Our Experience With Lending Club

It all started innocently enough, in April 2014, when I wished for steady and healthy cash flow from an investment. At the time, we were contemplating early retirement.  I felt our assets weren’t up to the task of bringing in cash on-the-regular. So I looked for something that would.

I’d heard people brag of double digit returns with Peer To Peer (P2P) lending. Hastily, I opened an investment account with Lending Club, and seeded it with a big fat nut-o-cash. I selected all of the robo-investing options such as ‘automatic distribution’ across various kinds of loans, and ‘automatic investing,’ which poured earnings back into new loans.

After three months, the account was returning 12% on an annualized basis, and after accounting for service fees of about $10 a month.  Hot damn! I sent in more money. By summer’s end, we were in for tens of thousands of dollars.

September’s e-statement was the first to give me pause. I’d incurred a loss of $50 for charged off loans.  Service fees had crept up to $20. On interest income of $511, the effective fees were under 4%.  I could live with that.  But that charge off fee was closer to 10%. “Meh, the cost of doing business.” I figured.

Come tax time, I contemplated the reality that interest income was taxed at ordinary rates. I turned off the ‘Automatic Investing’ feature, and decided to start taking profits off the table.

By April 2015, we’d made over 8% on our initial investment.  Yeah!  Taxes be damned! I turned ‘Automatic Investing’ back on and watched as our retained profits swooshed into new loans.

In the May 2015 statement, I was shocked to see $333 in charge offs. That was more than half of the monthly interest brought in. Service charges were at $25.

Again, I turned off ‘automatic investing’.  By this time I’d decided that we could live off of Vanguard ETFs and rents from real estate investments.  We had pulled the plug on our jobs months before, and were living like kings in Patagonia, er I mean, we were living confidently off of our assets – you know, those assets that I’d thought were structured so poorly. Turned out, they were fine.

At month’s end, I withdrew all cash received from note payments for that month.

In June, $339 was charged off against $683 of income. Again I withdrew all cash that had accumulated.

In July, $422(!!!) was charged off against $694 in interest income.  Ouch.  I scrolled down to the details section of the statement and found a curious item: a $6 ‘recovery fee’. What was this?  Then I saw that $33 of previously charged off loans had been recovered. They’d charged me $6 to get $33? That was an 18% fee (~15% if you adjust for the service fee that otherwise would have been charged in normal operations).

Lending Club stood to make money charging off loans and then collecting lucrative fees in their recovery.  Not that I minded getting the $33 back.  However, I’d rather that $33 hadn’t been written off in the first place.

For the next three months, I withdrew all cash at the end of each month. The account balance had fallen by 10%. Charge offs continued to range from $300 to $400 every month.  Also, my returns were down to 6%.

Then I plotted the data: earnings, fees, charge offs and balances. Specifically:

  • Blue Bars: Monthly Income (interest income + late fees)
  • Red Line: Monthly Expenses (charge offs + service, recovery, & collection fees)
  • Yellow Line: Net Earnings per Month (Income – Expenses)

LendingClubEarnings

Point A is February 2015, when I first noticed the charge offs, contemplated the high tax rate, and turned off automatic reinvestment of earnings.

Point B is May 2015, when I realized that LC had incentive to charge off loans and then charge lucrative recovery fees to reclaim them. This was when I began pulling money out of the account in earnest. Returns fell dramatically from here, as less money came in from interest (no re-investment of principal), and charge offs continued to increase. The last bar was September 2015. At least our returns were still positive.

That all changed in November, when we made nothing. That’s when the earnings we brought in were completely offset by fees and charged off loans.

Lending Club Performance, November 2015:

EARNINGS:  $614
Interest received:     $520
Recoveries:              $94 ($ that had previously been written off)
EXPENSES: $612
Charged Off Loans: $563
Fees:                        $49 (includes $17 in recovery fees for bringing in that $94)

Yep.  $2.  Two bucks. December, incredibly, didn’t pass into negative territory. In fact, net earnings remained flat:

LendingClubPerf-Dec2015

It was around this time that a fellow Mr. Money Mustache forum member, CanuckExpat, suggested I sell notes on the trading platform. Just a few days before Christmas, I applied for a trading account. By the end of the year I’d sold 27 notes.

It was then that I decided on my objectives – get out of this Lending Club investment, without suffering a loss.

I experimented selling notes at a various premiums and discounts. I found I could sell ‘current’ notes close to their fair value. For late notes, I had to set sell prices that were at least 20% off. And even then, only a few would sell. The key was to divest of all of the current notes before they were marked in arrears.

In January, I sold about 25% of our portfolio.  That month, the statement revealed an improvement: our net income was $115.  Yeah!

LendingClubPerf-Jan2016

Here was the ROI of notes sold at that point:

Primary notes:    2.77% (at least it’s positive!)
Traded notes:     15.43% (1063 notes sold)
Combined return: 6.77%

By March 2016, we’d sold 90% of our account value. With the removal of so many interest-bearing notes, our gross income collapsed, and net income fell into negative territory:

Now it’s July 2016. I’ve sold off 97% of our Lending Club portfolio. Every few days, I lower prices on the remaining notes that are eligible for sale. Every day, one or two notes trade. I’m hoping to have this account closed out by the end of the year.

Even so, we’ve come out ahead. Just looking at the money that transacted between our savings account and our LC account, we’ve put in $65,000, and pulled out $68,500, for a net gain of $3500. The account has a balance of about $1500. If we are able to recover two thirds of that, then we’ll have made $4500 on an investment of $65k over the course of 2 years. That’s 7%, total return, or about 3% annually. Not great. Also, bear in mind that we paid taxes on the earnings each year, and that puts us at a return closer to 2% annually. Hey – at least we didn’t lose money!

A lot of people make the mistake of looking at the interest earned each month. Indeed, we earned a lot of interest. Since opening this account in 2014, we’ve taken in $12,370 in interest. Problem was, that income came with $7700 in fees, expenses, and write-offs.

So, be careful what you wish for. And if you choose to invest in P2P lender, watch the fees.

edit: I’ve been asked what our note allocation was. Here it is: 15% A, 30%B, 28%C, 14%D, 8%E, 4%F, 1%G. Probably a little too high on the C,D,andE. That could have something to do with all of the write offs. However, it’s in line with a somewhat conservative ‘platform mix’ portfolio offered by LC. I probably went for too much risk and that could account for some of my getting burned. Still, I’m done with LC.