What Returns Do You Expect Going Forward?

[Rob L]

I took a look at the statistics section of the LC website today. Specifically the chart titled "Investor Account Returns by Average Age of Portfolio" and made the following selections:

Average Age of Portfolio: 24 - 30 months (the maximum)
Portfolio Concentration: Any
Minimum Notes per Account: 100

Weighted Average	10th		90th
Interest Rate	%tile	Median	%tile
0% - 9%	3.3%	4.3%	5.3%
9% - 12%	2.7%	4.1%	5.5%
12% - 15%	1.7%	3.5%	5.5%
15% - 18%	0.9%	3.2%	5.9%
18%+	3.3%	2.8%	6.0%
ALL	3.3%	3.6%	5.6%

Something interesting to watch in the future on a quarterly or annual basis.

[Macroman]

This agrees with my experience. One thing to note is that there is essentially no addditional effective risk premium for buying riskier notes. I am shooting for 4% on what I have invested in an IRA and am not adding more.

I'd add that essentially the same situation seems to prevail at prosper.

[Rob L]

This agrees with my experience. One thing to note is that there is essentially no additional effective risk premium for buying riskier notes. I am shooting for 4% on what I have invested in an IRA and am not adding more.

I'd add that essentially the same situation seems to prevail at prosper.

Yeah, I think if you went back through the historical returns you would find risk premium peaked in notes of vintage mid 2014 or so. Through a combination of interest rate reductions and loosened underwriting, risk premium literally turned into a very substantial risk discount by mid 2016. One could argue borrower behavior was/is also a factor but interest rate and underwriting adjustments should have countered this. However, when your objective is originations and not returns, well we've seen the result. Since 2016 the risk discount has lessened but still exists and investor appetite for riskier notes has plummeted. The table above clearly shows a risk discount. The variance of returns (risk) increases with interest rate while median returns (reward) decreases.

[jrl]

I took a look at the statistics section of the LC website today. Specifically the chart titled "Investor Account Returns by Average Age of Portfolio" and made the following selections:

Average Age of Portfolio: 24 - 30 months (the maximum)
Portfolio Concentration: Any
Minimum Notes per Account: 100

Weighted Average	10th		90th
Interest Rate	%tile	Median	%tile
0% - 9%	3.3%	4.3%	5.3%
9% - 12%	2.7%	4.1%	5.5%
12% - 15%	1.7%	3.5%	5.5%
15% - 18%	0.9%	3.2%	5.9%
18%+	3.3%	2.8%	6.0%
ALL	3.3%	3.6%	5.6%

Something interesting to watch in the future on a quarterly or annual basis.

WRT the 18%+ rate, I don't understand how the return for the bottom 10% can be higher than the median. I just ran the numbers and it shows 0.1%, 2.9% and 6.9%. If I change it to 500 note minimum with a concentration under 0.5%, it changes to 1.3% 3.4% and 6.5%. That's what my portfolio conforms to, and i'm sitting at 8% ANAR and 9.55% NAR. (Achieved by doing some heavy back-testing.) So, the high returns are available, if you're willing to put the time in to find some good filters.

WRT talk of risk premium, I think lending club is doing with "grades" the exact thing that banks were doing in 2007. They're adding some riskier notes to the higher "grades" and some safer notes to the lower "grades." I see B & C grade notes that I wouldn't grade "E" all the time, but I also see "D" grade notes that I would consider B or C aswell.

I think the best course of action is to disregard LC's grades and interest rates as not indicative of risk, and come up with your own criteria. Right now (or, I should say, before I was kicked off the primary market) the biggest hit to my returns is/was people going delinquent within the first few months. The amount of straight-rollers and nearly-straight-rollers has certainly gone up since 2016. This could just be my filters, but from what I've been investing in, (tight filters, mostly higher grade notes), it's been nearly the same loss rate across grades.

Here's one of my better filters: https://i.imgur.com/kAd1lw2.png The ROI is similar to ANAR, as the IGP and Late notes are taken into consideration. ($25 and $50 notes, with some Folio included recently, but the numbers were similar before the inclusion of Folio notes a few months ago.) Also, I cut it off at loans originating on/after July 1 2017. Here's that same filter across LC's whole issuance, with all loans equally weighted at $1000: For whole loans: https://i.imgur.com/76SKco9.png For fractional loans: https://i.imgur.com/XLqjaSx.png As you can see, the returns on whole loans are usually better, along with much higher volume. I should also mention that this is one of my broadest filters.

So, in response to OP, with this filter, if the interest rates remain constant, I expect a return of around 8 or 9%. It would be higher, but there are no more E F G fractional notes.

[Rob L]

Of course you are right regarding the 18%+ rate return for the bottom. Must have been a typo on my part.

Meanwhile, I must be going batty but I cannot locate the chart titled "Investor Account Returns by Average Age of Portfolio" anymore.
I have tried, really. Embarrassing! You just looked at it last night. Okay, exactly where can (did) I locate this? 

[jrl]

Of course you are right regarding the 18%+ rate return for the bottom. Must have been a typo on my part.

Meanwhile, I must be going batty but I cannot locate the chart titled "Investor Account Returns by Average Age of Portfolio" anymore.
I have tried, really. Embarrassing! You just looked at it last night. Okay, exactly where can (did) I locate this? 

I can't find it now either... Did they take it down? I think it used to be https://www.lendingclub.com/info/statistics-performance.action

But that redirects to this page I've never seen before, with much less info. https://www.lendingclub.com/investing/investment-performance

I think there was also a link to it on top of these pages https://www.lendingclub.com/info/statistics.action https://www.lendingclub.com/info/demand-and-credit-profile.action

The "Understanding your returns" page still exists, which is close. You just can't see what returns are for interest rates other than in relation to your own WAIR. https://www.lendingclub.com/account/lenderBenchmarkReturns.action

[Rob L]

Of course you are right regarding the 18%+ rate return for the bottom. Must have been a typo on my part.

Meanwhile, I must be going batty but I cannot locate the chart titled "Investor Account Returns by Average Age of Portfolio" anymore.
I have tried, really. Embarrassing! You just looked at it last night. Okay, exactly where can (did) I locate this? 

I can't find it now either... Did they take it down? I think it used to be https://www.lendingclub.com/info/statistics-performance.action

But that redirects to this page I've never seen before, with much less info. https://www.lendingclub.com/investing/investment-performance

I think there was also a link to it on top of these pages https://www.lendingclub.com/info/statistics.action https://www.lendingclub.com/info/demand-and-credit-profile.action

The "Understanding your returns" page still exists, which is close. You just can't see what returns are for interest rates other than in relation to your own WAIR. https://www.lendingclub.com/account/lenderBenchmarkReturns.action

Well I feel less batty! Guess LC must have taken it down. Wonder why? Too bad because it provided information that was not available anywhere else and gave a unique view of the performance of actual investor portfolios. Curious coincidence it was taken down just after this thread was started here. Makes a nice conspiracy theory no?

[jrl]

Wonder why? Too bad because it provided information that was not available anywhere else and gave a unique view of the performance of actual investor portfolios. Curious coincidence it was taken down just after this thread was started here. Makes a nice conspiracy theory no?

Well, those returns are terrible. For a taxable account you're looking at 1-3% after taxes and fees, and that's for the top 10% of accounts! Compared to the stock market with capital gains taxes, it's a no-brainier. The reason why returns are so low, is because people are ok with it. If everyone did the back-testing and refused the garbage loans, they would either stop offering loans to those borrowers, or make them pay a higher interest rate..

Actually, that would make a better platform. Put all the credit info up, educate the lenders on credit modelling, and let the lenders decide the interest rate. Release all the loans in the morning. If a loan doesn't get funded in 1 hour, bump the interest rate up a few percent, every hour until it's either funded or approaching usury rates. Whatever the final rate is, is what the borrower has to pay on the whole loan. Then the borrower could choose to either accept the rate, or wait x amount of time before trying again. Of course a lot more would need to be figured out, but I think it could work if implemented properly. The interest rates rising too high would be competing with the lenders need to avoid idle cash.

[.Ryan.]

The reason why returns are so low, is because people are ok with it.

Absolutely spot on. I have long felt this way.

Since LC still receives the retail based funding they need even though returns continue to diminish, there is little incentive for them to implement change to benefit the investor.

[Rob L]

Well, those returns are terrible. For a taxable account you're looking at 1-3% after taxes and fees, and that's for the top 10% of accounts! Compared to the stock market with capital gains taxes, it's a no-brainier. The reason why returns are so low, is because people are ok with it. If everyone did the back-testing and refused the garbage loans, they would either stop offering loans to those borrowers, or make them pay a higher interest rate..

Actually, that would make a better platform. Put all the credit info up, educate the lenders on credit modelling, and let the lenders decide the interest rate. Release all the loans in the morning. If a loan doesn't get funded in 1 hour, bump the interest rate up a few percent, every hour until it's either funded or approaching usury rates. Whatever the final rate is, is what the borrower has to pay on the whole loan. Then the borrower could choose to either accept the rate, or wait x amount of time before trying again. Of course a lot more would need to be figured out, but I think it could work if implemented properly. The interest rates rising too high would be competing with the lenders need to avoid idle cash.

It was before my time but if I understand what others have posted correctly then Prosper 1.0 did let the lenders decide interest rates. It was a train wreck. The majority of lenders under priced loans very badly and got burned. Prosper had to start over and it resulted in what they have now (same more or less as LC).

And oh yes I agree, those returns are terrible.

[Fred93]

Since LC still receives the retail based funding they need even though returns continue to diminish, there is little incentive for them to implement change to benefit the investor.

They receive most of their cash from institutional investors, and most of that from banks.  Why banks are satisfied with such low yields is beyond me, probably because I'm not a bank.   ... but we have to consider that these days we're competing with banks.

[jrl]

Since LC still receives the retail based funding they need even though returns continue to diminish, there is little incentive for them to implement change to benefit the investor.

They receive most of their cash from institutional investors, and most of that from banks.  Why banks are satisfied with such low yields is beyond me, probably because I'm not a bank.   ... but we have to consider that these days we're competing with banks.

Probably because of the low interest rate policy. In Europe, they have negative interest rates (NIRP) in some cases. https://www.investopedia.com/articles/investing/070915/how-negative-interest-rates-work.asp This is much larger and more complex conversation for another time and place though..

In reality, these unsecured loans should have returns comparable to credit cards. (7%) https://www.valuepenguin.com/how-do-credit-card-companies-make-money

LC Fractional Loans, current returns, Vintage 2015 thru 2017: https://i.imgur.com/GFCCSFz.png

Which would mean a 2-3% increase in interest rates is needed across all grades, just to match the profitability of Credit cards, which include a lot more higher quality borrowers than LC loans. LC only lends to those with "prime" credit scores. Around 16% of LC fractional loans had borrowers that were superprime, compared to 62% of the credit cardholding US population or 78.9% of the total prime credit cardholding population. Page 21: https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2019.pdf (LC data from NSR 2015-2017)

Due to the increased risk, it should probably be higher than 3% across all grades except A, and maybe B.

[macroman7799]

Since LC still receives the retail based funding they need even though returns continue to diminish, there is little incentive for them to implement change to benefit the investor.

They receive most of their cash from institutional investors, and most of that from banks.  Why banks are satisfied with such low yields is beyond me, probably because I'm not a bank.   ... but we have to consider that these days we're competing with banks.

I think to a substantial degree banks are getting preferred choice of loans and would not be willing to take many of the loans going through the retail platform, at least not on the terms that they are being offered.

[Fred93]

I think to a substantial degree banks are getting preferred choice of loans and would not be willing to take many of the loans going through the retail platform, at least not on the terms that they are being offered.

Do you have any evidence?

LC has many times said it doesn't happen.

You're not the first to suggest this, but none of the other folks had any evidence.  Just sour grapes, conspiracy theory, etc.

[jrl]

I think to a substantial degree banks are getting preferred choice of loans and would not be willing to take many of the loans going through the retail platform, at least not on the terms that they are being offered.

Do you have any evidence?

LC has many times said it doesn't happen.

You're not the first to suggest this, but none of the other folks had any evidence.  Just sour grapes, conspiracy theory, etc.

There's a very subtle difference when looking at the difference between fractional and whole loans, especially in the riskier grades. It seems like Fractional investors have been getting better A loans, while Whole investors got better C/D/E loans. What percentage of whole loans go to banks, I can't remember. How much of this can be explained by variance, I don't know either.

Data from NSR, 2015-2017 vintage loans: https://i.imgur.com/XFxZxpy.png

Also, seperated by credit score (Prime/Superprime): https://i.imgur.com/EXRmYEY.png

Both have all loans equalized at $1000. I use 2015-2017 because that's when loan quality/returns degraded, and 2018 vintage is too recent and would skew the numbers UP.

If there exists any bias toward whole loans, it's very small.