P2P Lending Portfolio Update: Q2 2017

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text definition of Loan

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Always nice to see money in my P2P lending accounts flowing in the right direction – towards me!

Despite the usual fluctuations in returns with some loans going into default, now that my latest investments are fully invested, the interest is picking up steam.

Let’s dig into the numbers!

Summary

  • Original Investment: $101,000
  • Current value: $105,251
    • $3197 growth since last quarter, ~3% quarter on quarter
  • Notes Targeted
    • Filter: debt consolidation, home owner, 0 credit inquiries in past 6 months
    • Note terms: 3 year & 5 year – 50/50 split
    • $25-$50 per note

Now that my Lending Club and Prosper peer to peer lending accounts are fully invested, the performance is back up to trend.  Above trend actually, since the notes in this account are new and not fully seasoned.  Hence the 3% return last quarter, which implies a ~12% annual return – much higher then the expected 7-8%.  As the bad apples fall out, my long term returns should settle down more into the expected range.

P2P Loan Performance: Q2 2017

  • Opening Balance: $102,053
  • Interest Earned: $3516
  • Write-offs: $184
  • Expenses: $134
  • Net Cash Flow: $3197
  • Ending Balance: $105,251
  • Quarterly return: 3.1%
    • Expected Annual Return: 5.5%-8.5%

The write-offs continue.  Always surprising to see the outliers on either side – some who pay off their loan in full the first month, and others who never make a single payment and start defaulting immediately.  I expect the write-offs to increase over the next few quarters and begin to level off toward the end of the year.

One side effect of the low write-off rate at the moment is that my expenses this quarter were almost equal the writeoffs.  Some of these expenses were regular ongoing expenses for servicing notes, but the majority were recovery fees.  Always nice to get money back from a defaulter, but given the heavy expenses associated with a recovery, it’s a pyrrhic victory at best.

The Loans

Here’s the current state of my investments.

The Good

Automated investing continues to do well for me both at Lending Club and Prosper.  Any new money in my account gets invested automatically according to my criteria – people requesting loans for debt consolidation with 0 credit inquiries in the past 6 months.

  • Total Loans: 2,536

As always, Prosper’s quirky automated investing makes you choose what matters most – note grade or your personal filtering criteria.  For now I continue to use recurring investment rather than their “Auto Invest” so I can select notes based on home ownership and credit inquiries.  This means my note grades are subject to fate – whatever grade note comes up for investing when I have money available to invest.  It’s working so far, but I may decide to abandon my filters in the future and switch to “Auto Invest” so I can better choose my note grade allocations.

The Bad

At the moment I only track the loans that have entered collection, not the ones that are behind in payment.

  • Written off loans: 32

There’s always a chance of recovery for the written off loans, as well as the borrowers who are behind in payments catching up.

As I expected, the number of written off loans is increasing as the portfolio matures.  This will level out eventually, and the returns stabilize.

P2P Portfolio

Note Grades

With 3 different accounts across two platforms I’ve diversified across providers, and have expanded the grades of notes I’m purchasing.

One of the problems I mentioned last update is wanting to avoid investing in the same Lending Club note in both my accounts.  Since then I have modified my investing criteria on both Lending Club accounts to invest in C grade in my original account, and invest in all the other grades except C in the larger one.  While I will still have a mix of grades across both accounts until the original notes are paid off over time, going forward all my new investments will be in unique notes with no overlap.  This isn’t a major concern, but a minor optimization I’ve done when time permitted.

Since I started my P2P investing with Lending Club, I’m using Lending Club grades (A-G) for my reporting purposes, and converting Prosper’s 7 step (AA-HR) ratings into Lending Club’s.  I’m sure the criteria for the grades are different between LC and Prosper, but I’m comfortable with the implicit fuzziness.

p2p lending note grades pie chart 2017 q2

Note Terms

While the shorter term notes do carry a lower risk of default (less time for borrower to run into problems) and are easier to liquidate, the longer term notes do typically have higher returns to compensate for the increased risk.  Given my long time horizon for this money, I’m comfortable investing in the 5 year loans as well, for the higher return.

Originally, I didn’t specify a term for my automatic investing criteria.  Now that I’m fully invested, I see I’m approximately two-thirds invested in 3 year notes and only a third in the longer term notes.  To get a more even balance, I’ve temporarily modified my investing criteria to only invest in 5 year notes.  Once I’m closer to even, or perhaps a little heavier in long term P2P loans, I’ll switch back to unspecified duration in my automated investing.

You can see this change has already started to make a difference, going from 28% 5 year notes last quarter to 32% this quarter.  Obviously this will be a gradual shift.  I’m looking forward to seeing how performance and default rates vary between the 3 year and 5 year notes.

p2p lending note terms pie chart 2017 q2

Closing Thoughts

I’m still happy with my P2P lending performance so far.  While the jury’s still out as my new investments with Prosper and Lending Club mature, from a tools and market size perspective, Lending Club is my preferred P2P lending market.  Feel free to sign up with Lending Club here and you’ll get a $150 (or more!) bonus.  Once the dust settles a bit, I’ll start charting my quarterly returns over time, and I’ll have a clearer picture of their relative performance.

Next update I plan to take a look at default rates by note term and note grade.  It may be premature since it typically takes a year for the bad borrowers to fall out and returns to stabilize, but it’s a metric I plan to keep an eye on over time and modify my investing strategy as need be.

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.

2 COMMENTS

    • I know, it can be scary trying something new, especially when it comes to money.

      I guess I have a rebellious streak. Given how the Federal Reserve is forcing money into the stock market to prop it up by keeping interest rates so low, it just increases my anxiety about stocks and makes more alternative investments more appealing. Same return, but unknown market correlation. We’ll know after the next correction.

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