Loans will default. It’s a fact. Lending Club states an expected default rate, however the average default rate is not known yet. There is not enough information to accurately predict what will happen. And of course, past performance is in no way indicative of future results. As of today, Lending club has funded 45,137 loans. If you check out their SEC 10Q filings for September 2011, they had funded 33,167 loans.
I’m going to look at the older SEC document (September 2011) as opposed to the newer loan amount for a couple reasons. The first one being, I have the SEC report in front of me. The second one, It’s almost impossible for a Lending Club note to default and charge off in 4 months. The new data is skewed too young to add any value to any data that is already too young to glean much in terms of statistical significance.
As of September 2011, 33,167 loans were funded. So far 4,537 of those notes were fully paid. This is a very small sample. It’s only about 14% of the total number of loans originated. So first of all, it says Lending Club is a young company. Second of all it says, we can’t get much factual information. 14% of a small number is a smaller number.
Still, I want to look at the data to see if it is improving over time. And we can find more information about or 33,167 loans. In fact, 2,193 of Lending Club’s loans have gone to collection. 754 notes have been charged off due to delinquency.
Essentially, a charged off note is a note that has gone past 120 days late, then it has gone through collections, and finally a (variable) amount of money has been returned to the investor.
754 Notes have been charged off. So far, for completed notes, Lending Club has a “charge off” rate of 14%.
# Charged Off Loans / (# Paid Loans + # Charged of Loans)
Historically, Lending Club notes that are charged off receive about 2 cents on the dollar. (p. 39 10-Q report) What this says, is a charged off note is more or less worthless. Unless you want to make a joke about offering “my two cents”
An interesting aside: notes that are 31-120 days late can also be sent to collection. In fact 2193 of these notes have gone to collection. (p.39 10-Q Report) FYI I’m going to make an assumption in the following sentences. The assumption is that the notes currently in collection will not go current again. Or in terms of Greek Bonds, these loans in collection will get a haircut. The current Lending Club haircut is .43 cents on the dollar.
So what do we know? We know that so far, 4,537 notes have been paid in full. We know 754 notes have paid .02 on the dollar. And we know 2193 notes have paid .43 cents on the dollar. We also know Lending Club’s average annual percentage rate (of total loans) is 14.26 percent (p.36 10-Q report).
This is where the lending club NAR and 800 note philosophy comes into play. 7,484 notes are in collection, defaulted or paid in full. That means you have a 60% chance of making 14.26% on your note, a 30% chance of losing .57 cents on the dollar, and a 10% chance of losing .98 cents on the dollar. At least according to history. If you’re investing a lot and always reinvesting, these numbers eventually become acceptable.
UPDATE 1: (2/1/5:15pm) There is better information in the comment section regarding an “average”, hypothetical return on notes sent to collection and notes that are charged off.
Weekend Reading
Comments
Appreciate it for the excellent writeup. Anyway, how could we communicate?
I believe there’s a problem with your numbers. Since the 754 that have been charged off obviously went through the collection process at some time, are you not, in fact, counting double counting when you use the 2193 number as consisting of notes that have undergone collection?? Would a 754 subtracted from 2193 not be the number that you’re actually looking for?
Indeed, Dan. It makes no sense to double count the notes, thanks for pointing that out!
Excellent points, Peter.
It would have been better (although still not completely accurate), for me to say: the 2193 notes in collection originated $21,365,375 and sent $3,368,839 to collection. This seems to imply that the other 18,000,000 or so was paid at the “average” rate.
Using the average loan rate for the time period, ($10,528) We can say that charged off loans originated to the tune of around $7,938,112 and sent $5,098,623 to collections.
So a historically, a hypothetical $100 would net you:
$89 dollars at $1.136 to the dollar.
$4.50 at .43 cents to the dollar
$6.50 at .02 cents to the dollar
I divided the amount sent to collections or “charged off” by their respective origination amounts. But all in all you are right, my original numbers were misleading. Thanks for giving this a read!
Great article and welcome to the small p2p lending blogger community. A couple of points I would make in response to your article:
1. To say that a charged off note earns 2% on the dollar is a little misleading. That may well be the factually correct but a borrower can pay a loan for 18 months and then stop paying, in which case an investor has earned far more than 2c on the dollar. The same logic applies to the 43c on the dollar argument,
2. The average interest rate is 14.26%, but an investor who manages to invest in all notes that stay current and have no defaults will not earn this much. The investor fees which are around 0.5% – 0.7% annually at Lending Club will reduce returns.
Keep up the good work. I have subscribed to your blog and look forward to future posts.
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