My Lending Club investment returns have been taking a beating lately. Even with a spread of more than 1400 loans across multiple grades, I’m getting burned with -0.3% Annualized Return.
This account funded in the Spring of 2015, so the loans are in their at their 30 month point, a ‘danger zone’ when Lending Club reports most defaults take place.
This account has followed all of the recommended investing ‘rules’ on the Lending Club website – Buy more than 800 loans, spread out your credit risks, etc. After following the Lending Club guidance, all I can state is that the performance is rather unnerving, minus 0.3% Annualized Return:
My allocation is a bit more aggressive than normal, but still ‘spread’ across multiple grades:
I’ve noticed that default rates on Lending Club run much higher than what the Fed reports as its Consumer Credit Card Default/Charge-Off Rate, which presently sits at 2.47 percent – For Lending Club loans graded ‘C’ and worse, the default rate is more than triple the Fed’s Credit Card default rate. Here’s a breakdown of Lending Club defaults on loans by Grade, from their own website:
- A – 2.43%
- B – 4.25%
- C – 7.4%
- D – 10.96%
- E – 14.45%
- FG – 19.7%
But wait, it gets worse. This data set includes a historical bias that includes loans initiated all the way back to Lending Club’s founding in 2008. Based on my negative returns on loans mostly initiated in 2015- Spread across hundreds of loans and multiple grades- I think the above default rates are wildly optimistic.
I can only hazard a guess as to why Lending Club default rates greatly exceed typical Credit Card default rates as well as historical Lending Club default rates:
- Consumers rack up unsustainable amounts of credit card debt, and have discovered they can turn to Lending Club or Prosper to refinance their credit card debt- Only to postpone the inevitable default on this debt.
- Lending Club’s ‘algorithm’ for assigning creditworthiness is broken.
- Lending Club is not performing sufficient due diligence on the factors it says it is screening for.
- Lending Club is issuing loans that don’t meet its own standards, as it did when it sold its own loans internally to keep sales figures up in 2015.
Conclusion: Stay away from Lending Club. You’re just burning money – You might as well enjoy spending the money on something fun.
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