A different measure of Lending Club performance

My previous posts have attempted to understand why my Lending Club account that performed so poorly over the last two years. I’ve focused on note charge offs. But there are a few problems with this simple measure. First, all notes span several years. Looking at the number of notes charged off at any given moment obviously does not include those that will change off in the future. Notes originating in 2015 will experience a higher occurrence of being charged off in 2017 than those originating in 2016.

Another major problem with this number is that all charged off loans do not have the same impact. A loan that goes bad immediately is more costly to the investor than one that goes bad after 20 payments. So far, my search for why my account has performed so dismally has been based on this charge off rate. It has led me to conclude that I was probably unlucky in the notes selected for me by the automated invest facility. But the key word was probably. So, it was time to look for another measure.

The available data for each note does include the initial amount (cost) of the loan and the total received in payments thus far (includes principle and interest). These two provide a measure of the return on investment. Following is a chart that computes this for 36 month loans by quarter issued.

Issue	All Notes 36 Months
Quarter	Count	Invested	Paid	Return
Pre 2012	31,532	300,594,325	319,044,423	106
12_Q1	6,498	77,296,100	83,978,951	109
12_Q2	8,469	96,339,425	105,085,986	109
12_Q3	13,322	149,186,075	163,911,172	110
12_Q4	15,181	184,977,525	206,331,342	112
13_Q1	17,988	245,932,525	272,792,084	111
13_Q2	23,136	283,421,075	315,085,442	111
13_Q3	27,318	331,273,775	368,367,252	111
13_Q4	31,980	411,464,100	455,817,219	111
14_Q1	34,074	447,347,925	493,612,864	110
14_Q2	37,881	466,990,450	510,187,030	109
14_Q3	40,595	509,787,900	543,763,731	107
14_Q4	50,020	621,914,475	632,321,709	102
15_Q1	56,569	728,871,550	694,875,466	95
15_Q2	64,222	815,616,325	719,810,984	88
15_Q3	73,572	952,460,650	771,468,348	81
15_Q4	88,810	1,129,512,575	809,524,476	72
16_Q1	96,120	1,299,314,500	790,361,572	61
16_Q2	74,537	967,192,700	501,180,878	52
16_Q3	73,898	900,567,750	382,828,020	43
16_Q4	78,940	963,225,600	292,633,330	30

The chart indicates the number of notes, total loaned, and total paid on these loans through the 1^st quarter of 2017. The most common rate of return is 111 (11% profit). This rate starts to fall with the notes issued in the 2^nd quarter of 2014. The reason is that they haven’t finished the 36 months, so borrowers ar still paying the loans back. I generated the same chart for 60 month loans and it has similar characteristics. The most common rate of the older vintage notes is 117. It’s higher than the 36 month notes, but the payback period was 5 years instead of 3.

One observation is that the 111 payback rate over 3 years is a bit less than 4% per year. This is lower than what I hoped for and expected when I joined Lending Club. I’ve visited several forums that deal with Lending Club investments and get the sense that many investors feel notes issued in 2015 and 2016 were of lower quality. That could be a reason for my poor performance. But you can’t draw that conclusion from the data listed above.

I’ll use this return measure in my next post to finally answer the question about how much luck played in my portfolio. Follow me on Twitter, @billlanke, for notice as to when that occurs.