Average Returns by Loan Grade at Lending Club

Lending Club P2P Investment Returns by Credit Grade

A couple of days ago Lending Club added this new page to their site that included the graph above. I found this extremely interesting. For years they have told us the average returns of the different loan grades on their statistics page but this is the first time they have provided a range of returns within each grade.

Here is the fine print that explains the top 50% and bottom 50% numbers in the above graph:

3 – Top 50% and Bottom 50% are dollar-weighted averages of individual loan performances for each grade calculated from either the best performing half or the worst performing half, respectively, of all issued loans in each grade as of May 25, 2011. In practice, if a portfolio of Notes was created from the worst performing half of all issued loans in a specific grade, the return would be roughly equivalent to the Bottom 50% of that specific grade as depicted in the chart above. Conversely, if a portfolio of Notes was created from the best performing half of all issued loans in a specific grade, the return would be roughly equivalent to the Top 50% of that specific grade as reported in the chart above.

Obviously the top 50% of loans in all loan grades would include no defaults whatsoever, and the bottom 50% would include all the defaults. As you would expect the average return for the top 50% of loans within each credit grade increases as the interest rate gets higher. But as you can see for the bottom 50% of loans there is no opposite trend. I would have expected bottom half of the G loans to perform badly, I am actually surprised they managed a positive return, but what is fascinating is that E rated loans have the best performance when taking the bottom 50% of loans.

What this chart tells me is that investing in A rated loans is not a recipe for safe returns. Sure there is far less deviation in returns for A rated loans but both C and E rated loans perform better even when taking the bottom 50% of all loans. I may tweak my selection criteria after seeing this chart and load up on more E-rated loans and lessen my exposure to D-rated loans. Based on these numbers any way you slice it E-rated loans are a better bet than D-rated loans.

As always I am interested to hear your thoughts.

  • Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.

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