Poll

Yeah, so okay....  ummm, Prepaid good? or Prepaid not good? Choose the one closest to your opinion.

Good, if the loan is 8+ months old.
4 (25%)
Good over the long term of your well-diversified account.
0 (0%)
Bad no matter what.  It hurts your bottom line.
7 (43.8%)
Meh. Better than defaults so...  no big deal.
5 (31.3%)
Go back and read what I said about this in the string!
0 (0%)

Total Members Voted: 16

Voting closed: August 18, 2014, 10:46:37 AM

Author Topic: Account reaches it's first birthday with a 9% Fully Paid status  (Read 33529 times)

Amelia

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I'm not an analyst and can barely follow all the conversations about spreadsheets and XIRR etc.  I know how much I put in and how much is coming back and follow some basic filtering to reinvest.

So, should I be surprised that of my 706 loans in good standing, 64 of them have been Fully Paid?  That's nearly 10% which seems high but maybe others are seeing the same?   I've stopped investing in A and B loans so hopefully the next year looks different but perhaps it will just switch over to Charge Offs instead of which I have 4.

Fully Paid:
A = 5; B = 36; C = 11; D = 3; E = 2; F = 4; G = 3

Jomar

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #1 on: July 30, 2014, 03:48:54 PM »
My account is 10 months old and nine of my original 100 notes are already fully paid as well.  I'm sure some of the others around here can confirm this with hard data, but I'm pretty sure higher-grade loans are more likely to prepay, so it'll depend on the mix of loans in your account.

AnilG

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #2 on: July 30, 2014, 03:58:00 PM »
Let me plugin PeerCube's new feature and how to use it to answer your question.  8)

Go to https://www.peercube.com/histperf.

Note down Loan Count issued in 2013 and 2014 and all Years

2013 = 134,756
2014 = 57,232
All = 285,141
 
Now select 'Loan status' from drop down list and click show

Note down the Loan Count for Loan Status Fully Paid

2013 = 15,476
2014 = 1,629
All = 56,996

Divide the later number with first and multiply by 100 to get percentage of loan fully paid

2013 = 15,476 / 134,756 = 11.5%
2014 = 1,629 / 57,232 = 2.8%
All = 56,996 / 285,141 = 20%

So your fully paid numbers are in ballpark. Nothing unusual here. Anyway, you want borrowers to pay off loans early. It will increase your returns because interest is front-loaded on amortized loans.

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Anil Gupta
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Fred

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #3 on: July 30, 2014, 04:09:52 PM »
Nice feature, AnilG.  Very handy.

As an investor, I do not mind at all when borrowers prepay. 

My rationale: LC loans are fully amortizing.  The interest portion of payment is highest during the early months of the loan.  As the loan matures, the interest portion of payment gets smaller and smaller.  Prepaid loans allow us to skip the tail-end of amortization.  When the funds from prepaid loans are re-invested in similar-risk loans, we investor should earn more.

rawraw

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #4 on: July 30, 2014, 04:43:59 PM »
So your fully paid numbers are in ballpark. Nothing unusual here. Anyway, you want borrowers to pay off loans early. It will increase your returns because interest is front-loaded on amortized loans.
Are you certain about this?  Also, you are assuming notes at the interest rate/credit quality exist to reinvest into.

AnilG

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #5 on: July 30, 2014, 05:16:18 PM »
Actually if you are investing with a target expectation of return for your portfolio and your borrowers repay early, you are hitting above your target return.  In this situation you can afford to reinvest in lower yielding loans and still hit your target return. Early payees are giving you a gift of able to lower risk on reinvestment. I will suggest to review all your fully paid loans to see if you can modify your investment criteria to get more of them.

Are you certain about this?  Also, you are assuming notes at the interest rate/credit quality exist to reinvest into.
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turing

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #6 on: July 30, 2014, 05:18:19 PM »
Anyway, you want borrowers to pay off loans early. It will increase your returns because interest is front-loaded on amortized loans.

Maybe I'm missing something here, correct me if I am.

But the interest rate on the principal outstanding is still the same at month 0 as at month 35.  The dollar amount paid in interest is more in month 0, but interest rate doesn't change.  If you are earning 10% on the note at month 0, you are still earning 10% on the remaining principal at month 35.

Maybe you are referring to default risk is lower when they are fully paid, which is obviously true because default risk has gone to 0.

AnilG

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #7 on: July 30, 2014, 05:50:10 PM »
Yes, you are correct the interest rate on outstanding principal stays the same and that is the key of why early payoff helps lender.

Let's take an example. $100 lent at 10% for three years. Borrowers repaid loan in 1 year.

Total Interest received if borrower followed the schedule = $16.16
Total Principal paid back = $100
Total Cash inflow = $100 + $16.16 = $116.16

Cash on Cash Return = $116.16 - $100 / $100 = 16.16% over three years

When borrower pays fully at the end of first year

Interest received in first year = $6.65
Principal received in first year = $30.07
Final payment for principal = $69.93

Total Cash inflow = $6.65 + $30.07 + $69.93 = $106.65

Cash on Cash Return = 6.65% over 1 year or 19.95% over 3 years if you keep lending $100 to borrower who pays back after a year.

Your interest realization rate = $6.65 * 3 /$16.16 = 123%


Maybe I'm missing something here, correct me if I am.

But the interest rate on the principal outstanding is still the same at month 0 as at month 35.  The dollar amount paid in interest is more in month 0, but interest rate doesn't change.  If you are earning 10% on the note at month 0, you are still earning 10% on the remaining principal at month 35.

Maybe you are referring to default risk is lower when they are fully paid, which is obviously true because default risk has gone to 0.
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Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
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lascott

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #8 on: July 30, 2014, 05:53:42 PM »
Anyway, you want borrowers to pay off loans early. It will increase your returns because interest is front-loaded on amortized loans.

Maybe I'm missing something here, correct me if I am.

But the interest rate on the principal outstanding is still the same at month 0 as at month 35.  The dollar amount paid in interest is more in month 0, but interest rate doesn't change.  If you are earning 10% on the note at month 0, you are still earning 10% on the remaining principal at month 35.

Maybe you are referring to default risk is lower when they are fully paid, which is obviously true because default risk has gone to 0.
Here is an example with numbers on a $25 note.
Tools I use: (main) BlueVestment: https://www.bluevestment.com/app/pricing + https://www.interestradar.com/ , (others) Lending Robot referral link: https://www.lendingrobot.com/ref/scott473/  & Peercube referral code: DFVA9Y

turing

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #9 on: July 30, 2014, 07:09:11 PM »
Yes, you are correct the interest rate on outstanding principal stays the same and that is the key of why early payoff helps lender.

Let's take an example. $100 lent at 10% for three years. Borrowers repaid loan in 1 year.

Total Interest received if borrower followed the schedule = $16.16
Total Principal paid back = $100
Total Cash inflow = $100 + $16.16 = $116.16

Cash on Cash Return = $116.16 - $100 / $100 = 16.16% over three years

When borrower pays fully at the end of first year

Interest received in first year = $6.65
Principal received in first year = $30.07
Final payment for principal = $69.93

Total Cash inflow = $6.65 + $30.07 + $69.93 = $106.65

Cash on Cash Return = 6.65% over 1 year or 19.95% over 3 years if you keep lending $100 to borrower who pays back after a year.

Your interest realization rate = $6.65 * 3 /$16.16 = 123%


Thank you for this explanation with cash reinvestment.  That makes sense now.

Fred93

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #10 on: July 30, 2014, 08:18:54 PM »
Almost half of Lending Club loans are paid early.  Therefore, you shoiuld expect on the average EACH MONTH a bit more than 1% of loans in your porftolio to be prepaid. 

Prepayment HURTS the lender, because of the large fees LC charges on prepayments, and the need to recycle the money, ie going thru the loan funding/review/etc delay again.

trevor

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #11 on: July 30, 2014, 08:31:21 PM »


Prepayment HURTS the lender, because of the large fees LC charges on prepayments


What large fees on prepayments? I've been searching around the LC site and I'm not sure what fee you're talking about
« Last Edit: July 30, 2014, 08:36:05 PM by trevor »

BruiserB

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #12 on: July 30, 2014, 08:47:35 PM »


Prepayment HURTS the lender, because of the large fees LC charges on prepayments


What large fees on prepayments? I've been searching around the LC site and I'm not sure what fee you're talking about

You as lender pay 1% of each payment (Principal + Interest) you receive to Lending Club.  So if someone pays off their loan early, you pay 1% of the early payoff to Lending Club.  You can actually lose money if the borrower pays in full on their first payment.  Example: $25 lent at 8%.  After 1 month you are owed $25 x 0.08 / 12 = $0.17 in interest.  The borrower decides to pay off and pays you in full with $25.17.  Then Lending Club charges you 1% which is $0.25.  So you net $24.92 and you had $25 tied up from the time you committed to the loan, waited for it to issue, waited a month, and then waited about a week for the payment to be credited to you.  So you will have had your money tied up for 6 weeks and then come out in the red.

Rob L

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #13 on: July 30, 2014, 08:48:28 PM »
If that pre-payment to close out the loan is $1000 principal and $13.54 interest then the fee is 1% of the total payment is $1013.54* 0.01 =  $10.1354.
LC is charging you the 1% for your own principal you receive back as well as the interest.
Thus it is always so with every payment, but principal drops with each payment.
The earlier the pre-pay the more it hurts.
Then you have to re-invest in another loan and wait.
FYI: With my portfolio the higher the Fico the more likely the loan will be prepaid.

Fred

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Re: Account reaches it's first birthday with a 9% Fully Paid status
« Reply #14 on: July 30, 2014, 08:49:12 PM »
Prepayment HURTS the lender, because of the large fees LC charges on prepayments

It does not hurt more.  LC collects the same total fees on a loan anyway, whether it is prepaid early or it survives until maturity.

The question is on the interest amount -- young loans produce higher interest portion of monthly payment.