Author Topic: Question about monthly return  (Read 429 times)

jd

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Question about monthly return
« on: August 11, 2017, 08:35:57 PM »
Hello all. Thank you in advance for your help.

I'm thinking about investing $1,000 with Lending Club. I was wondering what I could expect back on a monthly basis.

In your view what would I get back (cash) monthly if I invested only in the safest notes? I know there are many strategies but I'm just wondering about that question for the start. 

Thank you again.

Fred93

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Re: Question about monthly return
« Reply #1 on: August 11, 2017, 10:32:31 PM »
I'm thinking about investing $1,000 with Lending Club. I was wondering what I could expect back on a monthly basis.
In your view what would I get back (cash) monthly if I invested only in the safest notes? I know there are many strategies but I'm just wondering about that question for the start. 

For the most part, your returns are interest minus defaults.  In other words, each month you get some interest paid to you, and some loans go bad (default), which effectively removes value from your account.  Some comes in, some goes out.  You recycle the money that comes in every month by buying new notes, so you stay always with all your money invested.  In this situation, we just need to figure out how much comes in, and how much goes out and subtract the two numbers.

The interest rate on the safest loans, ie the A1 grade 36 month loans is presently 5.32%.   That's the amount that comes in.

Figuring how much goes out due to defaults is more complex.  There is historical data, but of course that's history.  The last year for which we have completed loans is 2014 (because that was three years ago).  We know that loans from 2015 and 2016 have performed a little worse than 2014 loans, although in the safe grades the difference is small.  We can look at historical data to give us the total fraction of loans that default.  However, the math to get from there to how much chargeoff you can expect each month is harder.  There are a couple of extra things going on.  First, because loans have a declining balance, defaults late in the life of a loan cost you less than defaults early in the life of a loan.  Second, a significant number of loans repay early, which means that you have to recycle the principal from these loans, so your always-invested portfolio will see an average default rate over time which is different from the all loan default rate.  In the end it is reasonable to use a number on the order of 1% to 1.5% as the annual loss rate for high quality loans.

So if you used 5.32% as the interest rate, and 1.5% as the annual loss rate, you'd get returns on the order of 4%/year, which is 0.33% per month.

There is a great web site for back-testing your investment strategy, so you can see how it turned out in prior years.  http://www.nsrinvest.com





AnilG

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Re: Question about monthly return
« Reply #2 on: August 12, 2017, 02:23:05 AM »
If you lend to 36 months loans, your monthly payment will be about 1/36th of amount lent for up to next 36 months. Most months, payment will be slightly more and few months the payment will be lot less.

Hello all. Thank you in advance for your help.

I'm thinking about investing $1,000 with Lending Club. I was wondering what I could expect back on a monthly basis.

In your view what would I get back (cash) monthly if I invested only in the safest notes? I know there are many strategies but I'm just wondering about that question for the start. 

Thank you again.
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Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
PeerCube https://www.peercube.com

jd

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Re: Question about monthly return
« Reply #3 on: August 12, 2017, 07:42:28 PM »
Thank you both very much.  You were most helpful.