#### Agflyer

• Newbie
• Posts: 10
##### Adjusted Net Annualized Return Question
« on: March 01, 2014, 12:02:09 AM »
Well, I finally saw my first interest payment of \$0.34 show up in my account. I also noticed that my Adjusted Net Annualized Return changed from "new" to 2.06%. Um, my weighted average weight is 16.91% with 228 loans, but why would my adjusted NAR be so low? Is 2.06% my possible annual return? Ouch. I don't want to be too antsy and I feel pretty confident in the loans in my account, but I'm curious if someone might be able to help me understand this a little better? Thanks  !
« Last Edit: March 01, 2014, 12:04:24 AM by Agflyer »

#### BruiserB

• Sr. Member
• Posts: 417
##### Re: Adjusted Net Annualized Return Question
« Reply #1 on: March 01, 2014, 08:56:05 AM »
Just be patient.  You won't have a real number there until a month goes by and you've received a first payment on all of your notes.  The math just doesn't work now with only \$0.34 interest received and all of the principal you've invested. If all of your notes make their first payment, you will see a much higher rate close to 16.91%, but don't get too excited about that either.....over time it will drop some as you have defaults....and you will have some.

I'm nearly 3 years into investing and add new funds each year and reinvest all payments.  My weighted average rate is 18.96 and my NAR is shown as 13.26 right now.  If I turn on the adjustment for late notes it shows as 11.16 which is pretty much what I get if I calculate my return in Excel with the XIRR function.

#### Agflyer

• Newbie
• Posts: 10
##### Re: Adjusted Net Annualized Return Question
« Reply #2 on: March 01, 2014, 10:36:11 AM »
Thanks for the explanation, Bruiser.  I suspected that it was something like that, but I didn't have much luck finding it in previous threads.  Have a great weekend!

#### gamassey

• Jr. Member
• Posts: 72
##### Re: Adjusted Net Annualized Return Question
« Reply #3 on: March 03, 2014, 03:23:00 PM »
Question for BruiserB:

With about a 13% NAR and reinvesting all payments (interest and principle) what is your approximate doubling time.  By doubling time I mean how many months would it take to double your initial investment (ignoring additional investments each year).

I have been in LC for about 6 months now with a NAR of 14.14% (I know that this will drop towards 10% over time).  When I put the numbers in Excel it is hard to believe how quickly it appears to double so I am curious about what your experience shows.

Thanks,

Allen

#### Randawl

• Sr. Member
• Posts: 469
##### Re: Adjusted Net Annualized Return Question
« Reply #4 on: March 03, 2014, 04:34:18 PM »
You can approximate doubling time by taking 72 divided by the percent return you are projecting.  For instance, a 9% return would have a doubling time of roughly 8 years.  72/9=8.

#### BruiserB

• Sr. Member
• Posts: 417
##### Re: Adjusted Net Annualized Return Question
« Reply #5 on: March 03, 2014, 04:49:06 PM »
gamassey:

Randawl's answer is just what I would have given you.  The "Rule of 72" http://en.wikipedia.org/wiki/Rule_of_72 is a great way to do a quick "in your head" calculation.

It is important to remember that you are being taxed on your gains as they happen though....so if you are making 10% but are in the 28% marginal tax bracket, Uncle Sam will take 2.8% and leave you with only 7.2% each year.  If you don't dip into your account to pay the taxes, it will grow as if untaxed, but you will have to come up with the money to pay the taxes from other assets each year.

#### gamassey

• Jr. Member
• Posts: 72
##### Re: Adjusted Net Annualized Return Question
« Reply #6 on: March 03, 2014, 04:53:49 PM »
The rule of 72 is only accounting for interest earned.  With LC we have interest and principle buying new loans and then each new loan begin generating P&I, so it seems that it will double much faster than the rule of 72 shows.

#### BruiserB

• Sr. Member
• Posts: 417
##### Re: Adjusted Net Annualized Return Question
« Reply #7 on: March 03, 2014, 05:07:46 PM »
Not quite.  Lending Club does give you what is basically monthly compounding though.  Each month a borrower pays you back some of your principal plus some interest.  You can pool these payments with payments from other loans and purchase more notes.  You then begin earning "interest on your interest" which is what compounding is.  But you don't begin to collect interest on the same principal at a 2x rate.  This is what would have to happen to make your savings grow more than compounding.  Once a borrower pays you back some of the principal, he stops paying interest on that principal.  That's why when you look at the amortization table of someone paying off a loan, the amount of principal increases and interest decreases for each fixed payment.  Now you do loan that principal out again by buying another note, but that principal is only making you money from the person who is now borrowing from you.  The first borrower is no longer paying you interest on that money.

Not sure I explained it totally clearly, but it makes sense to me!

#### gamassey

• Jr. Member
• Posts: 72
##### Re: Adjusted Net Annualized Return Question
« Reply #8 on: March 03, 2014, 07:36:14 PM »
Not quite.  Lending Club does give you what is basically monthly compounding though.  Each month a borrower pays you back some of your principal plus some interest.  You can pool these payments with payments from other loans and purchase more notes.  You then begin earning "interest on your interest" which is what compounding is.  But you don't begin to collect interest on the same principal at a 2x rate.  This is what would have to happen to make your savings grow more than compounding.  Once a borrower pays you back some of the principal, he stops paying interest on that principal.  That's why when you look at the amortization table of someone paying off a loan, the amount of principal increases and interest decreases for each fixed payment.  Now you do loan that principal out again by buying another note, but that principal is only making you money from the person who is now borrowing from you.  The first borrower is no longer paying you interest on that money.

That does make sense,my calculation was off because I was assuming (incorrectly) that the interest received each month was constant over the life of the loan.  As you pointed out the interest received each month decreases as the balance reduces.  I redid my spreadsheet using the ipmt function for each loan and it looks more reasonable now.  Although it is still doubling faster than the rule of 72 would predict.

#### bobeubanks

• Sr. Member
• Posts: 273
##### Re: Adjusted Net Annualized Return Question
« Reply #9 on: March 03, 2014, 08:55:47 PM »
Rule of 72 gives a ballpark. At 13%, it would take a bit under 5 years to double. But don't forget that there is delay in reinvesting your interest and principle payments, so it will take longer than that.

#### rawraw

• Hero Member
• Posts: 2756
##### Re: Adjusted Net Annualized Return Question
« Reply #10 on: March 04, 2014, 11:20:39 AM »
And the fact that 13% may  be harder and harder to come by for 5 years.

#### Bohb Daishi

• Sr. Member
• Posts: 481
• I eat free lunches
##### Re: Adjusted Net Annualized Return Question
« Reply #11 on: March 05, 2014, 03:53:45 AM »
Randawl's answer is just what I would have given you.  The "Rule of 72" http://en.wikipedia.org/wiki/Rule_of_72 is a great way to do a quick "in your head" calculation.

Holy crap! I never knew this "rule" existed! I'm actually quite ashamed, since I have a bachelors in both finance and accounting. Guess it makes sense mathmatically since ln(2) is .693, so moving the decimal point and upping it to 72 makes it easier to do the mental math.

I must have skipped too many classes back in college or something.
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