Saturday, December 5, 2009

WARNING: Statistic Innacuracies & Potential Downfall

I was hoping to get returns on my investments with at a range of 10% based off their website which states the average return is 9.67%

Upon further review, most of the money coming in is toward new loans which haven't had enough time (120 days) to go into default or to be charged off. This naturally skews the data.

So what I did was that I took the data off their website for loans originating in 2007 and 2008 and the results and returns I see are actually much worse and quite scary.

The reason for this is because most loans end up going into default after about one 6 months to a year. Everyone pays fine for the first couple of months, and then they TANK.

For example, try going to and set the custom dates from June 1, 2007 to December 31, 2008. What you'll see are some pretty sobering statistics.

None of the average returns are above 6% APR. The F class notes are even negative.

Here's a breakdown of each credit grade and the percent that end up getting Charged Off or enter into Default:

Total Loans Charged Off Default % Fail
A 397 5 1 1.51%
B 692 44 15 8.53%
C 722 60 22 11.36%
D 519 64 14 15.03%
E 386 52 8 15.54%
F 163 43 5 29.45%
G 122 24 3 22.13%

According to the default rate you're seeing above is GINORMOUSLY more than what they're supposed to be.

The defaults are CRAZY. I can expect as high as 10%, but I can't believe I'm seeing almost 30% default rates for some credit grades. And these loans are supposed to be only for those with FICO scores above 650. We shouldn't be seeing anything higher than 6.3% default rates.

Perhaps the main saving grace is if you only invest in Grade A loans.

Based off the fact that index funds average 8% and have crazy volatility, I was hoping that was going to offer me a much sweeter alternative. The true data suggests otherwise and I'm hitting my head for not delving into the data while I was initially investing.

Now I'll just be happy to get 6% returns over three years with, but unless my loans end up turning out good, I'll still be relying on the good old index funds to bring in the average 8% over the long run.

And based off the data, I may just invest in Grade A loans for now on.


  1. Yep. I've drawn graphs of the fraction of lendingclub loans that have gone bad vs time, and update them from time to time on my blog. I've also posted same for loans.

  2. Jefferson,

    you are right. I always argued that the growth dilutes the default rates and to see the real picture you have to view loans and defaults for each origination month seperately.


  3. Shouldn't we be looking at data through, say, July 31 (more than 120 days before today)?

    This changes the performance picture -- returns go to 8% for loan classes A-E.

    Result of the softening of the downturn?

  4. Most loans go into default about 6 months - 12 months after the first payment, so I would say 120 days might be on the too soon side.

    For example, if someone didn't make their payment on the 4th payment, it would be the 4th payment + 120 days before it enters into default or 240 days.

  5. The first few months where nearly everyone pays on time is called 'speedboating', and this period can lull you into a false sense of security. Lending Club's default rate is still much lower than Prosper's, and I think if you choose your loans carefully, and keep the amounts invested in each loan pretty low, you can obtain 10% return after fees and default rates are figured in. Between my two accounts at LC, I'm netting close to 11%, with no defaults as I approach one year out on most of my loans. Of course, my stock portfolio has outperformed my LC portfolio this year. I probably will not add any additional capital to LC in 2010, as I see how my loans mature. I have been reinvesting interest payments all along.