LendingClub Notes provide access to consumer credit, an asset class that—until recently—was only available to large institutional investors. Since it’s a new asset class for many investors, we hear a lot of great questions about how Notes work.
Whether you’re investing in Notes for the first time or you want to deepen your knowledge, here are 5 Key Things that every investor should know about LendingClub Notes.
1. Focus on net returns.
When you’re building a portfolio of Notes, it can be tempting to focus on each Note’s stated interest rate and assume that’s what your return will be. It’s a reasonable assumption as that’s the amount of interest the borrower will be charged during the life of the loan, but the interest rate doesn’t reflect the full story as there are a few primary factors that impact investor returns.
As borrowers make payments on their loans, you’ll be paid monthly on the corresponding Notes in which you’ve invested. However, Notes can experience: charge-offs, when a borrower misses their payments for so long we formally recognize their loan as a loss, prepayments, when a borrower pays more than their minimum required monthly amount, reducing the amount of interest you’ll receive over time, and fees.
Net returns take these factors into account. That’s why we provide projected net return estimates before you invest to help you better understand how LendingClub Notes could potentially fit into your overall investment strategy. We also provide other net return metrics throughout the lifecycle of your investment. Below is a hypothetical illustration of an investor’s potential net return so you can see how it works.
2. Charge-offs will happen.
It’s inevitable that some borrowers will fall behind on their loan payments. Some of them will get back on track, and others won’t.
Marking a loan as “charged-off” means LendingClub no longer believes there is a reasonable expectation that the borrower will make any more payments, which means that investors lose both their outstanding principal as well as the interest they would’ve received if the borrower had continued to repay the loan.
All investors in consumer credit experience some charge-offs, so it’s important to understand charge-offs and how they might impact your investment strategy. LendingClub’s credit grades (ranging from A to G) can help investors estimate the potential risk for charge-offs and choose Notes that best meet their individual goals.
3. Diversification is key.
Purchasing multiple Notes that correspond to different loans or borrowers can help limit the impact of any single charge-off. In fact, 97% of investors who own 100+ Notes of relatively equal size have seen positive returns6.
Building a portfolio with many Notes is easy with our automated investing (AI) tool. You simply set the investment criteria you want with easy-to-use filters, and AI will invest in Notes for you as matching Note inventory becomes available.
You can also build your portfolio one Note at a time with our manual investing option. And if you’re interested in slicing and dicing the data, we make our complete loan database available for download.
4. Monthly payments include both principal and interest.
Loans on the LendingClub platform are fully amortizing, which means monthly payments to investors include both principal and interest. Early on, a larger proportion of any payment is made up of interest. As the loan ages, payments are comprised of more principal.
A Note’s income stream is different from that of other fixed income investments. If you invest in a single, standard bond, you typically receive interest payments semi-annually over the life of the bond, and your principal is returned at maturity. The fully amortizing structure of our Notes means you can enjoy consistent monthly cash flow and solid returns over time, while avoiding lumpy payments. Investors should note that LendingClub Notes differ from bonds in many ways, including liquidity, fees and other factors.
5. Reinvestment is critical for consistent returns.
Because Notes are fully amortizing, about half of the original investment principal for a 3-year Note can be returned to you within 14 months, assuming the borrower does not charge-off. New investors can be surprised to see half the money they earmarked for investment back in their pockets in a little more than a year.
Getting your initial investment (principal) amount and any interest you’ve earned back relatively quickly can be in line with certain investment strategies. However, if the cash you’ve gotten back is left sitting in your account, rather than reinvested, you would be missing out on the opportunity to have your money potentially earn more interest for you. Using our Automated Investing tool can make it easy for you to reinvest the cash you’ve gotten back into new Notes.
Consumer credit is an exciting asset class and we’re proud to make it accessible to a broad range of investors. Our Notes have some unique characteristics that set them apart from other investments and allow them to offer the potential for solid risk-adjusted returns.
If you have any questions about how our Notes work or what to expect from your investment, our team is here to help. Contact us to learn more about what Notes can do for your portfolio.
The calculations shown are for illustrative purposes only, and do not reflect any actual or projected results for any investor. Actual investor results may vary. This information is not a promise of future results. Individual portfolio results may be impacted by, among other things, the size and diversity of
the portfolio, the exposure to any single Note, borrower or group of Notes or borrowers, as well as macroeconomic conditions. Notes are offered by prospectus filed with the SEC and investors should review the risks and uncertainties described in the prospectus prior to investing in the Notes. This information is not presented as investment advice. LendingClub does not provide investment, legal, or tax advice. 2
Average Interest Rate represents the weighted average interest rate for the loans corresponding to the Notes in an investor’s LendingClub portfolio. The number used in this illustration is based on the current stated interest rate of LendingClub’s Platform Mix (see Automated Investing section for details on the Platform Mix). Investors can select Notes corresponding to their desired loan grade or mix of loan grades, whether through LendingClub’s Automated Investing Tool or by manually selecting loans. Note purchases are subject to loan inventory and availability, which is not guaranteed. Interest rates are subject to change. This information is not a promise of future results. 3
Effect of charge-offs and prepayments measures the impact on returns caused by both charge-offs and prepayments over the life of the portfolio. Charge-offs impact returns because investors lose both principal invested in the charged off Notes and the potential to receive interest from such Notes. 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. The impact expressed here is for illustrative purposes only, does not reflect any actual or projected results, and may not accurately reflect the actual charge-off or prepayment rate for any individual investor. Actual charge-off and prepayment rates vary. It is inevitable that certain loans will charge-off or prepay and result in a loss of investment capital. Actual charge-off and prepayment rates experienced by any individual portfolio may be impacted by, among other things, the size and diversity of the portfolio, the exposure to any single Note, borrower or group of Notes or borrowers, as well as macroeconomic conditions. 4
Effect of LendingClub Fees measures the impact on potential returns caused by fees charged by LendingClub. LendingClub charges an investor service fee of 1% of the amount of borrower payments received by the payment due date or during applicable grace periods. The service fee is not an annual fee and may therefore reduce annual investor returns by more or less than 1%. LendingClub services the loans facilitated through our platform by maintaining investor accounts, collecting and processing principal and interest payments from borrowers, and distributing payments net of service and collection fees to investors. LendingClub also charges a collection fee on the amount of any payments successfully collected on pre- and post-charged off loans. Please review the prospectus
and visit our website for complete details on how LendingClub charges fees, how fees impact investors and net returns. 5
Annualized Net Return is the hypothetical net return for invested capital on an annualized basis. It is for illustrative purposes only, is not a promise or indication of future results, and is solely based on a hypothetical LendingClub portfolio. As with all investments, taxes are an important consideration that may also affect your net return. Investors should consider their personal tax situation when investing and consult a tax or financial advisor for further guidance. 6
As of June 30, 2017. Based on adjusted net annualized return (Adjusted NAR) of current retail investors with a portfolio containing 100+ Notes, none of which have been purchased or sold on the Folio Investing Note Trading Platform,* where the portfolio concentration is one percent or less (i.e. no Note constitutes greater than one percent of the total portfolio value) and the portfolio has a weighted average age of at least 12 months (weighted based on the dollar value of each Note relative to the total dollar value of the portfolio, where the age of each Note is measured as of the purchase date of such Note). Adjusted NAR is calculated using the formula described here. This information is not intended to be investment advice. Historical performance is not a guarantee of future results. Actual results may differ materially from historical data. LendingClub Notes are not guaranteed or insured, and investors may lose some or all of the principal invested. Individual portfolio results may be impacted by, among other things, the size and diversity of the portfolio, exposure to any single Note, Borrower, or group of Notes or Borrowers, as well as macroeconomic conditions. *Folio Investments, Inc. (“Folio Investing”) is a registered broker-dealer and member of FINRA and SIPC and operates the Note Trading Platform. Folio Investing is based in McLean, VA and is not affiliated with LendingClub. Folio Investing has no role in the original issuance of the Notes and is not responsible for and does not approve, endorse, review, recommend or guarantee the Notes or the accuracy, reliability, or completeness of any data or information about the Notes. See the Important Disclosures page for additional important information. More information about Folio Investing is available at www.folioinvesting.com.