Back in late January, I wrote that it was time to Revisit Lending Club. Specifically, I wanted to revisit why my net annualized return was 4.78% and the average person had a 9.68% return. After a little research, I realized that I was lending too conservatively. I picked the cleanest loans I could find…. so clean that when one didn’t come through it destroyed my rate. There was no margin for error.
Over that last 6 weeks, I started reinvesting all the payments from my previous loans differently. One of the first things I did was look at the returns by credit grade with this graph:
As you can see, the A loans that comprised almost my entire portfolio had to be changed. I focused my attention away from their average 5.86% returns and more towards the E loans with their 12.48% performance. In addition, I looked for the following criteria:
- 24 Months since delinquency
- Credit score above 750
- Interest Rate above 13.43% (this excludes the A & B grade loans)
- The loan was approved by Lending Club
With these in place, I feel a little better lending to those E grade loans. The results have been pretty amazing thus far. My 4.78% is now at 5.90%:
I have to admit that I didn’t think I’d see this kind of progress as quickly as I have. I’m still doing my fair share of knocking on wood. A couple of charge-offs could bring me right back down to 4.78%. However, as it stands now, I’m only a few months away from hitting that nearly 10% net annualized return – a good number in today’s low-interest rate environment.
Looking to diversify your portfolio? Give Lending Club a try.
Congratulations on your move up. I had a similar thing happen to me. Started off with A & B loans and not that well diversified. A couple of defaults and I was down to a 4% NAR. But with reinvesting in a smarter way I have doubled my NAR in less than a year. I focus these days on the C-F grade loans with pretty strict criteria.
Lazy man
Glad to see you are venturing out to other credit grades. Please remember that all Lending Club borrowers are creditworthy as per our strict credit policy. We also consider many other aspects of the borrower’s credit history and loan request to determine the interest rate charged. The credit grade and interest rate we assign is risk adjusted. We do expect relatively lower default rates the better the credit grading. Diversification is probably your best ally when increasing the credit risk of your portfolio.
Looking forward to seeing how your portfolio progresses.
While I appreciate that you are investing in these loans, I have to ask why. I invest a portion of my assets in municipal tax free bonds. On average, each bond I buy is rated A or above and earns me about ~5%. Adjusted for taxes, that means the actual return is 5.8%-7.8% (if you are between the 15%-35% tax bracket). While some would argue that municipal bonds are risky at the moment (historically though it is rare for a municipality to declare bankruptcy…but given today’s economic climate, I suppose the chances are higher), why wouldn’t you invest your money there rather than lending club? I have to believe that muni’s are a safer investment than consumer loans (since municipalities can levy taxes to pay them if need be). And, at the 28% tax bracket, the return is close to 7%.
Mod20Guy,
There are a few reasons why I don’t invest in municipal tax free bonds:
1) I’ll be open and state that I’m not very educated in the area of municipal tax free bonds. That’s probably the biggest reason, ignorance. I’m open to an education on the subject.
2) Regarding #1, I did a little digging and found that Fidelity has some municipal bond funds (http://personal.fidelity.com/products/fixedincome/ourmuni.shtml.cvsr). Most of them seem to have returned under 2% over the last year. The 10-year averages are closer to 4.2% – 4.7% range.
3) The average Lending Club lender is getting a 9.67%. I realize I’m below average because I had poor diversification. There are cases where some people are getting a 15.64% return. The person is the probably the exception to the rule with no one
4) Diversification. Even if I add some municipal bonds to my portfolio, I can see P2P lending having a different risk profile.
By the way, in California a few cities have declared bankruptcy. The relatively nearby (to me) city of Vallejo is one example.
I was wondering different techniques for investing at Lending Club. I have gone the route of spreading across many notes–only $25 per note. It has worked pretty well for me so far, but curious as to what other methods might be.
I’ve got a similar situation where I was getting about 8% (not too bad) but was mostly in A and B loans. I have since started diversifying, and now have loans in a variety of grades. I’m now earning closer to 9.7%, and hope to have that up to 10% soon. No defaults so far – knock on wood.
Lazyman,
Your experience is what I determined from when I started investing in Lending Club. IMHO Lending Club doesn’t price most A, B and some C’s high enough to warrant the risk on return. Hence why I go up the yield curve. It’s worked out well so far with a 11.25% NAR.
@Mod20Guy
I’m not sure how much LazyMan has invested in Lending Club. A really safe way to invest in Muni’s is in specific bonds, not a muni mutual funds. To do this then you should have a least 50k to be properly diversified.