Lending Club: Charge-offs will happen
1. Focus on net returns
2. Charge-offs will happen
3. Diversification is key
4. Monthly payments include principal and interest
5. Reinvestment is critical for consistent returns
Lending Club has gradually drawn more attention to the effect of prepayments on loans and this guide is no different.
“Prepayments impact returns because they reduce the amount of principal earning interest from Notes. A Note is considered prepaid when the dollar amount received is greater than the amount due for any given month,” they say. “It is inevitable that certain loans will charge-off or prepay and result in a loss of investment capital.”
Not mentioned however is that investors are charged a 1% fee on all outstanding principal if a borrower pays off their entire loan early despite it being no fault of the investor. And investors are less likely to monitor the impact of these fees if they keep reinvesting their cash which of course Lending Club advises investors to do.
The guide is still helpful in setting expectations for retail investors who ignored or did not understand all the fine print when they signed up. Quoted below about charge-offs:
“It’s inevitable that some borrowers will get behind on their loan payments. Some of these borrowers will get back on track and others will stop repaying their loans. After it’s clear that a borrower won’t make any more payments a loan is considered ‘charged-off.’ All investors in consumer credit experience some charge-offs, so it’s important to understand them and consider how they might impact your investment strategy.”
Overall, the guide is a nice way of keeping retail investors engaged. As someone who invested on the platform for a few years, one of the biggest disappointments I found was that the platform did not feel like a “club” at all. There was no sense of peer community and there was almost no communication whatsoever from Lending Club about anything other than requests to deposit more money.
But lately, peer funding has been dropping off the platform after reaching an all time high back in the first quarter of 2016. In Q2 of this year, only 13% of loans were funded by peers. 44% of loans were funded by banks. Maybe they’re not entirely ready to see individuals disappear completely or maybe they just want those that remain to keep the faith as returns slide. Hopefully, they continue to supply interesting and helpful materials in the future.Last modified: August 16, 2017