Lendign Club Provides Investors with Negative Returns

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:

Lending Club Provides Negative Returns

Grade/Default Rate:

  • 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:

  1. 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.
  2. Lending Club’s ‘algorithm’ for assigning creditworthiness is broken.
  3. Lending Club is not performing sufficient due diligence on the factors it says it is screening for.
  4. 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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