It occurred to me that it has been some time since I’ve updated people on my Lending Club lending. I’ve been Lending Club for years and years now… and typing that sentence makes me feel really old.
A friend of mine was asking me if lending money on Lending Club is really worth it. I decided to back and dig into my previous updates to give her a quick snapshot of how it has worked for me. The obvious caveat is that someone else’s performance will be different, but my performance is actually a little below the norm according to Lending Club. Anyway, I sent her a couple of years worth of data and posts that I’ve written:
- May 2011 – $3045.10
- July 2011 – $3231.02
- September 2011 – $3285.47
- May 2012 – $3385.32
- October 2012 – $3571.36
Here’s what it looks like today:
So that $3045.10 of account value in May of 2011 is now nearly $3800! I’ve added no new money, just reinvested the payments of previous loans and let it snowball. That’s around ~$750 on $3045 of principle in about 39 months. (Look at me getting all mathy). I found a calculator online and that rate of return comes out to about 6.75%. That’s different than the amount that Lending Club shows in the image, but their calculation is over the entire time I’ve had the account (and is undoubtedly more complex).
In a world where banks are paying fractions of a percent, this is much better. (Especially when they pound their chests at giving “three times the nation average”, which amounts to fractions of a percentage point.) Of course, this there’s risk with Lending Club and it isn’t like a bank account at all. I think that risk is minimal since I’ve had 456 notes, a significant sample size by almost any measure.
The thing that I like most about Lending Club is that I can see myself using my Lending Club account as a source of income in 30 years when I’m 67. Doing the math and compounding this interest, it will be $21,289 at that point. The cost of living will be more… and it’s not like $21,289 will sustain me for years, but it’s enough to take $200 a month out for years. That will hopefully cover some bills, which isn’t bad considering that I just put money in once.
These small decisions add up. Get started at Lending Club today.
Personally, I don’t trust any calculation I can’t replicate myself.
I can’t replicate the calculations of many of my ETFs, yet I trust them.
The RoR for Lending Club (and Prosper) are usually done in a way that presents the return in the most favorable light possible.
They will ignore idle capital in your account and only calculate the return of active loans. So all of payments you received that made you an average return of 7.52% were sent to your account as cash and then completely ignored by that return calculation until they were reinvested in another loan.
This is why your real return will always be lower than the return that they show you.
Sure, I don’t expect them to give a worst case scenario. That’s why I liked calculating my own rate of return using my previous posts. It wasn’t that far off.
A few years ago, your updates convinced me to look more closely at my own Lending Club account and fund a few more loans. My returns have been similar, so I thank you for that! I always enjoy these updates on how you’re doing with it. :)
Awesome! Glad it is working out for you.
“They will ignore idle capital in your account and only calculate the return of active loans”
This makes some sense, if you’re calculating a return on INVESTMENT. The idle balance isn’t really invested.
Consider this scenario. You have $1000 in your account, but only invest $50 in loans at any time, leaving $950 constantly idle (yes, I agree that it would make no sense to do this). If your return was calculated based on the $1000, it would grossly underestimate the performance of the investment vehicle.
This is true. However, there is “forced” idle time that is significant (few days, even a week) while you wait for loans to fund. In a brokerage account, you can invest most fund almost instantly as an example.
So should Lending Club include this in their calculation? It’s one of the nebulous questions about tracking the performance of P2P lending.
As a response to your last comment LM, there is very little funding time these days given the significant investor demand.
I, too, am a big fan of calculating my own returns. I’ve always included the cash drag as that is money I’ve “committed” to P2P Lending and is a part of the investment.
Have you considered adding any funds to this investment? Simply doubling your current account size will create tremendous momentum 5, 10, 20 years down the road.
I suppose you are right writing2reality about the funding time. Still there’s time before I get the $25 available to make the next loan… and there’s time from when that becomes available to when I can actually get in and make the loan.
I’m well aware of the power of compound interest. However, I’ve been looking to commit my money to real estate holdings as I consider that a better value. I have written several posts on it, but here’s a recent one: http://www.lazymanandmoney.com/real-estate-vs-reits/.
And you are right as well, it takes time for some cash to accumulate to the point where it can be reinvested. I’d imagine with a mature account of your size you are getting enough in monthly payments to fund 4-6 new notes a month. So once a week isn’t too tremendous of a lag, but certainly will have some downward pressure on returns.
Wasn’t questioning the ability for you to calculate compounding interest, but to compare an alternative investment like Lending Club to a rental property doesn’t make sense. Much like one doesn’t compare Google to T-bills. No one can tell you how to allocate your investments, and from the sound of things you’ve got solid rental this past fall.
I will add you’ve missed attributes in the direct Rental vs. REIT comparison. Certainly dividends/ROC, tax considerations, special HOA assessments, and significant vacancy or CAPEX. And you did do a nice job of identifying some of the limitations of individual properties. I wish you the best of luck with the direct rentals. I’m a fan of them as well as REITS, but for different reasons.
This is great stuff, writing2reality.
The reason I compared the investments was because they come from the same finite pool of money. Think of it like an NFL team with a salary cap. You can say, “Hey you should spend a ton of money on a cornerback. That will pay off come game time.” Unfortunately that means putting less money in players at other positions such as quarterback. No one would say that a quarterback is comparable to a cornerback, but on some level you have to make a comparison.
In the rental/REIT comparison, I’ve included dividends (of the REIT, there are none for the rental). I didn’t include special HOA assessments, but I did include a maintenance fund to cover it. Same with CAPEX. It’s impossible to calculate significant vacancy other than to assume that it will happen at some point and lower your income expectations. Maybe I didn’t lower my income expectations enough, but the rental/REIT is such a lopsided battle it isn’t significant.
I calculate your return from May 2011 to now at 8.07% using XIRR. You really ought to learn how to use that spreadsheet function. Here’s a link to a tutorial:
http://whitecoatinvestor.com/how-to-calculate-your-return-the-excel-xirr-function/
Also, be aware that the biggest risk for any Lending Club investor is that the Lending Club goes out of business. That risk isn’t lessened by owning a lot of loans, nor by owning less risky loans. So you might as well go for the riskier/higher returning loans, but be sure you limit this asset class to a small percentage of your portfolio. While the loans themselves aren’t necessarily speculative, the future of Lending Club certainly is.
That’s a good call. I had forgotten about XIRR. I had been really into making such calculations back in 2006 when I first started lending money in Prosper. Since that time, I’ve given up because it is too complicated. For example the “account value” itself is speculative. I feel pretty comfortable knowing that it is around 7% and if it could be 8.07% that’s even better.
I’m pretty satisfied with Lending Club’s contingency plan if they go out of business: http://kb.lendingclub.com/investor/articles/Investor/What-happens-if-Lending-Club-goes-out-of-business. They’ve got a back-up in place and I’m fairly sure the notes themselves wouldn’t be part of Lending Club’s bankruptcy.