LC Returns: 2 Years Are The Drag

Last week, Lending Club announced their earnings for Q4 and 2017. I didn't report on it here since I still have no interest in buying LC stock but if you are interested, here is some good coverage of what they reported.

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Our friends at Lend Academy

Note Performance

The much more interesting information to me, since I like making loans more than the stock is how the note performance is going. There has been no way to avoid declining returns over the last year or two. My own returns, which were over 10% for 2013, 2014, 2015 and part of 2016 are now in the single digits too (for a little over a year).

This is a screenshot of my returns on LC. When I started, my goal was 1% per month, achieving that nearly every month for 2.5 years. Now, 7.22%. Is that better than other fixed-income investments? Definitely. Is this enough to be super excited about? No. And the trend of declining returns is disturbing and something to watch.

Two Years Are The Culprit

Returns are declining, but why? Everyone I talk to is facing declining returns so instead of looking at my loan picking, which I think is still solid and better than the average or the AutoInvest features, I am looking at loan vintages. The vintage, like with wine, is the year the loan is 'produced' or originated so every loan originated in 2013 back when I started this blog is from the 2013 vintage, which you can see from the light green in the charts below was a very good year.

Let's look in a little more detail. This is the loan vintage chart for all 36-month loans on LC that were funded before 2017.

In 2008, the dark blue line, you can see that this is by far the lowest performing year in Lending Club's history so far. But look at the next lowest (the middle arrow). That pink is 2015, a term that's not even finished yet (termed out we call that) since some loans have almost 1 year left on a 3-year loan. Look at it, it's doing terrible. 2015 is on track to be the 2nd worst year ever for 3-year loans and the worst since the SEC got involved and made LC and Prosper change their compliance around and go into a quiet period, which I discussed here way back in 2015.

Looking at the other recent years, 2014 termed out to a pretty good year in the middle of the pack although lower than previous years and 2016 (the left arrow showing the purple) is the LOWEST performing vintage in its first 14 months of all 36-month loans. A bad, bad sign.

Here are the 60-month loans by vintage.


What we see here is similar to the 36 mo vintage. The 2015 vintage here is the worst performer after 2 years on a five-year loan, as shown by the middle arrow pointing at the pink. On the other hand, 2016 is going a little less crappy although the steep decline between months 6 and 14 (left arrow) makes it likely it will surpass 2015 and 2011 for worst performer in a few months. 2013 was strong and 2014 with the right arrow at the red is showing very respectable performance.

When we are looking at the general trend, these 2 years: 2015 and 2016 are the culprits. They are the loans that are killing our returns. Everyone. Yours, mine and the professional managers too.

What Do We Do About It?

Now that we know what's going on, what do we do? First, it's important to understand the trend. We have to fight against the trend now in order to get outsized returns. So what are our options?

  1. Stand pat if you are ok with your returns. Mine certainly exceed other fixed-income investments.
  2. Move money to another retail investor-friendly platform. In my book P2P Investing 101, I outline 7 different options for investment in p2p lending for retail investors like us.  Worthy Financial now makes 8, as I outlined in late January.
  3. If you love consumer unsecured, then you need to use greater scrutiny on what you invest and how you filter your LC loans. Returns are declining and we haven't even had the recession yet that everyone knows is coming eventually. If you don't know where to start, try my Credit Analysis tab to learn about many of the data points LC uses so you can get comfortable with what you select.
  4. If you love consumer unsecured, then you may want to overweight Prosper as compared to Lending Club. Their underwriting looks more consistent although returns are declining there as well.

Learning more about how the loans are underwritten can provide some big advantages to you and your returns going forward. The way the 2016 vintage is shaping up, you are going to need some kind of edge if you want to get close to where your past returns were previously.

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

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