An In-Depth Look at Investor Service Fees

No investor likes fees. But for many investments, including p2p lending, fees are a part of life. The topic of investor fees at Lending Club and Prosper is not one that has been covered in depth anywhere until now.

This is detailed post that took me a long time to put together but if you read the entire post you will have an excellent understanding of how investor service fees work. But before we get started here is a quick primer on fees. All investors pay a 1% service fee . But how this fee is calculated differs at both companies. We are going to be looking at these differences and how it impacts investors at both companies.

Lending Club Investor Service Fees

Every time a borrower makes a payment Lending Club takes a 1% service fee. This fee is rounded up or down to the nearest cent with a minimum fee of $0.01. This fee is a fixed rate and will be charged on any payment whether it is a regular payment, partial payment or a loan payoff. This doesn’t mean that your returns are reduced by 1%, in some cases it will be more and in some cases less.

Here is the explanation of how these fees work from the Lending Club site. This explains why the impact of the 1% fee is in fact less than 1% in most cases:

We charge investors one percent (1%) of all loan payments. This service charge is designed to cover our costs for servicing loans, making Note payments and maintaining investor accounts. The 1% service charge impacts investors’ annual returns by less than 1% because it is not an annual charge. The average impact of the 1% service charge on the annual returns of a 36-month Note is 0.72%, while the average impact on the annual returns of a 60-month Note is 0.41%. Here is the formula for calculating the impact of the service charge:

=RATE(36,monthly_payment* 0.99,amount_invested)*12-weighted_average_interest_rate for 36-month Notes and

=RATE(60,monthly_payment* 0.99,amount_invested)*12-weighted_average_interest_rate for 60-month Notes.

Example

Invest $100 at 10% over 36 months, you get a monthly_payment of $3.23. The impact of the service charge is then calculated with “= RATE(36,-3.23*0.99,100)*12-0.1” This equals -0.6198%, meaning the investor would be getting a net of 0.62% less after fees due to the service charge. The investor’s net interest rate would then be 9.38%.

This assumes that a borrower makes on time payments for the duration of the loan term. If this happens then the impact will always be less than 1% on your returns. As we know, though, this does not always happen.

You can see the fees impact on your account in one of two places – you can see the breakdown of every transaction on your Account Activity page and the monthly total when you look at your monthly statement.

The Early Payment Problem at Lending Club

At Lending Club, because they are taking a 1% fee of each borrower payment, when a borrower pays off a loan early it can have a negative impact on investors. In extreme cases it is possible for investors to actually lose money when a loan is paid back in full immediately.

If you take a look at the table below you will see that for interest rates of 10% or below an immediate repayment of a loan will lead to a small loss for the investor. This loss is made up by the second payment but regardless a very early payment will impact returns at any interest rate because the fees will eat into a large portion of the interest earned.

Note AmountInterest RatePaid In FullService FeesNet ReceivedInvestor Gain
$1007.50%$100.63$1.01$99.62($0.38)
$10010%$100.83$1.01$99.82($0.18)
$10012.50%$101.04$1.01$100.03$0.03
$10015%$101.25$1.01$100.24$0.24
$10017.5$101.46$1.01$100.45$0.45

While a loan payoff with the first payment only happens rarely, my unscientific estimate is that it happens between 0.1% and 0.5% of the time, this is still something that Lending Club should address. However, I don’t think borrowers should be burdened with any prepayment penalties because that is one of the attractions of peer to peer lending for borrowers. And as investors we want good borrowers.

So, what I would like to see at Lending Club is one of two options. First, they could remove the investor service fee completely for all loans that are fully paid back on the first payment. Alternatively, investor fees should start on all loans with the second payment with no fees taken out for the first payment. Both these scenarios will ensure no investor ever loses money on any Lending Club note.

Prosper Investor Service Fees

Prosper takes a different approach. They take a 1% on the total outstanding principal so their fees reduce as the principal balance is reduced. This means that Prosper is not taking a portion of any interest payments, only the principal. An early loan payoff is actually good news at Prosper because service fees will have not had much time to accumulate.

Here is the explanation of service fees from Prosper’s site:

Investors pay an annual loan servicing fee, currently 1% of the outstanding principal, subtracted from loan payments received. The fee is accrued daily, the same way that regular interest is accrued on the loan. It is calculated as: the annual servicing fee divided by 365 multiplied by # days since last payment, then multiplied by the outstanding principal of the loan.

In reality the Prosper service charge is slightly less than 1% of the outstanding principal at any one time because they annualize the fee. You can see this clearly when you view any of your notes on Prosper by clicking on Lending Accounting in the Payment History section on the note detail screen.

Different Outcomes for Loans Held to Maturity

For loans that are held all the way to maturity Lending Club is going to have lower fees than Prosper. An example of a $50 note with a three-year maturity at 15% the total fee at Prosper is around $0.78 while at Lending Club the amount is $0.72. The difference is even larger on 5-year loans where the same $50 note at 15% has fees of $0.60 at Lending Club and $1.16 at Prosper.

This assumes that every payment is made according to the amortization schedule. If a borrower makes two payments in the same month then service fees will be taken out of both payments. And if a loan is paid off in the first half of the loan term then Prosper will always have lower fees.

Minimizing Investor Service Fees

You may have noticed that the fees at Lending Club on a 5-year loan was less than on a 3-year loan in our example. The reason for this is that Lending Club rounds service fees to the nearest cent. So, if a monthly payment on a note is $1.49 then you will only be charged a $0.01 service fee on each payment, at $1.50 your fee doubles to $0.02.

If fees really matter to you then I recommend looking at an amortization schedule to see the monthly payment. I can tell you that if you are investing in $25 notes then you will be paying $0.01 in service fees even though payments will always be less than $1.00 for 3-year loans. This is why some investors prefer borrower payments to be greater than $1 and less than $1.50 so they are taking advantage of the rounding.

To take advantage of this rounding at Lending Club look at the amortization schedule and see the monthly payment of each loan. To make it easier for you I have included a table here with common note amounts and interest rates that also shows the monthly payments and Lending Club service fees.

Note AmountInterest RateLoan TermMonthly PaymentService Fee
$256%36 months$0.76$0.01
$2515%36 months$0.87$0.01
$2524%36 months$0.98$0.01
$256%60 months$0.48$0.01
$2515%60 months$0.59$0.01
$2524%60 months$0.72$0.01
$506%36 months$1.52$0.02
$5015%36 months$1.73$0.02
$5024%36 months$1.96$0.02
$506%60 months$0.97$0.01
$5015%60 months$1.19$0.01
$5024%60 months$1.44$0.01
$756%36 months$2.28$0.02
$7515%36 months$2.60$0.03
$7524%36 months$2.94$0.03
$756%60 months$1.45$0.01
$7515%60 months$1.78$0.02
$7524%60 months$2.16$0.02
$1006%36 months$3.04$0.03
$10015%36 months$3.47$0.03
$10024%36 months$3.92$0.04
$1006%60 months$1.93$0.01
$10015%60 months$2.38$0.02
$10024%60 months$2.88$0.03

The Last Word on Fees

While I know there are many people who are very concerned about these investor fees I am not one of them. While I think Lending Club should change their policy so no investor can ever lose money on a loan that is paid back in full, I don’t consider the fees themselves an important issue. Sure it could impact my returns by a few basis points but if I continue to get double-digit returns then I am not too concerned about them.

But what do you think? As always I am interested to hear your comments.

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Zach
Sep. 19, 2012 10:54 am

This is a good article that analyzes some interesting perspectives that I never considered before. I like the $1.01-$1.49 monthly payment target concept; it could be difficult to factor in though.

Lending Club seems to make the service fees easier to understand for new investors, while prosper tries to make the fees more equitable for investors (but harder to understand).

I think a mixture of the two formulas could be beneficial in being fair and simple for investors to understand.

Roy S
Roy S
Sep. 19, 2012 8:57 pm

I didn’t realize that LC rounds their fees to the nearest cent. I think Prosper rounds it to the nearest $0.000001, which I actually prefer (even though it may hurt my returns rather than help).

Someone, somewhere is going to have to eat up the loss. Either the borrower through an early payment fee, the lender (which is happening now), or LC. As I mentioned in an earlier blog post, I am not a fan of prepayment penalties. This is one case where I would actually support a prepayment fee, BUT I would make it only for loans paid off in the first month. The borrower is tying up money that could be used to fund other loans, and should therefore be the one penalized. I really don’t think the lender should be the one being penalized. Ultimately, I think the best move (public relations-wise) would be for LC to eat the loss, since they are the ones determining all these fees.

I can also see an argument being made that the lenders eating the loss is not bad, since according to your analysis their fees are overall lower than Prosper’s fees…

*Note: I’m not a lender on the LC platform, so my suggestions in no way impact my personal returns. Not sure this makes me truly unbiased, but I’d like to think that I am more so since the fee structure on LC doesn’t directly impact my returns one way or the other.

Henry Miller
Henry Miller
Sep. 22, 2012 7:48 am

If an investor has 100 or more notes, then first payment repayment will be a non-issue, but more like statistical noise. It is the overall fees that matter. Relative to near zero bank interest rates, P2P rates are good, provided due diligence is used in purchasing notes.

Fred
Fred
Sep. 23, 2012 9:15 pm

Peter,

Thanks for this article; it makes fee comparisons much easier to do.

Also, could you please give an example for this statement: if a loan is paid off in the first half of the loan term then Prosper will always have lower fees?

The statement seems counter-intuitive since Prosper would collect higher fees in the beginning of the loan, that Prosper would collect 75% of total fees on the first half, and only 25% (of total fees) on the second half.

So, if a loan is paid off in the middle of loan’s term, Prosper would have higher fees than Lending Club would.

Anyway, this really is a good issue to bring up; I am now assessing my allocation between LC and Prosper due to fees.

Thanks,
Fred

Fred
Fred
Sep. 24, 2012 8:36 pm
Reply to  Peter Renton

Thanks Peter.

It looks like Lending Club calculates the projected fees throughout the loan life and collect them at the payoff time. $0.24 fee for a $25 60-mo 16.82% loan is a lot of money — about 4 months of interests!

Fred
Fred
Sep. 25, 2012 9:05 pm
Reply to  Peter Renton

Ah yes, you are correct: monthly interest on this loan averaged around $0.32 during the first year.

With monthly fee of $0.01 (rounded to nearest cent), LC basically exacts 2-yr of fees ($0.24) on payoff date.

Hmm ….

Peer-Lend
Sep. 24, 2012 2:55 pm
Reply to  Fred

Great question, Fred – very important implications to “re-investment risk”, at scale (impact of defaults to return of principal + lower fees earlier in the lifetime of loan).

Zach
Sep. 26, 2012 8:11 am

Thought it could be important to point out that Lending Club does make a one-time balloon payment back to investors for overcharged investor service fees.

For example, if you have a loan that is making payments of $0.51 monthly, there would be a minimum service fee of $0.01 on each payment. Over the course of the loan, Lending Club roughly 2%-to account for this overcharge, Lending Club will make a balloon payment refunding an discrepancy over the 1%. Note that LC does not charge you for rounding errors where they get less at the end (than 1%). So, in this example, Lending Club collected $0.36 in service fees, but will refund $0.18 (truly 1%).

Em
Em
Oct. 13, 2012 9:16 pm
Reply to  Peter Renton

How come I’ve never heard of this! Is it documented anywhere? Can you give an example of what to look for? And most importantly, is this “rebate” accounted for in Foliofn’s YTM calculation?

Now, I know most loans’ Payment Histories are chock full of rounding errors, for example Outstanding Principal almost never matches Principal Balance for a loan with more a few payments, sometimes it’s off by 10 or 20 cents. I’ve been ignoring it for the most part, but it’s always made me a little nervous that they can’t seem to get the numbers to add up. They’ve even helpfully added 12 decimal places precision to some of the fields (it’s hidden in tooltips on the table cells). Not sure how helpful any of that is exactly, especially since the numbers still don’t match Outstanding Principal!

Em
Em
Oct. 17, 2012 6:30 pm
Reply to  Peter Renton

So if I’m understanding what I’m looking at in this example, they’re taking 3 separate Account Activity entries, which all happened on different dates (one of which is this rebate), and then mashing them together into a single entry on Payment History.

1.23 + 39.76 + 0.06 = 41.05

WHO DESIGNS A SYSTEM LIKE THIS??? IT’S JUST WEIRD!!!!

Account Activity

252820442 10/13/12 PAYMENT PAYMENT, Loan 716825 $0.06

250853981 10/11/12 Lender Service Fee Service Fee, Loan 716825 $0.40
250853980 10/11/12 PAYMENT PAYMENT, Loan 716825 $39.76 $290.68

238716409 09/20/12 Lender Service Fee Service Fee, Loan 716825 $0.01
238716408 09/20/12 PAYMENT PAYMENT, Loan 716825 $1.23

Payment History

9/14/12 9/20/12 $41.05 $40.48 $0.57 $0.00 $0.00 Completed – on time

shu zhou
shu zhou
Mar. 21, 2014 7:47 pm

Hi, Peter,

I like this website, this analysis is mind blowing and Love it, Love it. even Round is such small number, but over time, it is huge and will affect the overall returns. from now, I will buy 3 notes for example rather than 1 or 2 notes.

Thank you,

Thomas zhou.

Jim S
Jim S
Aug. 2, 2014 7:59 pm

Thank you very much for this explanation ! I just had a full payoff on my very first note with lending club and was a bit annoyed to see I lost three cents on a 25 dollar payout with 23 cents interest and net minus 3 cents in fees. I didn’t understand what was going on until I read your article. I’m starting my lending club journey off on the wrong foot (down .37%) but hopefully things get better from here!

michael
michael
May. 16, 2015 6:11 am

My very first payment, after sinking 15k of an Ira into lending club, was a total payoff. I got $.06! Whoopi hoo!

Bob
Bob
Feb. 14, 2016 1:34 pm

After year of being charged excessive fees hidden by mutual funds stock brokers and banks, I had become very weary of fees. This discussion helps to clear the air but I have concerns as a relatively small investor with accounts of 30K divided pretty evenly between Prosper and LC. I have been an investor since 2010.

Prosper seems to make sure there is no totaling of fees or if there is its way at the bottom of the page. Prosper’s statement makes sure there is no beginning balance or net income figure that would help in calculating monthly net gain.

Lendingclub’s statement does a great job providing net monthly gain and beginning and ending balances clearly at the top of the page. However fees are not part of the performance YTD figures on the statement. Lendingclub does a great job showing fees and recovery charges on web page.

What is clear in both stock brokering firms and banking is the use of fees in many cases as gimmicks. Banks get around usury by replacing interest income with fees for instance. Also Prosper and Lendingclub generate income from origination fees in addition to charging investors management fees.

The bottom line is not accumulated interest but net income. In this day of infinite computer power we need apps that help get to the account’s bottom line for MTD,YTD and life of the account. These apps seem to be very hard to find.

Thank you for removing some of the ambiguity on fees with this discussion.

Questions:
Are fees subtracted from income on OID tax forms?
On the Prosper Account Details web page how do I compute total fees in the Performance Summary ?
On the Prosper Gain/Loss to date are fees subtracted to provide a net gain?

Ryan Lichtenwald
Ryan Lichtenwald
Feb. 16, 2016 11:32 am
Reply to  Bob

Hi Bob, here are the answers to your questions:
1. According to Prosper, OID income is reported net of servicing fees and collection fees. (https://www.prosper.com/plp/investing/)
2. In the Performance Summary page, payments received is less servicing and collection fees. Your best bet would be to probably look at your account statements for a detailed listing of servicing fees.
3. Since payments received is after servicing and collection fees, the net gain does include those fees.

Giovanni
Giovanni
Jun. 2, 2017 7:27 am

Very interesting article, but the table are not showing up for me. Something broken on the page?

matthew
matthew
Sep. 30, 2017 8:59 am

If I am reading the chart correctly, the fee for any $25 notes is always rounded up to a penny, so if you are only buying $25 notes, your fee will always be slightly higher, while if you are buying a higher dollar value note, some of your fees are rounded up and some are rounded down, so your fees will be closer to the 1%.