Over the last few years I have been a cautiously optimistic, relatively early adopter of investing in unsecured peer to peer loans. I first start dabbling by opening small taxable Lending Club and Prosper accounts in late 2011 and early 2012 respectively. After promising initial results on those tiny amounts, in the Fall of 2012 I began making substantial investments in Lending Club notes via a Roth IRA as this investment not only has high expected returns, but also is maximally tax-inefficient. Eventually, I would dedicate 5% of my portfolio to the asset class, almost all of which was in that Lending Club Roth IRA account. I felt like I did my research and was quite aware of the various risks associated with the investment and felt the probable rewards were worth the risk.
My returns in the asset class were quite good over the years. My XIRR spreadsheet shows the following returns:
- 2012: 12.7%
- 2013: 13.2%
- 2014: 11.3%
- 2015: 10.0%
- 2016: 7.1%
for an annualized return of 9.9%, which was certainly higher than the average investor on the platform was seeing. The low correlation with the rest of my portfolio was also a major benefit. The hassle factor was not insignificant, but I eventually found ways to automate it. As a financial blogger, I was given free access first to the services of Interest Radar and then to the services of NSR Invest. They both worked a little bit differently, but each was useful for my primary purpose of not having to manage each individual $25-50 note manually.
Over the years, the platforms began to be more and more dominated by larger firms and the only way to buy the “good notes” was to either pay one of those firms or otherwise have a computer buy them automatically for you. But my returns were still within the 8-12% range I felt I needed to be getting in return for the risk I was taking. So what happened to cause me to want to leave Lending Club? There were a number of factors.
# 1 Desire For A Simpler Portfolio
Long-term readers are familiar with the portfolio we've been using for years. It's not perfect by any means but sticking with it has served us well. The only real change made in the last decade was substituting these P2PLs for a few of the bonds in the portfolio. However, as discussed in an upcoming post, I'm finally biting the bullet to simplify the portfolio significantly. As I've said many times, I think three asset classes is the minimum in a diversified portfolio and I think there are real benefits in increasing that to about seven asset classes. There may be some minimal benefits in going from seven to ten, but beyond ten (like my portfolio) you're really just playing with your money.
# 2 Less Hassle If I Die
One great benefit of a simplified portfolio is that it is easier for your heirs and/or their financial advisors to sort things out when you die. If I were to die today, all of the asset classes I invest in would be relatively easy to liquidate and deal with except for my investments at Lending Club and Prosper. I simply don't want my wife to have to deal with this hassle. Now, I thought about this up front. In fact, that was a major reason why I opened that Roth IRA at Lending Club instead of Prosper (because Lending Club let you sell late notes and Prosper didn't.) Back then you could relatively easily sell your notes, perhaps over a week or two, and move on with your life. What I have discovered since I started to liquidate my notes is that it isn't nearly as easy to do so as I had hoped, and it appears it has become significantly harder than it was a few years ago.
Untracked powder is always worth the price of entry
NSR Invest has a relatively new and slick feature that allows you to sell your notes at a range of prices automatically. It was implemented shortly before I decided to liquidate and I've been very grateful for it. What has been disappointing, however, is just how slowly those notes sell, through no fault of NSR Invest. Now most of my notes are good notes. They've given me great returns and are current. But even so, the market for them seems pretty thin. As of the time of writing this blog post, I've had all my notes on the market continuously for over two months at various prices. I was able to sell a few at a premium, but not nearly as many as I expected. I was able to sell more at par and even more at slightly below par. But after three months, I've only managed to sell about 70% of them (about $32,000 worth.) I'm getting close to having my initial investment back (about $34,000) and I've still got $14,000 worth of notes. So the final returns on this investment aren't even close to in. Interestingly, the taxable account notes sold a lot faster than the Roth IRA notes. I think part of the issue is that the sub- $25 notes sell a lot better than the $25-50 notes that constitute most of my investments since I went to NSR Invest. Another minor issue with the NSR Invest selling feature is that they don't let you sell notes for more than a 60% discount and nobody will buy notes that are 3 months late without a larger discount. In fact, it's pretty tough to sell late notes at all. I probably won't be discounting notes any more than I've already done and will just let payments trickle in for years at this point. My rollover back to Vanguard for 70% of the investment should take place any day now (I hope, they're really slow right now.)
In addition, Prosper decided last November that it wasn't going to let you sell your notes at all. It used to be they just didn't let you sell the late ones, but by the time I decided to liquidate, it was no longer an option. It looks like I'll be a Prosper investor for the next 5 years too whether I want to be or not. No big deal, it's only $500, but it's still a bit of a hassle to have no secondary market for those.
A more annoying feature of this liquidation is trying to decide how much cash drag is worth paying extra transfer fees for. While there are no fees to get into Lending Club and its chosen IRA Provider Self Directed IRA Incorporated, there is a $100 fee for a partial transfer out and a $250 fee to close the account. Now these were all disclosed and I was aware of them, but I had hoped to just have to pay the one time $250 fee when I eventually left. Now that it looks like full liquidation will take years, it's probably worth paying one or two of those partial transfer fees to minimize the cash drag.
There are several investments in this asset class available to accredited investors that allow you to not only spread your investments across multiple platforms but also to really minimize the hassle in this asset class. However, the minimums on them are $250K+, which was four times what I was willing to dedicate to the asset class at this point in my life.
# 3 Dropping Returns
While my returns have been quite good over the years, the overall trend is not encouraging, particularly in the last year. Now, whether that should be blamed on my switch to NSR Invest, on the shenanigans at Lending Club, on the maturing of the asset class with the entry of institutional players or what, the fact remains that returns are dropping out of the range that I expected for the risk I was taking (8-12%.) My current returns for this year so far are -1.3%, but that's mostly due to the fact that I've sold some notes at a discount.
# 4 Cockroach Theory
As I've discussed many times over the years, the main risk with P2P Lending is platform risk. I always knew that a certain percentage of borrowers were going to default. That was all baked into my projections. I expected a high default rate, but when you're getting 18-30% interest on the notes, you can afford to have a lot of them default and still get a great return. Platform risk, i.e. the risk that Lending Club goes out of business, was the more worrisome risk to me due to the way this is all structured. In 2016, there were a few “cockroaches” that became visible at Lending Club. It turned out the CEO, Renaud Laplanche, and his family had been borrowing from the company to make it look like its volume was higher in order to attract outside investor money. That wasn't a huge deal financially, except for the loss of trust. Then there was a finding that proper accounting standards weren't being followed with one account. Lending Club made it right and fired Laplanche, but it seemed two cockroaches had snuck out from under the counters and it made me wonder how many more were under there, especially considering that Lending Club was the flagship of the peer to peer lending fleet. Other investors and perhaps even the borrowers have surely been wondering the same thing and perhaps that's why my returns dropped for 2016 and perhaps that's why I'm having a harder time liquidating than I anticipated.
At any rate, I found myself wanting to watch and see what happened rather than contribute more money to the account. For month after month I delayed my periodic Roth IRA rollover to the account. It was slowly becoming a smaller and smaller portion of my portfolio, well less than the 5% my investing policy statement committed me to put in there. Then one morning in the Fall I found myself waking up early and thinking about my Lending Club investment. Two or three days of that and it was decided. I don't need investments I lose sleep over. If I was unwilling to commit additional capital, I probably shouldn't leave the old capital there either. After discussion with my wife and our obligatory three month wait dictated by our Investing Policy Statement, we decided to start liquidating.
# 5 More Attractive Investments
Another factor that played into our decision was the appearance of more attractive investments for our money. As regular readers know, the last couple of years I've been dabbling more and more into real estate. While we aren't particularly interested in direct ownership and especially management of income properties, some of the syndicated and private fund options meet our requirements for high returns, low correlation with our stocks, bonds, and even publicly traded REITs, and acceptable amount of transparency and liquidity. In fact, most of the crowdfunded platforms routinely offer 9-10% 1 year hard money loans backed by the property itself. We figured if we can get 9% on a loan backed by an asset, why would we invest in an unsecured loan that was only giving us a 9% return, especially with all of that hassle? As we simplify our portfolio and dedicate a slightly larger portion to real estate, that portion had to come from somewhere and the P2PL allocation seemed an obvious place for some of it.
# 6 Little Synergy With The Blog
One of the things I had hoped would occur as I wrote periodically about my Peer to Peer Lending experience was that it would provide a little boost to the blog income. I have an affiliate marketing deal with both Prosper and Lending Club such that if a reader opens an account after going through my links I get a small commission. I've learned two things about affiliate marketing deals over the years, however, both of which severely limited the amount of income I earned from Lending Club and Prosper.
- The purchase has to be essentially a no-brainer. In any affiliate situation, I'm going to write about all the negative things I know about because I want to be fully transparent with my readers. But if you write about a bunch of negatives, nobody signs up for the deal. So, no surprise, I never had very many takers with this deal.
- I have to be able to offer something special to the reader that they can't get by going directly to the company's site, like the bonus money for refinancing your student loans. I had nothing to offer that was unique with the P2PL sites.
At any rate, the bottom line was that Lending Club and Prosper affiliate commissions never really amounted to much and I've become much pickier about future affiliate partnerships.
In conclusion, investing in Peer to Peer Loans did work out well for me. My overall returns were not only positive but impressive. It was far more hassle than I ever expected, both getting in and getting out. And when the real risk actually showed up, it bothered me a lot more than even the 2008 stock market downturn.
What do you think? Did you ever invest in P2PLs? Why or why not? How did you do? Have you made any changes due to the events at Lending Club in 2016? Why or why not? Comment below!
I also invested in Lending Club several years ago and found it too tedious to make it worthwhile. I have invested in crowdfunding this past year, using PeerStreet, Patch of Land, and Real Crowd. I am pulling out of PeerStreet and Patch of Land due to the higher risk associated with 3-5K in single loans. I have found that about 30-40% of my loans have periods of late payments. One loan was a few days away from foreclosure but the borrower found another lender and was able to pay it off. I have a significant amount in a Real Crowd fund through Broadmark which uses the same idea but my risk is spread out over a lot more loans through the fund and my returns this past year have been about 10%.
This whole adventure reminds me of past investing manias where the initial companies/players received the juiciest of returns; as things mature and more players enter the game returns then diminish. This is exemplified with canal companies or railroad stocks from way back when or even more contemporarily – with mutual fund asset bloat affecting the returns of a previously-winning strategy. I imagine this process will repeat for the next endeavour that had impressive returns.
Separately, in Bernstein’s Four Pillars book, chapter 2, he writes about the junk-treasury yield spread and how it only makes sense (often ignored) to invest in high yielding securities when their yield more than compensates for the loss rate and puts you a head of treasuries. For WCI and others who have tried investing in P2P lending, have you taken this into account and has it come out in the performance results?
It’s a pretty big yield spread between P2P yields and treasuries. Like 20%.
Performance hasn’t been too bad in my book. I’m certainly ahead of where I would have been had I left the money where it was before- TIPS and G Fund. As others have mentioned, the game isn’t quite up yet though.
I agree with @jlawrence01 points and add the following based on my experience with Prosper instead of LC (LC was not available in Oregon when I started my experiment in P2P lending):
1. P2P lending platforms (Prosper and Lending Club primarily) make most of their money on the loan origination fee they charge to the borrowers not on the 1% fee they charge the lenders. Meanwhile, the lenders (like me) take the bulk of the risk. This creates an incentive to originate as many loans as possible which in turn incentivizes them to do as little vetting as possible. This allows them to brag about the vast volume of loans they originate while transferring the risk to lenders.
2. Prosper claims that borrowers have 5, 6, or 7 days (Prosper says different things in different places on their website) to get their documentation in after a loan is funded or the loan will be canceled. I’ve seen some of my notes go over 14 days before they FINALLY cancel the loan and free up my money to invest elsewhere. This amounts to a 2 week free loan. Meanwhile, all of the best notes are funded within minutes of being posted on the site, incentivizing lenders to buy in early. This creates a tremendous cash drag that lowers returns. Since lenders are taking the risk, Prosper has no incentive to hold lenders accountable to either close the loan quickly or cancel it.
3. I do not trust the Prosper vetting process. I’ve actually had a lower default rate on Grade D loans than Grade B loans. Admittedly, I don’t have a large enough portfolio to make this statistically significant, but it does make me wonder how well Prosper is actually vetting the borrowers. Again, lenders are taking the risk so Prosper has little incentive to do a good job of vetting borrowers.
4. The least risky Grade AA and Grade A loans are frequently repaid early. I received just one payment on one of my Grade AA notes before it was paid off. Because of #2 above, this tied up my money for over 6 weeks for very little gain.
4. Prosper seriously overstates the rate of return they publish on my notes. I’ve made just $30 total over the past 19 months on a $2,500 investment, yet Prosper says my rate of return is over 10.5%. They magically make the losses on defaulted loans disappear. I will be very lucky to exit Prosper with a net profit after finishing winding down my portfolio.
5. I’ve seen all kinds of irregularities with the Prosper platform. Loans that are delinquent are marked as being current and vice versa on the summary page, but the actual note listing shows the opposite. One day it says that I have $10 in cash the next day it says I have $4. When I call Prosper to get an explanation, they say they miscalculated something and had to claw back some money. The Prosper platform is not ready for prime time.
I’m in the process of winding down my investments in Prosper. I have about a year to go to get the bulk of my money back. I don’t expect to exit with any profit whatsoever. I do not recommend P2P lending to anybody.
I just finished winding down my Prosper account. I made the last transfer out last week and after a few days of back-and-forth, Prosper finally closed my account. I am relieved to be free of these spives and wide boys.
I netted about a 0.5% gain in the ~3.5 years I was at Prosper. Total waste of time and money. Lesson learned.
Spives?
Unfortunate return. I think I ended up with 5-6% in Prosper but I’ve got a handful of notes left.
Hi, thanks for the article. I’ve been reviewing the different comments and responses to this p2p lending.
I’ve had about $73k between a traditional and roth ira. I just got all set up on the nsr investment platform in preparation of selling all my notes. I started investing with an agressive profile about 1.5 yrs ago and now would like to liquidate. My aggregate loan performance is 2.5%.
I currently have 1,761 notes:
– 1,651 current
– 17 in grace period
– 18 that are 16-30 days late
– 75 that are 31-120 days late
I did not do a good job of studying this investment, etc. Can someone offer some guidance on what kind of mark/up discount I should use to unload these notes?
please and thanks. josh
I can tell you that very few 16-30 day late and 31-120 day late notes sell even at the maximum 60% discount available on NSRInvest.
I sold a few current notes at a premium, many at par, and even more at slight discounts. I could have kept discounting and gotten rid of them all, but at a certain point, I’ll just hold the rest until they get done paying out. I don’t see a reason to sell a current note at a 10% discount. So my current ones are all listed at par and a few of them sell a week at this point. Maybe the really good ones already all got snapped up, don’t know.
Thanks for this article – I think your last one on strategy for liquidating Lending Club account is from 2021 – do you have anything newer? Any advice?
Also trying to liquidate my LC account. I have about $34k:
Issued & Current
11 in Grace Period
6 that are Late 16 – 30 days
35 that are Late 31 – 120 days
380 that are Fully Paid
2 that are Default
Is the Sacramento Method still a good method to try? I’m just starting my research but most of what I can find is from a few years back. Any good liquidation strategies that have been more recently tested?
I was able to liquidate about 3/4 of my portfolio over about 3 months. At a certain price, it was worth keeping to me. So I’m just listing all the current ones at par now, and I sell about 0.3% of them a day. It’s going to be a while. I’ve had to heavily discount the late ones to get them sold. They sell at about the same rate at 80% off.
Definitely not as fast as I had hoped, nor for as much money.
Thanks. Your article is giving me the confidence to know that what I’m doing is right. I’ve been investing with Lending Club since April 2011. Everything was going great while the loans were young, but it’s taken such a dive ever since the Laplanche debacle.
My summary tab says I’m making 7.85%, but I honestly don’t know how they calculate this, since the first two months of 2017 have been negative, and my return last year was (I calculated) about 6%. I stopped investing in new loans sometime in early 2016 and started withdrawing payments in August. At my peak, I had almost $15,000 in there.
I desperately want to believe in peer-to-peer lending, but the evidence speaks for itself and there is little reason to stick with it right now.
WC, beware your investment in Crowdfunded real estate. IMO it’s the next generation of P2P lending. I’ve been a commercial RE lender for the past 25 years. The reason the loan requests land on line is that there is a major deficiency/impairment with the loan request that hasn’t been disclosed or isn’t easily discovered. Hard money lending is best done locally, when you can visit the property, meet the borrower, and better assess the risk. As an old boss told me, buildings don’t make payments, people do….
Don’t be fooled by seemingly low risk due to a low LTV- the building could be deficient in some way that isn’t known (think environmental/structural issues, etc), and that doesn’t even touch on the local economic conditions that could impact the viability of returns in the next down real estate cycle. A good RE lender knows how to fully underwrite the risks of RE, which aren’t readily apparent on crowd funding platform.
Basically, there’s no free lunch in this business.
Best wishes
So what you’re saying is there is no way to do real estate successfully and safely without doing it yourself full time? I hope that’s not true, but can’t say for sure it isn’t!
Prosper posted a message to my account this afternoon that explains why I haven’t been able to figure out how they’re calculating the “Annualized Net Returns” they show on my account:
“Important Account Update
It recently came to our attention that the annualized net return numbers displayed on your account overview page were inaccurate due to a system error. This error only affected the Annualized Net Return and Seasoned Annualized Net Return numbers and has now been fixed.
This error did not impact any other part of your account, including payments, deposits, monthly statements, tax documents, and note and loan level information – including estimated returns.
We sincerely apologize for this error. If you have any questions, please email us at [email protected].”
The posted Annualized Net Return on my account dropped from ~11% to 2.28% today. That is a pretty huge difference. My calculations say that 2.28% is still higher than the real return but more inline with reality than 11%. Some people (like me) might get the idea that this wasn’t an honest mistake, but rather a deliberate attempt to mislead the investors. How could it possibly have taken years and years to discover this enormous error?
I just came here to post the same thing, Svaraman. In March I posted above that my returns were being way overstated by Prosper. Today they corrected their error which dropped my annualized returns from 15% to 8.6%. It took them almost a year to notice this error? My arse!
Yep. I replied to your post on February 27, 2017. I’m glad to have the balance in Prosper down to ~$100. I have a couple of notes that are currently overdue by more than 30 days. I’ve never seen a note that late become current so I expect these two will default bringing my net income over the past 2.5 years to less than zero. Your 8.6% seems pretty great to me!
My experiment with P2P lending is at an end. It’s not for me. I called Prosper to see if I could just abandon the remaining funds in my account as the $100 in the account is not worth the addition hassle in tax preparation, but after being transferred around a few times they said that wasn’t possible. Guess I’ll just let them ride until the last loan defaults.
I never really paid attention to their numbers anyway as they’ve always been inaccurate. I just calculated my own. Same with lending club.
Thanks for the article WCI. I’ve also noticed the drop in ROR on my portfolio and feel like it is time to liquidate or at least avoid automated investing of available funds. I started with $10K and noticed how long it takes to actually invest in notes (per the criteria I selected). If I remember correctly It took me over 3mo+ to allocate that money and I don’t think I ended up investing the full $10K because it was just too damn slow. I’ve never used robots so not sure how that goes but would hate to pay a fee aside from the one LC charges. In any case, returns for 2017 are super low by my standards at 5% so I’ve stopped re-investing and have been pulling ~$200/mo which is not too bad. For those who made comments around tax complications with LC. I found it easy to do with the agreement LC has with Turbotax. I’m also a REI with physical properties and so far so good (I only have 3) but I’m curious about RE crowdfunding such as Fundrise and others. I’ve heard pros and cons but have not made up my mind because I haven’t done my due diligence. The College Investor posted a nice article but would like to get more info from individuals who are actively using them and in particular Fundrise. I posted a topic at rockstar forum in case (http://forums.rockstarfinance.com/t/fundrise-feedback/3032) folks want to stop by to share thoughts.
I have a Fundrise investment, but since then they’ve changed their model to basically an “eREI” which I’m a little more skeptical of.
The information you shared in this article is absolutely right. The processing of paper work is very long even if a small return. I would love to hear more from you about finance tips. Thanks!
Nice article, thank you. I had very similar experiences with Lending Club and wrote about it here:
http://theenginewayoflife.com/2017/02/01/lending-club-an-honest-review/
Since I wrote that, my “selling” on the trading platform has dropped to nearly zero. I think whatever notes I have left are not making it through the search criteria people want, and I just can’t get rid of them. Now I’ve got to wait for them to be repaid or default. Ugh.
Yea, I know the feeling. Still, I think I was able to sell 80% of my notes in just a few months and another 10% since. Annoying to have to wait up to 5 years to completely liquidate.
Exactly. Those percentages are aligned with mine. I’ve done about 90% since the beginning of the year, decreasing each month, and now coming almost to a stop.
What I’m really curious about is if these really are my worse 10%. Many of them are Current (not all, or course). But do the people not buying them know something? Are they really my least valuable or most risky notes? I hope not, but it will be interesting to watch if my default rate starts to increase.
One thing I’ve noticed is all the ones I have left are >$25.00. My sub $25 ones were snapped up right away. They also tended to be older notes though, so that might have had something to do with it.
I’m feeling pretty great about my decision to only purchase 3 year notes as there is no longer any way to sell Prosper notes. I was able to liquidate a few of them before Prosper parted ways with Folio Investing but at this point my only option is to ride them out until the mature or default. I will be done by the end of February 2018, then it is adios to Prosper.
Given that Prosper notes have no liquidity, I’m surprised that anybody would continue to invest in them, particularly after the revelation that they’ve been misreporting the investment return since the start.
Interestingly enough, I have one note that is headed toward default even though there is just one payment remaining. I thought that was bad but @Mr Engine had a few that just took the money and ran. Wow!
Oh yea, I’ve got a few prosper notes I’m stuck with, but I never had more than about $600 invested there so it’s more of a nuisance than anything. Thanks for the reminder. Every few months I log in and transfer the accumulated cash out.
Thank you for the great and honest review!