Lending Club Update: Earning 15.6% NAR on P2P Lending Investments

~ ~ ~ April 2011 Update: Shutting Down My Lending Club Investments over Q&A Change ~ ~ ~

My Lending Club investment portfolio is continuing to look fairly impressive as we close the books on 2010.

Summary

• Net Annual Return is up to 15.64% NAR. My highest observed NAR was 15.69%, but as of today, I’m up 61 basis points or 0.6% from last quarter.
• Zero defaults or charge offs. However, the day is certainly fast approaching (one Ch.13 bankruptcy filing, 5 notes 31 to 120 days late, 1 note 15-30 days late). Plus, no one likes a show off.
• Risk has increased slightly to the more risky, high grade notes. The number of 15%+ notes has increased by 2% (based on the percentage of Grade D notes and higher) from last Lending Club update.
• The 5 year vs 3 year note percentage has increased slightly to 62% vs. 38%, up from last quarter numbers of 55% vs. 45%.
• Lending Club “investment club” has ~45 people.

Detailed Analysis

For those who want to look under the hood and kick the tires a little bit, here’s a more detailed look at the what’s, where’s and how’s.

• Investor Performance. Based on Lending Club’s metrics, I rank in the 91% percentile of investors in the $5,000 to $10,000 range. For how long this performance lasts, I have no idea considering a few defaults and/or charge offs are lurking around the corner, but a 90%+ NAR performance is personally rewarding since I spend quite a bit of time on the LC database running filters, asking borrower questions, going above and beyond in the due diligence arena, etc.
• Account Balance. The total balance is up around $2000 because I invest anywhere from $100 to $150 per week. This is a hedge against my optimism surrounding P2P lending because I feel if I dump too much money into the platform too soon, I will settle for notes that might not meet my conservative criteria. Therefore, I am only investing in the “cream of the crop” notes each week that are in 15%+ NAR spectrum. If I can’t find 15%+ notes, I dip into the 10% to 15% group.
• Portfolio Composition: Term Length. The 5 year notes present a bit more risk due to the extended terms of repayment (i.e. time to total repayment), but based on my metrics, I see little to no added risk due to the type of borrowers I’m selecting. Based on my strategy of job security, a borrower who keeps his/her job presents little difference in 3 year note or 5 year note default rate. Plus, I get an added bonus of a 0.5% to 2.0% bump in my ROI. (Note: I could be 100% wrong making these assumptions.)
• Maximum Diversification. Per my original Lending Club investment strategy, I’m only investing $25 per note. Put simply, I put as few eggs into each basket as possible. I can think of little reason to put more than $25 into a note other than you’re high net worth investor with $20,000+ to quickly deploy.
• Portfolio Composition: Grade. Based on the last quarter decision to focus on 15%+ NAR notes, I’ve seen a slight uptick of 2% in the percentage of Grade D, E, F and G notes. This doesn’t mean that I’m buying the super risky in Grade G notes as one might first suspect, but it means I continue to find some great borrowers in the higher Grade D through G range, if you base your investment decisions on job security as I do (e.g. a registered nurse with 5 years of experience is superior to a retail store assistant manager with 5 years on the job).
• Late Payments / Defaults / Charge Offs. I’ve consistently had a few late payers every month, but until now, the borrowers I’ve invested in righted the ship within 30-60 days. Obviously, now that my portfolio is becoming more seasoned and I’m approaching the 300 note mark, the zero default/charge off streak was bound to end sometime. To give some description of what’s happening with the 31 to 120 days late category: 1 note is a Chapter 13 bankruptcy filing where no court ruling has been issued as of yet (borrower only made 3 payments), 2 notes are on payment plans beyond the due date, and 2 are late with no explanation and contact cannot be made with borrower.

If you have more specific questions or you want further explanation of data that I failed to include, don’t hesitate to ask in the comments section below.

Lessons Learned

I often get questions about how I invest or tips/hacks that aren’t widely published in the blogosphere.

Here are a few quick tips I’ve learned the hard way:

1. Don’t invest too much too fast. I know the temptation of investing in something new and cool is difficult to fight, but as with most things in life, exercise some patience by easing into P2P lending. Learn the ropes, get comfortable with the concept of investing in P2P lending before investing $10,000 into your account and end up investing $1000 per person. In my opinion, that’s the wrong way to go about it.
2. A faster way to review Lending Club notes. The LC database and filters allow investors to screen notes very quickly and are of tremendous value. However, if you are an Excel junkie as I am and you want to see some very specific data without clicking on each individual note your filters churn out, try downloading the active Lending Club loan spreadsheet method.
3. Beware the perpetually indebted. Borrowers with a high revolving credit balance (> $25,000), borrowers with 6+ credit inquiries in last 6 months, borrowers with a leverage ratio (high debt to income), and borrowers who find themselves in a cash flow crunch. These are the borrowers who have a high probability of skipping payments, missing payments, and if too many debts pile up too quickly, the chance for a default/charge off is increased.
4. Not all government employees are safe bets. Contrary to public opinion, a government job no longer implies more job security than a private sector job. Most municipalities across America are experiencing revenue shortfalls, and in response, they are cutting costs where they can. This means everything from teachers, police officers, firefighters, etc., are all on the chopping block. So just because you see a loan from a police officer with 5+ years on the job, he or she is not a sure thing.
5. Anyone can file for bankruptcy protection. I mistakenly believed that certain professions would avoid filing for bankruptcy more than others. My first bankruptcy filing (a Chapter 13 bankruptcy) was actually filed by a dual income couple of law enforcement officers. I thought that law enforcement would have never filed for bankruptcy unless absolutely necessary, but being that they filed after making 3 monthly payments out of 60, it makes for an interesting “they knew how to game the system” conversation.

If you have a lessons learned experience to share, please let the group know.

The Lending Club Investment Club

As a few of you know, I head up a pseudo “investment club” via an email list where a few of us (e.g. around 45 investors to date) share ideas and highlight individual notes that we believe will pay off in full plus interest. This isn’t an official investment club per se, but it’s a quick and easy way to use groupthink and crowdsourcing to hash out ideas, expedite the investor learning curve and identify notes that a single individual might miss.

If you wish to be a part of the investment club, please let me know in the comments section below or send a quick email using the contact page with whatever questions you may have.

Quarterly Lending Club Investment Portfolio Updates

April 2011 Update: Shutting Down My Lending Club Investments over Q&A Change

December 2010 Update: Currently earning 15.6% NAR on Lending Club investment portfolio.

September 2010 Update: Currently earning 15% ROI on my Lending Club investment portfolio.

June 2010 Update: Currently earning 14.2% ROI on my Lending Club investment portfolio.

March 2010 Update: Currently earning 13.6% ROI on my Lending Club investment portfolio.