If this is the first of my Lending Club return updates that you’ve read, let me catch you up a bit. It all started with a little Lending Club / Sharebuilder experiment. It’s moved on past that, to an ongoing series here at Beating Broke where I share, on a quarterly basis, how the account is doing, the things I’ve done with the account recently, and the things that I might be thinking about trying over the next quarter.
How I invest in Lending Club
Because of where I live (North Dakota), I’m not able to directly invest in fresh loans. I’m forced to use the FolioFN trading platform to buy (and occasionally sell) the notes that I’m investing in. But, based on my returns, I don’t think I’ll be complaining anytime soon. If you’d like to read more about how I select my Lending Club notes, you can read my post on that subject here.
Lazy Lending Club Investing
While I consider investing in peer-to-peer investing to be a nearly passive income source, it isn’t a pure passive income source. What I mean by that is that it does require some active management in order to keep the money invested in loans, and not just sitting fallow in your account. Without meaning to, I put that to the test this last quarter. In February, I don’t even know if I logged into the account. I certainly didn’t buy any new notes. What that means is that for the better part of February, the money that I had coming in just sat in the cash account not doing a darn thing. By the end of February, the cash account was nearly 10% of my Lending Club portfolio. I invested all of that back into notes in March, but it was a lesson in needing to log in and check the account once in a while.
Lending Club Loan Analysis
Analysis might be a bit too strong of a word. At the end of the quarter, I had invested in a total of 62 notes. Of those 62 notes, 19 had been paid off, and there have been no written off loans. There is one that has slipped into the delinquent status column, however, and is showing signs of ending up in the written off column. The balance on principle of the loan is less than 1% of my total portfolio. I might be able to sell it, but it’s far enough delinquent that I’d have to sell it at a significant discount. Honestly, I haven’t decided if I’ll do that or not. I’d rather it just came back around and was paid off, but I’m more of a realist than that. Maybe we’ll be talking about the written off loan effect at the end of next quarter.
Lending Club Return
So this is the part that everyone’s been reading for, right? If you look back at the 4Q12 update, you’ll see that my rate of return (displayed as NAR in the account dashboard) was 14.48%. I screwed up a bit and didn’t record the NAR displayed at the end of March. As of 4/24/2013, it’s being displayed as 14.63. That still includes the one delinquent loan, so it’s likely to go down some if that loan is sold at a significant discount, or if it is written off. The spreadsheet I use to keep track of the numbers shows a a return of 15.86% and 13.26% (adjusted with inflation, which may or may not be necessary).
The cash flow in the account remains pretty good. I had several loans paid off in the last quarter that was reinvested. All told, the portfolio of active (principle remaining) loans grew by 2 over the first quarter. The average amount of money churning back into the account each month is averaging well over $30 a month now allowing me to invest in one new note (at $25/each) each month and then another when the balance grows beyond $25 again. Monthly interest received is teetering around the $10 a month line. I think my next goal might be to get the interest income up to $25 a month. That would be pretty sweet. I’d be investing in a new note each month on just the interest along. If I want to do that anytime soon, however, it means I’ll have to start putting money into the account again. I haven’t put anything into it since November of last year, and I haven’t yet decided when I’ll start putting money into it again, but it will likely be soon.
Embracing Risk, and Increasing Returns
I suppose that somewhere along the way, here, I should mention risk. The notes that I’m investing in all carry a risk of potential default. If they all were to default, I’d lose every penny in my account. The odds of that happening are pretty small. But, the odds of having one or two loans default out of a couple hundred is significantly higher. If you’re going to invest in Lending Club notes, or any investment, you need to know and understand the risks. That’s your warning, and my disclaimer.
Now, take a minute and go look to see what your bank or credit union of choice pays on their savings account. How about their best rate on a CD? Now, even if I were to invest my portfolio into loans with a better credit rating (and, supposedly lesser risk), I could easily be making 6-9% if there weren’t any defaults. It beats the heck out of the rates at my credit union.
One last disclaimer. Please don’t put your liquid (or, emergency) savings into risky investments. You need those readily available, and relatively risk free. Even at a paltry 0.25% in a savings account, it’s in the best place. Every other drop of savings is fair game though. Your money needs to be working for you, not the bank.
If you think Lending Club (or Prosper) is something you want to give a look (maybe you’ll want to try an experiment like I have?) you can sign up at the following links: (Lending Club | Prosper)
For many years, I was a user of ING Direct and their online banking products. When word went out a while back that the US branch of their online bank was being sold I began to worry that a good thing was about to be ruined. When we learned that the company that was buying them was Capital One, it didn’t exactly help me not worry. I’ve had a credit card from Capital One for longer than I’ve had an account at ING Direct, and while I’ve never had a terrible experience with them, I’ve never really felt that I was anything more than just another cardholder; easily replaced and nothing worth going out of their way for. If that level of service came to the online bank side after the purchase of ING Direct, I might have had to find something else.
The prospect of having to move my accounts at what was ING Direct to somewhere else upset me a bit. I’ve tried several of the online bank options, and so far, haven’t found one that was as easy to use as the accounts were with ING Direct. Now that ING Direct US is no more, and it’s been sold to Capital One, and re-branded to Capital One 360, what has my experience been?
Surprisingly, I have no complaints. I truly expected that they’d start squeezing in some new fees, or making it harder to get things done, but the experience so far has been very similar to what it was with ING Direct. There’s the obvious rebranding that came with a change of logo and color scheme, but for all intents and purposes, they’ve done a very good job of keeping the function and service levels where they were when it was ING Direct.
I suppose there may be some things behind the scenes that I don’t see that are different. And they may just be biding their time before they start implementing some new fees and roadblocks, but if so, they are taking their sweet time doing it. In the mean time, many of the features that I really loved about ING Direct are still resident in the Capital One 360 system. It’s still super easy to create a new account, making it simple to have an account for each purpose and being able to segment your money by purpose. Every other place I’ve tried this at, make it much more difficult to create a new account and that process becomes a roadblock to use.
The interface of Capital One 360 is very easy to use, with all of the major functions and features that most bank customers use right at your fingertips (or mouse pointer I suppose). The rates that they pay on their savings and CD accounts still aren’t the best around, but they remain competitive with most other online banks, and they are double and triple what my local banks and even Credit Unions are paying.
The connection between Capital One 360 and Capital One Sharebuilder remains, making it easy to transfer money to investment accounts and IRAs at Capital One Sharebuilder. Does that make a huge difference? Not really, but it is convenient.
Overall, I think Capital One has done a really good job of bringing the Capital One 360 accounts into the fold and not rocking the boat. I hope that they remain dedicated to keeping the excellent service and system in place. Even with a new name, Capital One 360 is still my favorite online bank.
The other day, as my daughter was on her way to the car when I picked her up from daycare. Along the way, she noticed something on the ground. In the excited voice of a 4 year old, she said “Daddy! Look! A rainbow!”, and then pointed at the spot on the ground she was looking at. As I got closer, I found that she was looking at a spot on the wet ground where some sort of oily fluid had likely leaked out of the bottom of a vehicle. Of course, oily fluids, on wet ground tend to separate out into what you and I would probably best describe as an oil slick. But, to my 4 year old, it was a rainbow on the ground. As we drove off to pick up her brother at school, I began thinking about what had just happened.
The thoughts were amplified when she noticed another “rainbow” on the ground on the way into the school. On our way back out of the school, with her brother, she excitedly called her brother over to show him what she had found. My son is 6 (nearly 7), and so has a slightly more advanced knowledge of the world than his sister. I fully expected, in the way that only a brother who doesn’t understand a 4 year old is likely to do, that he would quickly dismiss it for what it was, an oil slick on wet ground, and that her excitement would quickly dissipate. Instead, as she pulled him over and pointed it out, saying “Look!”, he quickly said “A rainbow!”. He saw it too.
As parents, we’re always so excited to teach our children new things. We’re often quick to correct them when they don’t get something right, or don’t understand it. They saw a rainbow. I didn’t. All I saw was an oil slick. Obviously, I saw the resemblance. But, I knew what it really was, so the wonder that my children had for it was lost on me. But, it kept me thinking.
How often do we take what we know, and use it as a filter for the world. Surely, that’s what knowledge is for, right? I know that 1+1=2, and that certain letters spell words, and that drops of oil on wet ground make a oil slick. Yes, it’s colorful, but it’s an oil slick, not a rainbow. How many times do we become so certain in our knowledge, and the filtering that we use it for, that we fail to see the rainbow?
How many people out there are so set in the knowledge that a bank is the lender, and use that to filter the idea of peer-to-peer lending as a sham, without allowing for a little of the rainbow to shine through?
The point is this: If you never question what you think you know, how will you ever know if you’re wrong? Sometimes the formula and constants change. Sometimes, the environment itself is what has changed. Heck, look at the newspaper industry. How long did they refuse to see the emergence of blogs (like this one) as a major change in the dynamic of how people get their news? Some of them still refuse to see that rainbow.
If you do one thing to improve your personal finance today, question what you think you know. Most of the time, you’ll still be right. But, maybe, just maybe, you’ll see a rainbow instead.
What are some rainbows that you’ve found by questioning what you thought was true? What methods do you use to find the rainbows in your life?
