Why LendingClub Investors Should Focus on Net Return
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.
Quick primer: How do LendingClub Notes work?
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.
How to think about returns
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:
- Charge-offs –when borrowers miss their payments for so long that we formally recognized 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.
- Fees—LendingClub charges a fee for servicing loans facilitated through the platform, as well as other fees in certain circumstances.
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.
How are net returns measured?
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.
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.
2Average 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.
3Effect 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.
4Effect 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 payments received within 15 days of the payment due date. 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.
5Annualized 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.