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How the time flies when you’re making money!

A new quarter means a new update on my p2p lending portfolio.

Wait, weren’t these monthly updates?

Yes, but as exciting as I find monthly statements showing 1% monthly returns, reading updates about it isn’t nearly as exciting.  For now, I’ve switched to quarterly updates on my P2P lending performance.  This should also give me time to publish updates on my other investments, like my dividend growth portfolio.

But this is about P2P lending, so let’s dig deeper and see just how well it’s going!

Summary

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
    • Note terms: 3 year & 5 year
  • Current value: $5,905.72
    • $232.12 growth since last quarter, or 4.1% in 3 months

Now let’s dig into the details.

P2P Loan Performance: Q3 2016

  • Opening Balance: $5,673.60
  • Cash Flow: $232.12
  • Ending Balance: $5,905.72
  • Return since inception: 7.37%
    • Expected Return: 6%-8%

The Expected 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.

In addition, in September I received a $25 referral bonus.  To be honest, this was a surprise since I’m not participating in Lending Club’s affiliate program, so I’ve asked for clarification.  At this point, I’m assuming it’s a new account bonus given to all new members.

Diversification is key, and peer to peer lending is an important part of a diversified investment portfolio.

The Loans

Here’s the current state of my investments.

The Good

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: 248
  • Fully Paid Loans: 9

It’s reassuring to see so many people paying off a loan they originally requested as a 3 year loan in just a few months.

The Bad

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 <30 days: 2
  • Late 31 – 120 days: 7
  • Defaulted loans: 0
  • Written off loans: 0
  • Total amount at risk: $74

Now that my account is maturing, the bad apples are starting to surface.

This is a large increase from my last update with just 1 late loan.  Still, thanks to diversifying across so many loans using the minimum investment amount per loan ($25), I’m only at risk of losing $74.

At one level, it’s infuriating to think of how hard I worked after my motorcycle accident to repay every penny owed, and these bozos are skating on a loan they only took out a few months ago. However, on the rational investor level, loss is expected and accounted for.  Plus, considering that’s a typical month’s interest payment, I’m still on track for my expected annual yield of ~8%.

Portfolio

Here is the current composition of my portfolio by loan grade and loan term.

Note Grades

lending club portfolio loan grades 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.

Note Terms

lending club term traditional ira

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 for this money, I’m comfortable investing in the 5 year loans as well, for the higher return.

For the past few months, my automated investing criteria has been open to both terms.  Interestingly, the distribution of loan terms has stayed at 80% 5 year loans.  To move my portfolio to a more 50/50 split, I’ve recently changed my automated criteria to only invest in 3 year loans to move me closer to my desired portfolio more quickly.  We’ll see how that’s paid off in next quarter’s update.

Closing Thoughts

Despite the ongoing turmoil in the P2P space, not to mention markets and economies overall, I definitely plan to transfer my small Roth IRA to Lending Club.  While I’m still planning on keeping P2P investing at <10% of my net worth, given the returns, I plan to take advantage of them.

A historical P2P performance page is still in the works.  I’ve created a spreadsheet for tracking my portfolio outside of Quicken.  Now I just need to find the time to convert it into a page (and in a way that the table is responsive and still displays well on mobile devices).  Life is complicated with 2 babies in the house, but it will happen soon.

Of course, there’s always news in the fast moving P2P lending space.  Most recently is the announcement that Prosper is closing its secondary market where investors could trade notes they no longer wanted.  Given I’m planning on moving in the next few years, potentially to a state which doesn’t allow P2P investing, having an easy, albeit pricey, method to close my portfolio early was attractive.  Originally I had planned to transfer my Roth IRA to Prosper, to get familiar with their platform, and diversify my P2P investing across multiple platforms.  However, with this news, I’m doubling down on Lending Club, and will be moving my IRA there next.

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.

4 COMMENTS

  1. Thanks for sharing your perspective on p2p. I’ve thought about dabbling in it but am scared if the economy turns that I’ll get stuck with a bunch of bad loans. With that said, timing the market is a fools game so I should probably look further into this and take the plunge. Thanks for sharing looks like I have some homework to do this weekend.
    Mustard Seed Money recently posted Is LASIK Eye Surgery Worth It?My Profile

    • Just like any investment, easing your way into it is a good way to start. That’s why I started with a single year’s IRA contribution.

      There’s definitely a risk, but I’m hoping that p2p won’t get hit any harder than other markets in the event of a downturn.

      Speaking of bad actors, one thing I was considering lately given the student loan fiasco and that federal loans aren’t addressable via bankruptcy, is why more students don’t try gaming the system… getting p2p loans and use those to pay off student loans and declaring bankruptcy to wipe the debt clean. Immoral to be sure, but there seems to be a distinct lack of morality on today’s society…

    • I’m sure most students wouldn’t be able to qualify for effectively doubling their debt right after graduating, but after a few years in a good job? Who knows…

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