Regular readers will recall that I am investing up to 5% of my portfolio in Peer to Peer Lending (P2PL) through Lending Club and Prosper. This is an update on my investments. I've written before about the downsides of P2PL, including:
- Time-consuming (the biggest downside to me)
- Subject to serious P2PL company risk – I would probably lose a lot of money if Lending Club went out of business
- Short track record- we probably don't understand all the risks yet
That said, I've continued the investment because it shows excellent returns and low correlation with the rest of my portfolio, not to mention satisfies my urge to tinker.
I've written before about my strategies for choosing loans. I've also decided to manage my loans rather strictly. Frankly, I want a portfolio full of loans to people who pay their loans on time. So as soon as their loan goes into the grace period, I sell the loan. I have been unable to obtain the data to determine if this strategy is a good one or not, but one benefit of it is that I haven't yet had any complete defaults. I frequently sell loans at a small discount and occasionally sell loans at a large discount, however. Lending Club allows investors to sell loans that are late, but Prosper does not. Lending Club is also bigger and I like the interface more, so after trying out both platforms, I've decided to concentrate on Lending Club, despite apparently higher average returns on Prosper (for all lenders, not me.)
My Initial Taxable Prosper Account
I invested $500 with Prosper in February 2012. The account is now worth $522.63, for an annualized return (XIRR) of 3.45% per year. Prosper claims I have a “seasoned return” (includes only notes 10 months or older) of 1.68% and an overall return of 3.22%. I have owned a total of 29 notes, of which 1 has been paid off, 4 have been charged-off (defaulted), 1 is less than 15 days late, and 23 are current. The four defaults happened after 2 payments, 4 payments, and 7 payments (twice.) The currently late loan misses payments all the time but pays extra when he does make payments. He has only made 7 total payments but has paid off 60% of the loan. Returns on this account also suffer from a serious cash drag, since the minimum amount for investment is $25 and the entire account is only $500.
My Initial Taxable Lending Club Account
I invested $1000 with Lending Club in November 2011. The account is now worth $1,173.52, for an annualized return (XIRR) of 12.3% per year. Lending Club claims this account has a return of 13.71%. I have owned a total of 79 loans. 10 have been fully paid and 57 are current. I have sold a total of 12, all at a loss. I find I can sell loans in the grace period for a 10-20% loss but late loans generally sell at a 50-80% discount. My initial strategy in this account was focused on lower risk loans, but reinvestments are invested in high risk loans just like my Roth IRA account.
My Lending Club Roth IRA
I rolled over some Roth money to Lending Club in September 2012 ($5K), October 2012 ($5K) and May 2013 ($2K.) That account is now worth $13,043.76, for an annualized return of 15.9%. Lending Club claims this account has a return of 22.94%. I have owned a total of 535 loans. 21 have been fully paid, 443 are current, 32 are in-funding, and 1 is in the grace period. I have sold off a total of 38 and 5 more are currently for sale. A few have been sold for a large loss, many are sold in the grace period for 10-20% off, and many are sold for almost full price (grace period loans that went current while they were for sale- no mercy from me, I still sell them, just for more money.)
My total annualized return (XIRR) on P2PL is 13.19%. I expect long-term returns between 8 and 12% using my current strategies. I'm not quite up to 5% of my portfolio yet, but expect I'll reach that in a few more months. All returns and statistics are as of June 5, 2013 when this post was written. If you'd like to give it a try, I suggest you start with a small account so you can gain a sense for the effort required prior to committing a large chunk of change. Disclosure: If you open an account at Lending Club or Prosper through the links on this page I get a small commission.
Are you involved in P2PL? How have you done? What do you like/hate about it? Comment below!