Lending Club PRIME Review and the Difference Between NAR and Actual Returns

Lending Club PRIME Review August 2011
It has been about four months since I gave an update on my wife’s Lending Club PRIME (link to my initial review) account, so I thought it was time to revisit the numbers. I am going to try and provide these updates quarterly from now on. I think p2p investors can learn several useful things from this review.

Above is the screenshot I took of the PRIME IRA account this morning. As you can see this account is earning a 9.73% NAR according to Lending Club with an account total of just over $60K. My last Lending Club PRIME update in April had my NAR at 10.37% and an account total of $58,577. Every month my account total keeps going up.

The Lending Club Numbers May Be Overstated

Even though the balance goes up every month the numbers Lending Club provide on their account details screen can be misleading. I have written about the difference between actual return and Lending Club NAR before and I am going to stress this again today. You may look at the screen shot above and believe I am earning 9.73% on my account right now, but that number is a slight exaggeration.

To get an accurate picture of your Lending Club returns you need to look at your monthly statements. The numbers there show your actual balance at the end of every month, whereas the account total figure above includess an estimate of your accrued interest, but this interest is not actually yours until the borrower actually pays the interest. You can read a brief explanation of accrued interest here.

Take a look at the spreadsheet below. This shows my actual account balance (taken from my statements) for the last four quarters on this PRIME account. I have also computed my annualized ROI based on these numbers (please note: the October 2010 quarter numbers do not compute correctly because there was a $533 bonus that I backed out so I could compare apples to apples).

[table id=17 /]

A few months ago I started recording my NAR every day from the Lending Club home screen to really see how it changed over time. So, I have an accurate number for the three months ending July 31, 2011. My average NAR according to Lending Club during this quarter was 9.84% and yet when you look at my account based on my statement balance the actual return earned was 7.64% – quite a large difference.

[Update: It was pointed out by a reader that I didn’t provide an annual ROI figure, just annualized ROI based on quarterly numbers. My annual real world ROI is 9.42% (backing out the $533 bonus) – much closer to the 9.73% stated by Lending Club.]

Why the Difference?

Some of it can be explained by the fact that some money sits in idle cash, but Lending Club is pretty good about reinvesting. They average a reinvestment about every 10 days so the average cash sitting in the account is only around $400. I think the main reason for the difference is in defaults. I had six charged off loans during the quarter with a total principal loss of $496 which reduced my end of quarter account balance. These six defaults reduced my NAR by 1.02% but with a $496 hit in that quarter my annualized ROI was reduced by 3.40%. From my math this accounts for most of the difference between the two numbers.

All these calculations are relatively simple because I had no cash inflows or outflows on this account in the past year. Most people will be adding or subtracting from their account in which case I recommend using the XIRR calculation to work out an actual return.

With several more late notes I expect my annualized real world return to dip well under 7% and maybe even below 6% before stabilizing somewhere around 7-9% by this time next year. For the hands-off PRIME account I think that is a decent return. I will be reporting back here on this account’s progress so you can the progress on this account over time.

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