Lending Club ROI help

[Goldy]

I signed up for a lending club account and funded it with a small investment to test it out and so far I love it. However, I am having a hard time figuring out the math on a few scenarios that I'm hoping you can help me with.

Lets say I invest 1,000 and my rate is 16.6% on 3yr loans. Assuming no defaults what is my profit?

That was the easy question so now the hard one.

Assuming the same parameters listed above, what is my ROI after 3 years if I reinvest my earnings? I cant figure out how to calculate this and its bugging me so hopefully you can.

[jpg7n16]

I signed up for a lending club account and funded it with a small investment to test it out and so far I love it. However, I am having a hard time figuring out the math on a few scenarios that I'm hoping you can help me with.

The formula you need is:

PV * (1+r)^n = FV

Where:

PV = Present value
r = rate of return
n = number of periods
FV = future value

(assumes reinvestment at the same rate)

Lets say I invest 1,000 and my rate is 16.6% on 3yr loans. Assuming no defaults what is my profit?

== Assuming no defaults and reinvestment ==

Beginning Value: $1,000
Final value: 1000 * (1 + 16.6%)^3 = 1000 * (1.166^3) = 1000 * 1.585242296 = $1,585.24

Profit: $585.24

== Assuming no reinvestment ==

Beginning Value: $1,000
Annual profit: 1000 * (16.6%) = $166

3 years profit: 166 * 3 = $498

Final value: $1,498

That was the easy question so now the hard one.

Assuming the same parameters listed above, what is my ROI after 3 years if I reinvest my earnings? I cant figure out how to calculate this and its bugging me so hopefully you can.

16.6%. You already know this from your data, there's no need to calculate it.

Although if you did need to calculate it, here's how you'd do it:

If -- PV * (1+r)^n = FV
Then -- r = (FV / PV)^(1/n) - 1

== Assuming no defaults and reinvestment ==

You start with $1000 (PV), and 3 years later (n), you end up with $1,585.24 (FV). Plug in formula:

r = (1585.24/1000)^(1/3)-1 = 1.166 - 1 = .166 = 16.6%

== Assuming no reinvestment ==

You start with $1000 (PV), and 3 years later (n), you end up with $1,498 (FV). Plug in formula:

r = (1498/1000)^(1/3)-1 = 1.1442 - 1 = .1442 = 14.42%


Hope this helps! Please ask any questions on that.

[kv968]

== Assuming no reinvestment ==

Beginning Value: $1,000
Annual profit: 1000 * (16.6%) = $166

3 years profit: 166 * 3 = $498

Final value: $1,498

It's a LOAN not a deposit-type investment. So if it were a one time loan with no reinvestments and a monthly amortization schedule, the profit would be $276.34.

With no reinvestment the profits wouldn't compound, they would decrease in time due to the amortization of the loan.

[Goldy]

Ya, sorry if I was unclear about that, its a loan.

So this is where I get a little confused, when you look at the amoritization table it shows total interest on the 1k of $276 which I would divide by the initial loan value for 27.6% gain or 9.2% per year over the 3 years. I'm sure this is a dumb question but why is 9.2% instead of 16.6%?

[kv968]

Ya, sorry if I was unclear about that, its a loan.

So this is where I get a little confused, when you look at the amoritization table it shows total interest on the 1k of $276 which I would divide by the initial loan value for 27.6% gain or 9.2% per year over the 3 years. I'm sure this is a dumb question but why is 9.2% instead of 16.6%?

Because the 16.6% is actually applied as 1.38%/month.

The total monthly payment for the life of the loan will be $35.45.

The first interest payment on the full $1000 will be $13.83 ($1000*0.0138). However the person is also paying $21.62 in prinicpal for that month.

So the next month the total that the 1.38% interest will be applied to is $978.38 ($1000-$21.62). So that month's interest payment will be $13.50 ($978.38*0.0138) and $21.95 ($35.45-$13.50) will be towards principal and so on until it's all paid off.

As the loan goes along, more money is paid towards principal and less in interest. It's kinda like how interest compounds in a bank account but in reverse.

In the case of a loan, the interest amount shrinks since it's being applied to a smaller principal as the loan gets paid off. In the case of a bank account, the interest amount gets bigger since it's being applied to an amount that's growing (assuming you don't take anything out).

[Goldy]

Because the 16.6% is actually applied as 1.38%/month.

The total monthly payment for the life of the loan will be $35.45.

The first interest payment on the full $1000 will be $13.83 ($1000*0.0138). However the person is also paying $21.62 in prinicpal for that month.

So the next month the total that the 1.38% interest will be applied to is $978.38 ($1000-$21.62). So that month's interest payment will be $13.50 ($978.38*0.0138) and $21.95 ($35.45-$13.50) will be towards principal and so on until it's all paid off.

As the loan goes along, more money is paid towards principal and less in interest. It's kinda like how interest compounds in a bank account but in reverse.

In the case of a loan, the interest amount shrinks since it's being applied to a smaller principal as the loan gets paid off. In the case of a bank account, the interest amount gets bigger since it's being applied to an amount that's growing (assuming you don't take anything out).

Thanks for that.

Now how would it work if the payments were rolled back into new loans at 16.6%? Would my ROI then be 16.6% due to all money being invested in a loan?

[kv968]

Thanks for that.

Now how would it work if the payments were rolled back into new loans at 16.6%? Would my ROI then be 16.6% due to all money being invested in a loan?

Technically if you were able to constantly reinvest the payments everytime you received them you'd make about 16.6% but you won't be able to.

Reason being, you loan $1000 at 16.6% APR for 3 years and you get your first payment. Well, that payment is only for $35.45. You couldn't turn around and instantly loan that out for another 16.6% for even a year. And even if you could do for it a year at that interest rate the payment you'll received off of that would only be $3.23/month. So it would just diminish to the point to where you'd just have keep the money instead of loaning it back out and that would stop the monthly compounding hence stopping the 16.6%/yr.

[Goldy]

The minimm loan fraction that you can invest in is $25.00 so I could reinvest the monthly income pretty easily. Where I start getting confused is that you are investing in new loans based on payments that were mostly interest so is it possible for the ROI to go above 16.6%?

[UnknownXV]

Technically if you were able to constantly reinvest the payments everytime you received them you'd make about 16.6% but you won't be able to.

Reason being, you loan $1000 at 16.6% APR for 3 years and you get your first payment. Well, that payment is only for $35.45. You couldn't turn around and instantly loan that out for another 16.6% for even a year. And even if you could do for it a year at that interest rate the payment you'll received off of that would only be $3.23/month. So it would just diminish to the point to where you'd just have keep the money instead of loaning it back out and that would stop the monthly compounding hence stopping the 16.6%/yr.

Actually, you can. This loan site functions in a similar way to a mutual fund, only for loans.. lots of people contributing small to medium sized loans, which only get funded when the full amount is reached that the borrower requested.

It's very curious indeed.

[kv968]

The minimm loan fraction that you can invest in is $25.00 so I could reinvest the monthly income pretty easily. Where I start getting confused is that you are investing in new loans based on payments that were mostly interest so is it possible for the ROI to go above 16.6%?

If you were able to consistantly reinvest the payment every time you received it at the same rate then you would make more than 16.6%/yr. However that's assuming you can do it constantly every month for the same rate. And even you can, you still fall into the fact that eventually you won't have enough to reinvest monthly even with the minimum being $25.

Going back to the original $1000 loan. The monthly payment for that loan would be $35.45 so you could reinvest that. But as stated earlier, even if you did that for a year with a 16.6% rate the payment on THAT loan would only be $3.23 (far below the minimum to reinvest). On that loan you'd have to wait for over 7 months worth of payments until you reached the $25 minimum to reinvest. That would break the continuous monthly compounding and lower your yearly rate percentage.

Hope I didn't confuse you. Or me for that matter

[UnknownXV]

This is definitely more complicated than a standard investment.

I'm still interested though. Does anyone know of something like this in Canada?

[kv968]

This is definitely more complicated than a standard investment.

I'm still interested though. Does anyone know of something like this in Canada?

It's really only complicated since the OP is looking for a specific return and how reinvesting affects the return. Finding out what the basic return of loan would be isn't hard. You just use an amortization calculator and see how much interest you'll get over the life of the loan and that's about it.

The only reason it's harder than a traditional investement is you're not applying the interest rate on an appreciating amount of money (i.e. bank deposit) but instead a diminishing one (i.e. loan payment).

[UnknownXV]

I guess complicated was the wrong word, it's just unusual based upon how I've previously thought about investing.

[kv968]

I guess complicated was the wrong word, it's just unusual based upon how I've previously thought about investing.

It may seem unusual because people typically don't go out and play banker and make loans consciously.

And I say "consciously" since some may not really realize that whenever you're buying a bond, that's what you're doing...loaning money. Different concept since you'll get the face value of the bond back in the end if you hold it until maturity but it's still a loan.

Just don't let it throw you.

[UnknownXV]

Technically making a deposit in a bank is loaning them money too, that's why you get interest.. it's just an indefinite term loan that you can cash in at anytime. It's just odd to think of it like that.

Anyways, it doesn't' matter for me. From what I can tell, the only site that offered a service like this for Canada was discontinued due to regulations in this country making it a hassle. Figures.