Lending Club has finally introduced a metric called the Adjusted Net Annualized Return. This is a more realistic view of your rate of return once all of your loans mature. It takes into account the probability of default of your loans, based on how late they are. This more accurate measure is about 2% lower than the NAR which every educated LC investor has known for years. The original Net Annualized Return measurement should be ignored.
NAR (unreasonably optimistic)
ANAR (much more probable forecast)
I still use LC as a passive investment, meaning I don’t spend time scrutinizing loans beyond my filters. My filters have been refined based on backtesting and are quite strict. Here is the first set of criteria I used:
- Credit Score above 679.
- Credit Inquiries < 5
- Debt to Income (DTI) Ratio: <20%
- Revolving credit balance < $25,000 (Otherwise bankruptcy more profitable)
- No loans for home down payment
- Loan Purpose: Home Improvement, Debt Consolidation, Work vehicle
These were not back tested, and more or less just educated guesses, which is sometimes better than nothing, but not always.
This is the filter set I use now, tested on LC's notes of the last 4-6 years. Note that this is very strict to maximize ROI.
- Credit Grade: D,E,F,G
- Home Ownership: Mortgage, Own, Rent
- Loan Purpose: (Exclude Other, Small Business)
- Inquiries in the last 6 months: <3
- Debt to Income (DTI) Ratio: >5% (weak correlation)
- Exclude loans with public records: Yes
- Exclude States: AZ, CA, FL, GA, IL, NV
- Months since last delinquency:>24
- Revolving Credit Balance: > 4000
- Monthly Income: > 4000 * Peter Renton's favorite filter
- Revolving Line Utilization: 10 – 100%
I would relax the filter to include C grade loans if I were to invest again. This is one way of investming my money faster
Things I learned:
- When making decisions, an ounce of data is worth a pound of intuition
- Diversification does not increase ROI, it merely reduces volatility with diminishing returns
- Income from interest is taxed at ordinary income rates.
- While offering many advantages over bonds, LC is not worth my time until I get a tax-protected account.
How LC Has Changed
LC has attracted institutional lenders like hedge funds who use automated programs to invest in loans as soon as each batch comes out. The highest ROI loans in the C-G grades are bought up before individual investors like me can get a piece of them. The market economics are favorable for borrowers and unfavorable for hobbyist lenders.
Would I Recommend It To a Friend?
Absolutely, but only if they intend to invest through an IRA. P2P lending provides returns for less risk than investments of comparable ROI. Backtested filter strategies like the one I provided are freely available on sites like Lend Academy, so you don't have to spend nearly as much time as I did doing trial and error research. Test mine on NSR and see if you're satisfied with it.