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New years are for new beginnings, even in P2P loans.

When it comes to investing, you hope the new beginnings are new, higher returns.

Unfortunately, that is not the case with my P2P lending account with Lending Club.  The defaults are coming fast and furious now that the account is seasoned.

Let’s dig into the results and see what happened last quarter.

Summary

Currently, I’m tracking a Traditional IRA account with Lending Club opened in 2016 with the usual $5,500 annual contribution.

  • 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: $5,996.21
    • $90.49 growth since last quarter, or 1.5% in 3 months.

That’s a dramatic drop in performance compared to last quarter’s 4% quarterly return.  Let’s take a closer look at what happened.

P2P Loan Performance: Q4 2016

  • Opening Balance: $5,905.72
  • Interest Earned: $214.00
  • Write-offs: $118.53  (ouch!)
  • Net Cash Flow: $90.49
  • Ending Balance: $5,996.21
  • Return since inception: 9.01%
    • Expected Return: 5.5%-8.5%

Lending Club gives the Expected Return figure above, and incorporates writeoffs for bad loans based on their calculations of similar portfolios.  As you can see, with last quarter, the bad apples are shaking out, bringing my actual returns more in line with their projections.

Side note: the opening balance plus earnings does not equal the ending balance.  This is due to service fees and write offs for bad loans.

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

Lending Club’s automated investing tool has been working well for me, reinvesting any new money automatically, be it from earnings, paid off loans, or loans that didn’t get issued.

Here’s the breakdown so far.

  • Current Loans: 251
  • Fully Paid Loans: 10

Always reassuring to see people paying off a loan early.  Makes me wonder if they’re scammers testing the systems, personal finance junkies evaluating the service, or…

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: 5
  • Late 31 – 120 days: 4
  • Defaulted loans: 1
  • Written off loans: 7
  • Total amount at risk: $205

Now the true nature of peer to peer lending risk starts to show up.

Disturbingly, when I look more closely at the distribution of written off notes, it’s very close to my portfolio profile.  I expected more writeoffs in the lower grade notes, but that doesn’t appear to be the case.  I’ll be keeping a closer eye on this going forward to see if there’s an issue with Lending Club’s borrower risk assessments.

I’ve already had $118 written off, with another $205 at risk.  Diversification helps, but it’s sad to see so many people defaulting on their debts.  Considering the majority of this happened in December, I wonder if this is a seasonal effect that will happen every year, or is unrelated.

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 write-offs, I’ll likely become more aggressive.

The majority of my investment is in C, D, and E grades.  Additionally, I filter out borrowers who have had 0 credit inquiries in the previous 6 months, hopefully weeding 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.

Since I haven’t modified my automated investing criteria, my loan profile hasn’t changed significantly.

Note Terms

Many P2P investors have a stated preference for the shorter term notes – lower risk of default and easier to liquidate.  Given my long time horizon for this money, I’m comfortable investing in the 5 year loans as well, for the higher return.

My note terms have changed significantly this quarter since I started investing in both 3 and 5 year notes.  Since I changed my automated investing criteria to only invest in 3 year notes last quarter, I’m now at 35% 36 month notes, and 65% 60 month notes.  Once the breakdown is more equitable, I’ll modify my automated investing to split equally between the two.

Closing Thoughts

Despite the ongoing turmoil in P2P loans, and markets overall, I am still investing more in peer to peer loans.  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.

Since I lost my job in a layoff a few weeks ago and need to rollover my 401k, I’m in the process of investing it in peer to peer loans with Lending Club and Prosper.  I’ll write in more detail about this later, but in summary will be investing $45K in each which will be reflected in my next quarterly update as well.  Given Lending Club is offering incentives for new accounts, I’ll be receiving an additional $350 bonus for this new investment, always a nice perk.

Previously I had been leaning away from Prosper as a peer to peer investing service.  However, given the amount of money, and my interest in comparing both platforms, I decided to go ahead with Prosper too.  This was difficult considering they’ve recently closed their secondary market which could complicate matters should I move to a state that doesn’t allow Prosper investments.  But it’s a risk I’m comfortable with at the moment.  No telling what will happen tomorrow, let alone next year.

Unfortunately, I still haven’t created an historical P2P performance page as planned, but it’s high on the list with the time not spent on the job search, or playing with my little ones.

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.

8 COMMENTS

  1. I have to admit that I am incredibly intrigued by P2P but haven’t taken the steps yet to invest. I don’t know why I am somewhat spooked that the debt market will implode if we go into a recession but then again there is always someone in the media saying the market is going into a recession. I’ll have to take a 2nd look. Thanks for sharing!!!
    Mustard Seed Money recently posted Will Real Estate Suffer Under Trump?My Profile

    • A valid concern. After all p2p loans aren’t FDIC insured like a bank deposit. But find me a bank paying 6-9% for your money.

      Don’t get me wrong, it stings when some welcher doesn’t pay back his debt, but the honest folk make up for it financially.

      Time will tell how this asset class holds up against another 2008…

    • It’s true I’m seeing higher rates of default as my portfolio matures. Assuming an equal distribution of defaults over the lifetime of the notes, I wouldn’t expect to hit an average rate until I’m half way through my notes at ~2 years, or in another 18 months or so.

      Frankly, I view all asset classes as suspect at this point. With so much money sloshing around the system, it’s making waves across the boards as everyone’s scrambling to find a place to invest for reasonable returns for a given risk level. At this point I’m viewing peer to peer lending as yet another diversification.

      Of course, any debate on what assets are actually disconnected enough to be classified as “diverse” in today’s markets would be a lively one!

  2. I’ve been thinking about dabbling with P2P lending. I’m just nervous what will happen if there is an economic downturn. The people who go to P2P lending might not be the best credit quality people out there. In a recovery period, I would want to get into p2p lending, as many people’s situations are improving.

    What are your thoughts of this?

    Also to comment on your comment above, in credit risk, there usually is increasing default risk as age increases to a certain point. Then the risk tails off. (I work in credit risk and we study these things)
    Erik @ The Mastermind Within recently posted My Goal to Read 75 Books – January 2017 Check-inMy Profile

    • Yes, a downturn is always a risk in any investment. In a perfect world we’d all invest right before the tide turns and starts raising all boats. Unfortunately, I left my crystal ball in my other trousers…

      I’m comfortable with the risk, and the amount of money I’m investing. But we all have different risk profiles. If you can afford it, a great way to get started is with 2 of your annual IRA contributions, assuming you make them. That’s $11,000 which will put you over their $10K in 2 years threshold where they will pay for all your SDIRA maintenance fees, and being in a tax sheltered account, it greatly simplifies record keeping and tax time.

      Speaking of borrower risk, I was just notified by Prosper that my funds are ready there, so I’ll be updating my earlier research with the latest data to see if I should modify my automated investing criteria.

  3. Jack,
    I feel your pain with those write offs. I’ve been investing for almost 4 years with Lending Club and this past month was by far the worst. I’ve read articles that said defaults have risen as of late, and they are increasing their rates to offset. It definitely hurts. I’m afraid more bad months are on the way before it bottoms out. Thanks for sharing your numbers.
    -RBD

    • I was just reading ESI’s 2016 P2P update and he was seeing similar problems with defaults this year. We’ll see how it plays out.

      I was just updating my numbers for January, and it actually wasn’t that bad for me. November and December were much worse. But I still don’t have enough data points to make any sort of generalizations. Looking forward to seeing how Prosper compares considering I’ve started my new LC and Prosper accounts at the same time with similar filters. Check back next quarter!

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