn’t. And that doesn’t include the close to $500 loss in principal & the $170+ in LC service fees for the year. So the “total return” for the first year in actual dollars will be around $3800+.

Just another example of how money sitting around (during the initial 3 months) really weighs down the real world returns. Of course this is a one time thing & the funny thing is that the 2nd year will get you more interest but a much lower NAR number (probably under 4%) after the account gets hit by AT LEAST another 20 defaults. Think I’m exaggerating the default numbers?? Think again, as that number will likely be an underestimate of defaults given the current rates. Talk to me in 14 months & you can praise me on my Nostradamus like predictions. :)

Peter Renton February 15, 2011 at 3:10 pm

Dan,

First, as I said in the article, this account has been open for 10 months, so my returns will be far greater than $4,500 by the end of 12 months. You are dead right that the real world return for this account will be less than 10.5% because it took over 3 months to fully invest the money (which is a good thing I think). Second, I neglected to mention the $800 bonus I received upon investing, which more than made up for the LC fees.

I decided to see the real world return for the six months after my funds were fully invested. On July 31, 2010 my actual balance was $53,927.22 and on Jan 31, 2011 it was $57,251.98. If my math is correct that equates to an annualized return of 12.33% over those six months.

Now, as you rightly point out that is the honeymoon period for p2p lending. Only three charge-offs in that period. I do expect another 20 defaults (this is in keeping with the average annual default rate of 3%) over the coming year. However, I don’t expect my real world return to drop to 4% as you say, I expect about double that.

I will keep everybody updated as to the progress of this account and the real world NAR, and in 14 months we will see who was more correct. Should be interesting.

Dan B February 15, 2011 at 4:22 pm

No, your returns will be around $4500. That’s $3700 thru now in interest plus $800 for the next 2 months which will get you to the 12 months.

Dan B February 15, 2011 at 4:42 pm

Each default will knock your NAR down by approx. 0.4%. Assuming a normal distribution of defaults in the next 7-8 months & peaking towards the end of those months, the NAR will dip to as low as 2.5%……………..then recover to just under 4% by the end of the 2nd year (14 months from now). Of course the 3rd & 4th year will see a continuous rise in the NAR as newly invested loans will be spaced out & this initial block of loans is replaced by brand new ones & we’ll repeat the entire cycle again at that time.

Mike February 15, 2011 at 5:11 pm

Does Lending Club still take their cut when each loan is paid every month? Is the .8% fee a onetime hit or an annual charge?

Peter Renton February 15, 2011 at 5:34 pm

@Dan, How do you work out that a default will drop the NAR down by 0.4%? I would think that there are a myriad of factors that will be at play that would make that number variable.

For example, if I have a note with say $80 principal remaining (a rough average in this PRIME account) and I am earning around 10% or roughly $5,800 next year in interest, how does that $80 result in a 0.4% drop in my return? I am talking real world numbers here and not the LC NAR calculation. Seems like it should be more like 0.14%. Am I wrong?

Peter Renton February 15, 2011 at 5:37 pm

@Mike, The 0.8% charge for setting up a PRIME account is a one time fee, not an annual charge. Now, Lending Club still take their 1% investor fee like they do on all investor accounts.

Dan B February 15, 2011 at 7:04 pm

@Peter…….You’re asking 2 related yet separate questions.
Yes, there are many factors that affect the amount that the NAR will decline with a single default. But you’re not facing 1 default, so the 0.4% is an average per default that will occur within the 12-24th month of a note. With 300+ notes, & into his 2nd year Matt over at Steadfastfinances had his 1st default recently………..it cost him 0.86% off his NAR.
I had around 500 notes & was into my 13th-14th month when I suffered my 4 defaults. Each of them cost me around 0.7%+ off my NAR.
You have 700+ notes & have already had 5 defaults (not 3) in your 1st year (3 charged off & 2 defaulted but not yet charged off)………..& each of the 5 lowered your NAR by an average of 0.35%. I’m not making this up. All this has already happened. So I stand by my 0.4% estimate especially given the fact that the defaults will be coming from the $100 notes & not the more recently purchased $75 ones.

Now for your 2nd question regarding real world returns…………. You should definitely bring in $5800 in interest………..actually more like $6800+ in interest next year given your 12%+ rate. In any case………..yes, a $80 default is a small amount compared to the interest you’re receiving annually & there lies the problem with the way NAR is calculated. The defaulted amount comes out all at once & not

Mike February 15, 2011 at 8:17 pm

Thanks, Peter. Looking over the loans that have been charged off, or are in the default or late categories, is there anything in the original listings that would have alerted you not to invest in these loans? Does PRIME sell any notes on the folio platform? If not, can you ‘intervene’ and sell notes that you choose to unload, or is the account on total autopilot?

Peter Renton February 16, 2011 at 10:17 am

@Dan, Thanks for the clarification. I am starting to think that NAR is kind of useless or at least needs some dramatic changes. I understand that no calculation is perfect, but both LC and Prosper could easily calculate your real world return, so why not provide that as well? Might lead to less disappointment.

@Mike, My understanding is that PRIME is an all or nothing deal. There is no dealing with the trading platform. The only way to intervene would be to stop the PRIME status, which you can do at any time. In which case you would take control back on the account yourself. But then you would need another $5,000 in cash before you could reestablish PRIME again.

Mike February 16, 2011 at 1:14 pm

If LC or Proper displayed their real world return as prominently as they do their NAR, it would lead to a lot fewer investors.

Following up on the other issue I raised, were there any clues in retrospect on your late/defaulted loans that you might have picked up on?

Peter Renton February 16, 2011 at 4:52 pm

Sorry I missed your other point. There are some interesting points to learn from these defaults. If I look at all five loans, including the 2 recent defaults, these are not loans I would have chosen myself. They were one B, three C’s and one D. All had a delinquency in the last two years and some had multiple inquiries in the last 6 months. One was flagged, “Does not meet the current credit policy” so presumably that loan wouldn’t be approved again.

This is the price you pay for having LC do it for you, you get allotted any of the loans on the platform that meet the grade you selected – in my case mainly B – D.

GaryH July 17, 2011 at 7:17 am

I am in the process of opening an account at LC and am considering the PRIME Account. In reviewing the four Target Interest Rates (10% – 16%), I was wondering if LC reports performance data related to the results in
achieving those targets? I understand that the portfolios for
the higher target rates carry higher risk but it would not
make sense to select anything but the highest rate unless it was
underperforming compared to the other target rates.

Peter Renton July 18, 2011 at 12:30 pm

@GaryH, I have asked Lending Club the same question and the answer is no, they don’t report their performance data for Lending Club PRIME. The reason they gave is that PRIME account are often converted from regular accounts that were managed by an individual. So investment results here would be skewed. And there are also plenty of people who change their risk factor – they may start out with a conservative portfolio and then decide they want to move to an aggressive one.

But you can get some idea of the returns from their average return by loan grade. I did a post about this last month:
/investing-lending/average-returns-by-loan-grade-at-lending-club/

Ron M. January 13, 2012 at 7:27 pm

Peter how is your account doing now ?

Peter Renton January 15, 2012 at 6:59 pm

@Ron, I have provided many updates to this account over the past year. You can read all the updates at this link:
/tag/prime/

I took this account off PRIME in October because I know I can do better than what Lending Club has done. I still have one PRIME account which I am keeping as more of a yardstick as anything. Right now my NAR on this account is at 8.79%. When I took it off PRIME I was at 8.70%. It will take a good 12-18 months for me to show much better returns but I expect to get this account to over 10% by within a year.

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