Many peer to peer loan investors count on clear and accurate reporting from the P2P platform to validate their P2P investing strategies. In this post, I would like to discuss Lending Clubs rate of return reporting, how investors should interpret this piece of data and how it is useful in assessing the success or failure of your investment strategy. If you are a Lending Club investor then this is certainly something that you want to be familiar with and monitor on a regular basis.
Lending Club calculates what they call Net Annualized Return for all investor accounts. They define this as “an annualized measure of the rate of return on the principal invested over the life of an investment”. In layman’s terms, this means the rate of return on an annual basis of the account balance. If the actual return is 10% in 6 months, then the annual return would be 20%. If the actual return is 30% over two years, then the annual return would be 15%.
Since loans are always being added or paid down, and interest is received, the calculation can be very complicated. Annualized figures are normally based on average daily value of and account. Therefore, it is very good for every Lending Club investor that this information is provided. Having to do these calculations oneself would be a very difficult and time-consuming part of lending club strategies.
Rate of return is also impacted (usually very significantly) by loans that default. Since the remaining principal is lost, the effect on rate of return is large. Loans generally default before most of the payments have been made so investors need to be aware of this possibility.
One way Lending Club has of help investors recognize the potential impact of loan defaults is a piece of data called Adjusted Net Annualized Return (ANAR). ANAR projects loan defaults and determines what the rate of return will be if those loans actually do default. To understand how this is determined, you must know that Lending Club tracks loans by status: Current, Grace Period, Late 16 to 30 Days, Late 31 to 120 Days. For each of these categories Lending Club has determined the likelihood of the loan defaulting. This is based on all previous loans that have been in those categories. When calculating ANAR, these percentages are included, thus adjusting the ANAR.
For newer portfolios the ANAR can be significantly impacted by loans in any of these categories, even Grace Period. While the risk of default is low (about 25%), if the account has not had a lot of repayments then losing even 25% or the principal of one loan can make a difference. Fortunately, the investor can adjust the amount deducted from the balance in the calculation of ANAR. They do not need to use the default experience values provided by Lending Club. Many investors adjust these values and make changes over time.
Want to know more about investing on Lending Club and how to be successful? There is a wealth of information available on their site for new and experienced investors. In addition, you can learn more about P2P lending investing from Peer Loan Advisor. They are a team of professionals who are highly experienced in this type of investment.