I did not realize it until a reader pointed out that I have not updated everyone on the status of my Lending Club investments. I even went back into the Own The Dollar archives and found that my last update was back in June of this year. A lot has happened with my loans since then.
I Had My First Loan Default
This past June, I had my first and only (knock on wood) loan default, and it was then charged off as uncollectable. This default dropped the 15% rate of return that I was enjoying down, and I now enjoy a 12% annual rate of return on my loans. Looking back on the one loan that defaulted, I can see a few mistakes and deviations from my lending criteria that I made. The $25,000 loan was for an entrepreneur who wanted to expand an existing franchise of a business. I love loans helping small business and entrepreneurs, but the $25,000 loan spread over three years charging an annual interest rate of 15.37% to the borrower resulted in an $871 monthly payment which may have been too much for a new business. The loan was going great from the point it was issued in July 2009 until February of this year when the last payment was made. Lending Club charged the loan off as uncollectable finally in June after collection attempts in house and through an outside collection agency was fruitless. Looking back, the borrow had a great verified annual income, was a renter, 50% credit utilization rate, and five years at the same job. I have five out of my 63 loans give me heartburn because the borrowers like to pay late, but three of those borrowers are actively trying to catch back up on their payments. Late fees could actually push the rates of returns on these notes higher than originally planned. I also actually had three loans be repaid early.
Strong Returns Earning Over 12% Annual Rate of Return
As of today, I am enjoying a 12% annualized return on my sixty-two investment loans with Lending Club. Hopefully most of the blog’s readers already know a little bit about Lending Club. If this is your first time hearing about it from me, Lending Club is the awesome peer to peer lending investment website where you can lend money without using a bank straight to individuals who need it the most. Lending Club does all the hard work for you by vetting the borrower, checking their credit, verifying their income, and serving as an intermediary. After that, it is all on the investor to pick through the 500+ loan requests to pick the best one with the highest interest rate for the amount of risk the investor can stand. (As of November 13th, Lending Club had 502 loans available.)
Loans Funding More Loans Through Compounding
Like your car payment or your mortgage, you make payments on those loans every month. The same is true at Lending Club, and my loans provide me with a steady stream of income every month. Now that I have over sixty loans paying principle and interest payments every month, I have enough loans for the payments each month to fund a new loan. I am in a sense enjoying compounding interest on my loans with old loans paying for new loans without new money being added by myself.
I Continue To Refine My Lending Criteria
In the past, I had written about my lending criteria. I think that being very selective about whom I lend money to has helped me avoid more defaults. I look for borrowers with a good verified income, decent credit score, a good reason for the loan (not debt reconsolidation which just shifts debt around), home owners, job longevity, small loan request size, three year term, low revolving credit utilization ratio, no bankruptcies or other public records, and a “C” risk rating or worse. I know that these criteria limit the amount of loans available to me, but it works out better for my rate of return in the end. I still I only look for loans with a risk rating of “C” or worse. Lending Club does a great job ranking the risks associated with its loans. They rank each loan A through G much like a bond would get rated, and then the loans are subsequently subdivided one through five for a full spectrum A1 to G5. The average interest rates you currently earn for each ranking are A: 6.17%, B: 9.62%, C: 12.98%, D: 14.83%, E: 16.69%, F: 18.54%, and G: 20.40% (as of November 13th, 2010).
Special thanks to Greg for the reminder to update these Lending Club stats. I will try to do better by updating everyone more often. What about you? Are you investing through Lending Club? How much are you earning? Are you more conservative than I am or do you go for the high paying loans? There are some out there paying 20% annual interest. Let me know in the comment section. I would love to hear what everyone else is doing.