Most p2p investors with Prosper or Lending Club want to know one piece of information above all else. What is the return on your investment (ROI)? Both companies provide their own estimates of your return and while this information is useful it is in no way the definitive answer. There are several ways that you can measure your p2p lending ROI that I will explore in this post.
1. Rely on Lending Club and Prosper
Both Lending Club and Prosper will give you their estimate of the return on your p2p lending portfolio. At Lending Club you see your NAR (Net Annualized Return) in big type on your account page. This is their estimate of the return on the outstanding principal in your portfolio and while it is a useful estimate it has its limitations. It only gives your return on your outstanding principal so if you have cash building up in your account it will likely overstate your real world ROI.
Prosper doesn’t provide your ROI number anywhere on their web site. [Update: In November 2011 Prosper started to provide ROI numbers on their site.] It does provide a total gain to date that is expressed in dollars but it will not give you an estimated ROI. However, once a month Prosper emails you an investment summary that provides you with an annualized ROI. Below is my statement from Prosper last month.
Prosper’s calculation is a little different to Lending Club but it is still based on outstanding principal. Prosper calculates total interest earned net of fees, defaults, and principal repayments and expresses that number as an annualized figure. But again this ignores any cash that is sitting in your account.
2. The Simple Method
If you did not add to or withdraw from your account at Lending Club or Prosper then you can perform a simple calculation to calculate your ROI based on your balance on your monthly statement. You can do this for the latest month, quarter, year or any other period. For example, here are my numbers from Prosper for the previous quarter. I did not add or subtract money from this account last quarter.
Statement balance 6/30/11: $5,208.70
Statement balance 9/30/11: $5,490.52
Then by performing this calculation: ($281.78/$5208.74)*4 you can find out your annualized ROI for last quarter. In this case that number is 21.64%, which is actually slightly more than Prosper’s estimate. The good thing about this method is that it does take cash into consideration although I had very little cash sitting idle in this account during the quarter.
3. Lendstats Lender Loan Performance Summary
This is only available for Prosper investors but I have found Lendstats Prosper Lender Summary to be an extremely useful tool. The trouble with the calculations from Lending Club and Prosper as well as the Simple Method mentioned above is that they do not take into account loans that are about to default. If a loan is 119 days past due and about to default then the above methods include that loan at full value. Now, obviously a loan that is about to default is not worth its full value.
So Ken from Lendstats allows every investor on Prosper to find out their estimated ROI based on discounting all the late loans in their portfolio. This way you get a more realistic idea of where your ROI is headed. You just need to type in your Prosper screen name into the Prosper lender search field. For example, with my Prosper portfolio as of today Lendstats estimates my ROI at 15.79%. Which is a more realistic number than the 20% numbers seeing that I have four or five loans that are probably headed for default and a few more that have just gone late.
Keep in mind there is one flaw in the Lendstats summary. If you trade actively in the Foliofn platform it does not include this activity in the ROI calculation (only because the information is not available on the Prosper download). So for active traders it is not going to be a very useful estimate of your ROI. For other Prosper investors, though, it is an excellent way to get an idea of what your expected ROI is going forward.
4. Nickel Steamroller Portfolio Analysis
While Lendstats provides useful information for Prosper investors Lending Club investors can head over to Nickel Steamroller to find a similar estimated ROI. There is a Portfolio Analysis tool that requires you to download all your notes from Lending Club as a CSV file and upload that file to Nickel Steamroller.
The analysis tool with give you an estimated ROI and it will list all your loans. It even marks duplicate notes and provides sell recommendations on notes that are below Lending Club’s average return. But the ROI figure is what I am most interested in.
For my relatively new Roth IRA portfolio that Lending Club has at an 18.23%, Nickel Steamroller suggests my estimated ROI is going to be much lower – 11.85%. This is probably because I have three loans that are over 31 days late and another three that are In Grace Period right now. Still I was surprised that there was such a large difference between the two numbers.
If you have a young portfolio (with a average loan age of less than 12 months) then Lendstats and Nickel Steamroller are going to give you an idea of your ROI looking forward. They provide an estimate of what your future ROI might look like but for young portfolios they will rarely be accurate when looking at the ROI that has been achieved in previous periods. This is because fewer defaults and late loans occur when a loan is still young. Once a portfolio is over 12 months old then their ROI calculations should be more accurate looking both forward and backward.
[Update: It has been pointed out to me that this last paragraph is not very clear. I realize it is not worded very well so I want to clarify. All I am saying is that on Lendstats and Nickel Steamroller the ROI on young portfolios typically go down with time.]
5. XIRR() – My preferred method
I have talked about the XIRR() method before and it is my preferred way to determine ROI. By using the balances on your monthly statements and taking into account any withdrawals or deposits you can get an accurate picture of your ROI over any historical period.
The XIRR() function (it is explained well here) provides a way to calculate return when you are adding or subtracting to your account regularly. I like it because it is simple and provides a fairly accurate historical ROI number.
The chart to the left here shows my total p2p lending portfolio for the 12 months ending 9/30/11. You can see I made several additions throughout the year (but I made no withdrawals). Now, when I make additions I typically take quite a while to invest. For example, the $9,000 that was added in May took over three months to fully invest but I included it in that month because that was when the money began being invested in notes.
The XIRR() calculation is a simple one. You have the dates in one column and the additions and withdrawals in the other column – here is my calculation for the spreadsheet above: =XIRR(B2:B14,A2:A14). The closing balance must be negative for the calculation to work. XIRR is not perfect but it is the most accurate way I have found to calculate ROI for any historical period. Of course, it gives you little indication as to what your ROI may be going forward.
As an aside I earned a $104 bonus from Prosper during this period which I have excluded from this chart. When I add that in to the spreadsheet my ROI drops to 8.15%.
An P2P Lending ROI Standard
While we all want to know our return there is not really one definitive way to calculate this. Both Lending Club and Prosper have slightly different methods so I prefer to use a method that can be consistent for both companies. In fact, I would dearly like to see a p2p lending standard when it comes to ROI. If we can create a formula that is endorsed by both Lending Club and Prosper I would see that as a big win for this industry.
So what do you use to calculate ROI? Or do you just rely on the numbers from Lending Club and Prosper? The five methods I mention here are certainly not the only ways to measure your ROI. I am interested to hear what others do. Please share your thoughts in the comments.