Lending Club Update (May 2014)

A few months ago, I wrote a detailed article covering years of my investing in Lending Club. I estimated that I earned 7% Interest there. It’s an estimation because of numerous things that make an exact calculation difficult. I wrote many of those things in this somewhat complex article.

Fortunately it’s easy enough to get a fairly good range. In fact, Lending Club gives us tools to do exactly that. The image below shows that I am earning an annualized 8.10%. It presumes all those late people are going to suddenly start paying. While that’s an unlikely scenario, it is a good upper bound.

Using Lending Clubs tool, I presumed all the late people will default. While the worst case scenario is that the people with current loans default, this is a reasonably very, very bad scenario. The result of this assumption would be an annualized return of 7.02%.

Lending Club has a lot of data of what default rates are, and they give you this information so you can predict what might be a most likely scenario. Using those numbers, my return would be 7.61%.

I have more than 200 active loans and I’ve been lending for years now. (The 478 number that you see in the image above includes loans that have been fully paid off and defaulted ones that were charged off). This large number of loans over a long time gives me a high degree of confidence in the returns. In fact, I am more confident in Lending Club returns than I am in any of my diversified ETFs. I certainly couldn’t tell you that the S&P 500 is likely to return between 7-8% this year. In fact, I would confidently bet on it returning some amount outside that range.

On one hand, I have stocks that could gain 20% or lose 10%. On the other hand, I have Lending Club that has shown over years that it returns 7% or more. Finally, on my third hand (you don’t have three hands?), I have:

CDs guaranteeing around 2.3% annually over 5 years.

It all depends on what your risk/reward tolerance is, but I think a strong case can be made for investing in Lending Club to smooth out the stock market’s wild ride while providing you better interest (without much more risk) than CDs.