When I logged into Lending Club today, I discovered that they’ve added the ability to automatically adjust your Net Annualized Return (NAR) calculation based on the status of your notes.
As a reminder, your NAR is an annualized estimate of investment returns but, in the past, it always treated notes that were overdue (and thus at risk of being charged off) the same as notes that were current.
Thus, your NAR has always presented a rosier picture than your eventual reality. But, to be fair, they never claimed that NAR was a forward-looking projection. Rather, it’s based on payments received, net of fees and actual charge offs, which never counted until they actually happened.
But now you can have their system adjust your NAR downward based on the status of your notes and historical recovery data. The later it gets, the more likely it is to default, so the more it gets discounted.
The defaults are based on the following charge of rates:
- Notes that enter grace period: 23% chance of being charged off.
- Notes that are 16-30 days late: 49% chance of being charged off.
- Notes that are 31-120 days late: 72% chance of being charged off.
- Notes that default: 86% chance of being charged off.
You can adjust these values if you wish though, unless you have huge dataset of your own, you’re probably better off leaving them set to the default values.
Once enabled, you’ll also get a discounted estimate of your account value so you can get a better feel for the magnitude of your likely future losses.
As for my portfolio, all of my notes are current, so my regular NAR and my adjusted NAR are identical at just over 16.4%. Of course, my portfolio is still relatively young, so there’s plenty of time for that to change…
If you’d like to try it out for yourself, you can get started here.