A little over three years ago, I initiated an experiment with Lending Club. I took $1000 and split it into two auto-selected loan portfolios. With the first $500, I cranked the risk slider all the way down to the lowest level. With the other $500, I cranked it all the way up to the highest level.
The end results was two portfolios of 20 x $25 notes each. The average rate on the low risk portfolio was 9.85% while the average rate of the high risk portfolio was 15.05%. At the time, these were all 36 month notes so the portfolios have (more or less) run their course.
The low risk portfolio finished with a balance of $518.58 — that’s a 3.7% total gain over three years.
The high risk portfolio finished with a balance of $502.49 (plus $0.52 due on a loan that is running late). Assuming that last little bit comes in, that’s a 0.6% total return over three years.
It’s important to keep in mind, however, that I wasn’t reinvesting the proceeds within these portfolios. Rather, I was using the money to pick additional loans in my hand-selected portfolio. Thus, these numbers aren’t all that reflective of my real returns.
Some interesting tidbits…
Both portfolios suffered the same number of defaults (five each), though the defaults occurred much earlier — and thus caused greater losses of principal — in the high risk portfolio.
In the low risk portfolio, there were three A and two B loans charged off.
In the high risk portfolio, there were four D and one E loans charged off.
My single best loan generated $32.89 in payments ($7.89 profit over the $25 invested) whereas the worst loan didn’t receive a single payment, resulting in a complete loss of $25. Both of these were in the high risk portfolio.
So there you have it… Based on a small sample of loans that were auto-selected a little over three years ago, it appears that lower risk loans provide slightly higher returns than higher risk loans. Apply for your own account
Note that these were completely static portfolios, without any selling of troubled notes.