Another month has come and gone, and it’s time to check in on my p2p lending portfolio.
June was a good month with Lending Club. Despite the ongoing disclosures, my peer to peer investments have been performing well.
Let’s dig deeper and see just how well they’re doing!
This year I opened a Traditional IRA account with Lending Club, investing my full $5,500 contribution in their notes.
- Original Investment: $5,500
- Notes Targeted: A-E grade, $25 per note
- Filter: debt consolidation, 0 credit inquiries in past 6 months
- Current value: $5,673.60
- $173.60 growth, or 3.2% in 3 months
Now let’s dig into the details.
Diversification is key, and peer to peer lending is an important part of a diversified investment portfolio.
P2P Loan Performance: June 2016
- Opening Balance: $5,606.70
- Cash Flow: $66.90
- Ending Balance: $5,673.60
- Annualized Return: 15.36%
- Expected Return: 6%-8%
For the number crunchers out there, the return figure above is given by Lending Club, and incorporates writeoffs for bad loans based on their calculations of similar portfolios. However, it takes time for the bad apples to fall out and start pulling that annualized return number down.
You’ll also notice the opening balance plus earnings does not equal the ending balance. This is due to service fees and write offs for bad loans
Here’s the current state of my investments.
I’ve been using the automated investing tool at Lending Club to automatically reinvest any new money, be it from earnings, paid off loans, or loans that didn’t get issued.
Here’s the breakdown so far.
- Current Loans: 226
- Issued Loans: 6
- Not Yet Issues Loans: 0
- Completed Loans: 0
Any investment has risk, and the risk with Lending Club is that a borrower fails to repay their loan. These loans go into collection, and some will be repaid and caught up, others will be completely written off.
- Late loans: 1
- Defaulted loans: 0
- Written off loans: 0
My first problem loan!
This loan was grade E, so you expect more problems with these borrowers. Bad loans follow the usual debt collection process, so I’ll receive nothing if the borrower completely reneges, or my investment minus collection fees if they catch back up.
It’s only 16-30 days late, so check back next month to see if this person caught up, or went belly up, leaving me with the check.
Here is the current composition of my portfolio by loan grade and loan term.
I avoid the high risk grades and invest a small amount in the safe loans. As I become more comfortable with the risks and writeoffs, I’ll likely become more aggressive.
The majority of my investment is in C, D, and E grades. As an additional filter, I only invest in loans for borrowers who have had 0 credit inquiries in the previous 6 months. This weeds out the more risky borrowers who are coming to peer to peer lending as a last resort.
I also only loan money for debt consolidation. While some would consider these borrowers higher risk, I’m more comfortable giving money to people getting their financial house in order, than someone taking a flyer on starting a new business, for example.
Many P2P investors have a stated preference for the shorter term notes – lower risk of default, plus receive their original investment back more quickly.
Given my long time horizon, I’m comfortable investing in the 5 year loans as well, for the higher return.
Over time, my target allocation is 50/50 for short vs long term, and I will revisit each year. I’m considering investing more with Lending Club, and if so, will weigh more heavily towards shorter term notes to balance my account more quickly.
After years of minuscule interest payments on the cash in my savings accounts, it’s refreshing to see such high returns, so quickly. Given the returns, I may transfer another IRA account to either Lending Club or Prosper to make the most of the possibilities. Still weighing the pros and cons of my options.
Now that I have several months’ data, expect a historical performance page shortly, outlining the performance of my peer to peer loans over time. Soon.
Finally, everyone in the P2P space is talking about Lending Club’s recent problems. I’m confident Lending Club will survive and thrive in the long term, but in the short term, it is a little nerve wracking. Considering it’s a private investment, there is no guarantee – there’s no FDIC insurance on your notes – so it pays to be cautious. While I wouldn’t put my entire retirement fund into any P2P investment, neither would I put it entirely in any class – stocks, bonds, real estate, etc. Diversification is key, and peer to peer lending is an important part of a diversified investment portfolio.
What’s your peer to peer lending story? Are you a borrower, investor, or want to be one or the other? Or just researching the possibilities for future action? Comment below and tell me how your P2P lending experience has been so far.
Image of loan definition courtesy of Blue Diamond Gallery.