I previously wrote about my experience signing up for Lending Club and now I am here to report my first Net Annualized Return (NAR). My first NAR came in at 10.87%. This is a result I am pretty happy with, but I know that it is going to come down as I have a couple loans below 10 percent that I have not received my first payment on the loan yet and thus are not included my current NAR calculation.
My initial strategy – start conservatively
My initial allocation is to have 80% of of my notes as Type A notes. Type A notes are from borrowers with a credit score of 714 or better and have an interest rate between 5.42% and 8.49% currently. I decided to invest the remaining 20% of my money in Type D notes in order to “juice up” my returns a bit. Type D notes are from borrowers with a credit score below 660, but they have an interest rate between 15.62% and 17.49%.
Another part of my strategy was to invest primarily in 36 month notes compared of 60 month notes. My thought process here is that my investing in shorter notes I will get more of my principal back with each payment and hopefully reduce my risk of default. I figure that a borrower who takes out a 36 month loan is more motivated to pay back their debts then a borrower of a 60 month note.
The last part of my conservative strategy was to limit my investment to $25 for each loan I invested in. The idea here was to keep any potential loses to a minimum. The way I see it, it is easy to blow $25 for a reasonable dinner for two, so why not take a chance making some money with that $25 instead.
What might change ?
As long as I don’t have any major default issues with my current batch of notes I will likely increase the risk I am taking over time. The first step I will probably take is to increase the number of 60 month notes that I invest in. Why? 60 month loans are currently paying interest rates that are at least 2.23% higher than 36 month notes.
Another step I may take is to switch my allocation out of the 80% Type A/20% Type D that I mentioned above to something along the like of a 60% Type A/20% Type B/ 20% Type D. Type B Notes have an interest between 9.99% and 11.99% from borrowers with a credit score between 685 and 713.