If you’re new to investing with LendingClub, or want to learn more, it’s important to understand your investment and what to expect—especially when it comes to returns.
While there are a few different ways to think about performance, there’s one concept that should be your ultimate focus: net return.
Below we discuss what net return means, why it’s important in assessing performance, and where you can find net return metrics on the LendingClub website.
Before we talk about returns, let’s review how investors can participate on the LendingClub platform.
LendingClub allows you to invest in consumer credit. Our platform connects people who want to take out personal loans (borrowers) with other people (investors) who want to earn returns.
Individuals can invest through Notes, which correspond to fractions of personal loans facilitated on the LendingClub platform. Notes mature in 3 or 5 years, depending on their term. And, because they can be purchased in $25 increments, investors can easily build portfolios with many Notes corresponding to many different loans and borrowers.
When you’re building a portfolio, you’ll see a stated interest rate for each Note. That interest rate is what the borrower pays over the life of the loan and corresponds to the borrower’s “risk profile.” Generally speaking, the higher the interest rate, the higher the expected risk of the borrower not repaying their loan.
It can be tempting to look at a Note’s stated interest rate and assume that’s what your return will be, but the interest rate doesn’t reflect all the factors that impact returns—most notably:
Over time, these factors will impact your ultimate return. The example below is an illustration of how this might look—but remember that an individual investor’s returns can vary based on many other factors as well, including the term and grade mix of their Note portfolio and macroeconomic conditions.
Focusing on net returns, instead of a Note’s stated interest rate, can help you better understand how LendingClub Notes can potentially fit into your overall investment strategy. For example, some people see Notes as an alternative to cash, some see it as a complement to a fixed income portfolio, and others see it as a potential tool to generate growth. Investing through LendingClub is “self-directed,” meaning you can choose how to invest according to your individual investment strategy.
Several estimates and performance metrics are available on our website. We give Projected Return—an estimate of how loans may perform—plus two net return metrics that can help assess the performance of a portfolio: Net Annualized Return (NAR) and Adjusted NAR (aNAR).
Projected Returns are what you see during the investment selection phase. These projections are LendingClub’s estimates of how loans may perform in the future. They estimate loan performance based on expected principal and interest payments, charge-off rates, prepayment rates, and fees. Projected return shows what each dollar invested in a Note could earn, and does not consider any amounts sitting in cash.
Net Annualized Return (“NAR”) is our basic net return metric, showing historical performance of loans or Notes. NAR is an annualized measure of the rate of return on the principal invested over the life of an investment. NAR is based on actual borrower payments received each month, net of fees, charge-offs, and recoveries. NAR assumes all loans that are not charged-off will be paid in full, regardless of their current or delinquent status.
Adjusted Net Annualized Return (“aNAR”) is calculated the same as NAR, but adjusted for potential charge-offs. It incorporates an estimate of future losses on any loans that are “past due” but have not been charged off. For more on how NAR metrics are calculated, please see here.
Want to learn more about LendingClub Notes? Check out 5 Key Things to Know About LendingClub Notes, where we dive into the details about charge-offs, diversification, and reinvestment.
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