More bad news and a plan

I was trying to wrap up this project on Lending Club and was visiting some of the investor user forums, I discovered something I hadn’t considered. One investor complained about the impact of the service fee when loans are paid off early. Lending Club will assess a fee of 1% on the full principle if the loan is more than a year old when it is paid off. I looked at this and it seemed reasonable, but you certainly would prefer these good borrowers paid off the loan over time.

While analyzing this I looked at the  payments made on a specific loan that was paid off early. I duplicated the calculations Lending Club made with each payment and realized how misleading the interest rate is. They compute the interest on the declining balance (as they should) but as the payments add up, the interest you earn declines.

I did an example starting with $100 invested at 10%. The borrower would have to pay back about $3.25 a month to pay this off in 36 months. Following is a chart of the first few months of payments.

Year	Month	Balance	Payment	Interest	Pd Princ	New Bal
10.00%	0	$100.0000				$100.0000
1	1	$100.0000	$3.2500	$0.83	$2.4167	$97.5833
1	2	$97.5833	$3.2500	$0.81	$2.4368	$95.1465
1	3	$95.1465	$3.2500	$0.79	$2.4571	$92.6894
1	4	$92.6894	$3.2500	$0.77	$2.4776	$90.2118

If you take this through the 36 months and total by year, you get the following sums.

	Amt Pd	Interest	Balance	Ret/$
Year 1	$39.0000	$8.6332	$69.6332	8.63%
Year 2	$39.0000	$5.4534	$36.0866	7.83%
Year 3	$39.0000	$1.9406	-$0.9727	5.38%
Life	$117.0000	$16.0273		5.34%

You earned $16.03 in interest on $100 over 3 years. That is an average return rate of 5.34%. If you add in the service fee (totals $1.17), your return is further reduced to 4.95%. The only way you can continue to get near 10% is to constantly re-invest the money you receive. When you want off this merry-go-round, you will pay a penalty.

Since I’m getting off by 2021, I will be paying this penalty in the last couple of years. And, this does not include the impact of charge offs and fully paid loans. 

My current plan is to continue to acquire some new shorter-term notes and buy some notes in their final year. None of these will have final payments beyond 2021. And I’ll be withdrawing some cash for investments elsewhere.