I am interested in the formula LendingClub provides as their measure of "Net Annualized Return":

$\big(1 + \frac{\sum_{i=1}^N{((I_i + L_i - S_i - C_i + R_i) / P_i) P_i}}{\sum_{i=1}^N{P_i}}\big)^{12}-1$

where the variables $I,L,S,C,R,$ and $P$ denote interest, late charges, service charges, charge offs, collections recoveries, and principal remaining, and $i=1...N$ parametrizes months in the portfolio. For example, if we have one loan that matured over Jan 2008 - Jan 2011 and another that matured over Feb 2009 - Feb 2014, $i = 1...N$ would index over all the months from Jan 2008 to Feb 2014.

First, I would like to confirm that in the numerator, the $P_i$ are indeed supposed to cancel, and LendingClub is merely trying to illustrate that they are taking a "fraction of principal" explicitly. The variables are all available in the full historical payment data (see All payments at the bottom of the link) LendingClub provides. However, I am having some trouble applying the definition.

Taking the conservative estimate and assigning all loans that are Charged Off, Default, Late (31 - 120 days), Late (16 - 30 days), and In Grace Period as defaulted and incorporated into the $C_i$ charge-off term, I still get a 10.9% portfolio-wide NAR. This seems high, since LendingClub advertises historical returns of ~6%.

It should be noted that LendingClub does not provide this information on an installment-by-installment basis except principal remaining, $P_i$, so I simply took total interest received, late fees received, etc. over the lifetime of the loan. I believe this substitution is acceptable because the sum ranges over all non-censored installments, so after collapsing sums it should produce the same result regardless of whether the loan yet reached maturity.


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.