Sunday, January 09, 2011

My Net Annual Return on Lending Club Account Up from 7.7% in 2009 to 9.5% in 2010

I have been originating (peer-2-peer) loans at Lending Club since Dec 2008. Since starting, I have issued 153 loans, of which:

15 loans fully paid off
0 loans late, default or charged off

In 2009, I made a net 7.7% return on my investment (after fees and note sales). During 2009, I only had one losing month where I had a monthly annualized return of -5.24%.

In 2010, I made a net 9.5%. My worst month had a monthly annualized return of 0.89%.

Lending Club says my account has a net annualized return of 12.72% and total interest earned of $325.54. Each of these are way off my actual return. My net earnings are actually some $80.25 less than what Lending Club advertises. The problem with Lending Club is that it doesn't fully factor in all fees and losses incurred in the sale of notes.

Overall, with exception to Lending Club not having "net earnings" and "net annual yield" displayed on it's account dashboard, I am very satisfied with Lending Club.

I attribute my greater success in 2010 to increasing my risk tolerance in notes that i'm willing to fund. In 2009, I was already selling almost all notes before they hit 16 days late. So, I was willing to do a few more note sales in order to balance out any extra incurred risk.

My note filter is:

Funding progress: 10% or more
Max loan amount: $25k
Interest rate: Excludes A and B rated notes
Months since last delinquency: 24 months or more
Max debt-to-income: 20%
Min length of employment: 2
Inquiries in the last 6 months: 3 max

In addition to this, I am reluctant to fund notes where the monthly income is less than 1/3 of total revolving credit balance. I exceed this sometimes when I believe that the individual is truly going to use the money for debt consolidation.

4 comments:

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Miami Real Estate Attorney said...

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Mike S. said...

Lending Club provides an equation explaining the mathematics behind their "Net Annualized Return."

https://www.lendingclub.com/public/lendersPerformanceHelp.action

However, the equation seems to contain some superfluous variables and the example calculation appears to be incorrect as well.

Mike said...

I put together a spreadsheet that explains Net Annualized Return on the following website. It is a little confusing and I prefer to measure returns using Internal Rate of Return.

Understanding Net Annualized Return