Peer to Peer Lending - 1.5 Years Later

So I obviously did not keep up with the monthly peer to peer lending entries. Life, work, lack or interest, etc.  But I never stopped the investments. Well, that's not entirely true, I decided to wind down my Prosper account and stick with Lending Club as my primary source. Primarily just because I seem to understand LC better.

So where do things stand these days? Let's review!

Propser

Please note that the status chart above looks worse than it actually is since I've been withdrawing all payments from the platform rather than reinvesting. If you kept the charge off in proportion it should be ~1/2 the size it appears.

Payments received: $3,783.33
Principal paid off: - $2,661.69
Payments in excess of principal: = $1,121.64
Principal charge-offs: - $793.16
Gain/loss to date: = $328.48

Principal value of active notes: $2,245.15
Total active notes: 130
Current: 120
Past due (1-30 days): 6
Past due (31+ days): 3
Payoff in progress: 1
Total charged-off notes: 37
Total notes paid in full: 48
Total notes sold: 0

Yes, you read that correctly, 37 charged off notes. Generally speaking Prosper's default rate tends to trend higher than LC's. This isn't terribly surprising since Prosper accepts higher risk (and higher interest) loans. (For comparison of default rates, check out Nickel Steamroller's chart.) But even then this rate is more than twice as high as my LC account, so I should, perhaps, chalk this up to less sound portfolio filtering and strategy on my part.

That said, my return is ~5.65% and I've still made a vastly greater return than if I'd left this sitting in my ING (Well... now it's Capital One 360 -- really? Man that's a... name.) account. I'm fully aware that I tried Propser first and that it was a learning experience. If I'd try LC first this whole write up may have looked very different and maybe I'd be winding down LC instead. Even so, I plan on continuing to wind down the Prosper account and focusing solely on LC.

Lending Club

LC has been very good to me these last many months.

My return is ~11.35% as of writing this. I've had 16 notes charged off total. I've also taken common P2P investing advice and begun selling late notes on FolioFN for appropriate discounts to par. Selling late notes is critical, it has already improved my return by 1%, and considering that's often better than the entire yield of a 'high-interest' savings account these days, that's nothing to sneeze at. 

Analysis

A number of websites have come and gone for analyzing the P2P loan base. Lend Stats is perhaps one of the most well known that comes to mind. The fact that both Prosper and Lending Club transparently offer information on their entire loan base means that anyone can try their hands at data analysis. The new space that's popping up, however, are "premium" (read: paid) analysis shops. There's Interest Radar and Nickel Steamroller Premium. I've been using IR for the last month or so. The site leaves much to be desired in terms of eye candy and web 2.0 functionality, but I do like the solid filtering and in-house scoring systems.  I have not used NSP yet, but I plan on it. From the descriptions they put forward it seems that the scope of what they're trying to achieve probably exceeds that of IR and will do so at a lower price point.

By the above I mean that NSP sounds like they are going to aim for fully automated investing, active management (perhaps automatically selling notes? that'd be nice), etc. IR is more about giving you the analysis tools that LC refuses to. Such as very specific filters (sometimes you don't want 20-25, sometimes you want 23.5, try telling LC that) and custom filtering options.

Investments

I'm coming up on two years in the peer to peer space, I'll hit that mile stone come December. At this point, I'm thoroughly sold. I plan on funneling my small savings account into LC and getting fully invested. (I should note that this is not my primary savings account, I do have a well-rounded emergency fund, and I'm not committing fiscal lunacy.) The risk to reward factor here is too compelling to ignore. Yes, the default rates could get considerably worse should we hit another economic downturn (just look at the default rates for LC during the 2007-2008 period) and so, in that respect, it is not at all comparable to a classic idea of savings. But I am young and can afford to take on more risk, and this is not my only venue of investment. My stock returns often beat my P2P returns, but I think from a risk and diversification perspective P2P lending has a solid place in anyone's portfolio.

Peer To Peer Lending - Month 3

This is my third monthly report for my peer to peer lending.

In terms of late and defaulting notes, Lending Club is, quite bluntly, kicking Propser's ass. Now I should point out that it's not exactly an apples to apples comparison as I have some riskier notes in my Prosper portfolio compared to Lending Club. That said, the notes that are likely going to default on Prosper would match my tighter filters on Lending Club. Let's review!

Prosper:

Note the build up of late notes!

Payments received:		$693.89
Principal paid off:	-	$480.55
Payments in excess of principal:	=	$213.34
Principal charge-offs:	-	$0.00
Gain/loss to date:	=	$213.34

Principal value of active notes:	$5,119.45
Total active notes:	203
Current:	196
Past due (1-30 days):	3
Past due (31+ days):	4
Payoff in progress:	0
Total charged-off notes:	0
Total notes paid in full:	8
Total notes sold:	0

Account value as of writing: $5,216.84


So how are we doing? Well, I've got four notes now that are 31+ days late. I'd be very surprised if any of them pay off. But surely all these notes that are delinquent must be high risk, right? Not really, and that's the rub.

The break down of these four notes: 1 B, 1 D, 1 E, and 1 HR. None of the notes had an delinquencies in the last seven years. One of the notes has a public record in the last ten years (which I've subsequently removed in my filter now). One common thread between these notes is that they all have 1 or more inquiries in the last six months. I've brought my Prosper filter inline with my Lending Club filter now and cut out borrowers with inquiries. This probably cuts out a portion of good notes, no doubt, but at the same time the largest chunk of loans are for consolidation and it makes a simple kind of sense that a good candidate for a consolidation loan should be looking to pay down their current credit lines, not take out new lines. (Yes, I realize things other than a credit line can register inquiries -- as I said, some good notes will get cut out with this broad sweep.) That said I'm only looking to reinvest payments, so I don't need a large volume of loans and can afford to be picky.

I fully expect these four loans to get charged off, they represent $150 in principal outstanding minus a small amount of payments received = $147.67 projected charge off. If this comes to pass my profit will be knocked down to below what my Lending Club account has brought in with less time under its belt.

Lending Club:

Account value as of writing: $5,136.79


My Lending Club account is doing great. All my notes are current. I have not had one note where a borrower has taken the money and walked away, which has happened to at least three notes on my Prosper account. If Lending Club offered an autoinvest option (based on your custom filters and with < $25k invested) I'd say there was no compelling reason to use Prosper based on my experience so far. Even so It's likely that even with a three week handicap losses will mean that my Lending Club account ends up coming out ahead of my Prosper account in earnings.


See the first update.See the second update.

Peer To Peer Lending - Month 2

This will be my second report on my foray into the world of peer to peer lending. I've had some more time to get used to Lending Club and Prosper and I've noticed a couple other interesting differences.

• Lending Club only posts payments that have passed, Prosper shows money in your account as soon as a payment is initiated -- but that money will be disappear if the payment fails!
• Sometimes money from a loan pay off can temporarily disappear -- that is the money disappears from your current note value because it has entered payoff, but since it hasn't been processed they don't display it in your cash balance -- which is the exact opposite of how they handle normal payments, talk about inconsistency

So, down to the meat of the matter, how are the accounts doing after another month? To say the least things have been eventful. As I related in my previous update I have a loan that was late. Since then I've had several others enter the 1-15 day late area on Prosper and most were subsequently brought back up to current. Sadly the original late loan is still late and has entered collections. I have $50 on this note. (I double invested on it due to user error.) I also have another loan which is in the 1-15 day late period.

Prosper:

Payments received:		$352.43
Principal paid off:	-	$248.85
Payments in excess of principal:	=	$103.57
Principal charge-offs:	-	$0.00
Gain/loss to date:	=	$103.57

Principal value of active notes:	$5,101.15
Total active notes:	196
Current:	194
Past due (1-30 days):	1
Past due (31+ days):	1
Payoff in progress:	0
Total charged-off notes:	0
Total notes paid in full:	5
Total notes sold:	0

Account value as of writing: $5,107.07

*According to lendstats the expected loss on a loan which is 1 month late -- like one of the above -- the expected loss rate is 80%.

Lending Club:

Account value as of writing: $5,061.97

See the first update.
See the third update.

Peer to Peer Lending

Prologue:


In a totally different direction from my normal posting which revolves around technical / programming questions I'm going to spend some time tracking my venture into peer to peer lending. I'm a twenty something professional and I'm attempting to find intelligent places to invest money. I've got a 401k, I have some money in a brokerage account invested in equities, and I've got some in cash in savings, etc. Next I've begun playing in the peer to peer lending space.

What Is P2P Lending?

This isn't quite so scary or random as it sounds. I'm not going around soliciting random people asking if they'd like to borrow money from me, rather I'm making use of third party services. There are two main players in the United States: Prosper and Lending Club. They've had very different histories, but both have been in the news sporadically in the last few years, especially while banks have been hesitant to lend to any but the most credit worthy individuals. (Specifically I've seen many different articles about small businesses turning to this type of funding when they need capital.)

The idea is pretty simple, find people who want to invest money and connect them with people who need to borrow. Of course there is a lot more to it than that. Due diligence is necessary. Are the borrowers who they say they are? Do they make as much money as they say they do? What kind of interest rate should they pay based on their credit history, income, and assets? These are all things companies like Lending Club and Prosper take care of for you. From an investment perspective all you need to do is decide what your risk appetite is. They both have various ranking systems (which I won't go into detail on -- but which the sites describe in depth) which range from people with excellent credit, low risk and returns, to people who have a more spotted past and who pay a much higher interest rate.

What's The Catch?

But wait, this is scary, right? What if the person stops paying? Default is always a risk, your money is not 100% guaranteed, but in an environment where you're lucky to see 3/4 of a percent APR from a 'high-yield' savings account, it takes some risk to get a return. This is not a savings account. That said, it is less scary than it sounds. While you can purchase the entirety of a loan, it is highly discouraged. Rather you can buy as little as $25 of any given loan. So if you take $2,500 to start with, you can buy $25 chunks of 100 different loans. Then if one person defaults, you've lost only the remainder of interest+principal on that note.

All this said, realize that P2P lending is largely an illiquid investment. Think of it as something more akin to a bond or a certificate of deposit. They can both be liquidated readily enough, but you'll most likely take a hit when doing so. There is a trading platform for notes (both services have a platform but they do not trade with each other, only users of each site may trade with other members). Every month you'll get a payment on a note which will include some money that goes towards the note's principal and some which goes towards interest. The principal is simply you getting your base back, the interest is your profit here. (Don't get too excited when you see that you're getting $100+ / month on your $5k investment.) You can, of course, choose to take the interest back out as profit, or you can reinvest it and allow your money to go back to work for you.

What I'm Doing:

I've decided to try out both sites and see which one I prefer. I've allocated $5,000 to each as a test investment and I intend to reinvest my profits. I may also allocate additional funds later if the downside risk is truly as minimal as the statistics make it appear. After a month and half on prosper and half a month on lending club, I can say they each have their own benefits.

Prosper:

• Allows automatic investments based on your filters.
• This is really nice as it means that as soon as you get at least $25 in payments it'll push those into new notes and maximize the compounding effect of reinvestment.
• Very broad / flexible filters
• Lending Club has filters as well, but they only seem to allow you to make very broad restrictions
• Higher interest rates
• Prosper tends to have a higher range of risk, that is they allow people with lower credit scores than Lending Club, and at most levels just seem to charge a slightly higher rate of interest than Lending Club
• Takes their money by playing the borrowing/investing spread
• They advertise 8% to a borrower, for example, and 7% to you, and then they take 1% of the resulting interest payments from the borrower
• Lending Club takes 1% of your payments directly so it is possible, if unlikely, that you could loose money, if a person takes out a loan and pays it back in full, in a month, you could end up with less principal than you started, this couldn't happen with Prosper

Lending Club:

• Volume
• Lending club flat out has more loans than Prosper, roughly twice as many loans which means there's a lot more loans out there for you to invest in
• More loans means you can get your money invested faster and it's easier to narrow down your filters without fear of getting too specific and ending up with a pool of loans that's too small
• Less risk
• Lending Club has higher credit standards than Prosper and the majority of their large pool of loans are A or B rated, the returns are lower, of course, but this can be a good thing depending on your risk appetite.

Full Disclosure:

• Prosper: First invested 12/21/2011
• Lending Club: First invested 1/9/2012
• $5,000 to each account
• ($0.17 more in LC due to their bank account verification in which they withdraw a small amount)
• In both accounts I've gone for a mix of high interest loans (I've outright excluded most AA rated loans on Prosper and A rated loans on LC to boost my return rates)

That said, it's February 4th, 2012. About a little more (and less) than a month in. Let's review!

Prosper:

Payments received:		$146.74
Principal paid off:	-	$87.42
Payments in excess of principal:	=	$59.32
Principal charge-offs:	-	$0.00
Gain/loss to date:	=	$59.32

Principal value of active notes:	$4,987.58
Total active notes:	190
Current:	188
Past due (1-30 days):	1
Past due (31+ days):	0
Payoff in progress:	1
Total charged-off notes:	0
Total notes paid in full:	0
Total notes sold:	0

Account value as of writing: $5,062.82

Lending Club:

Deposits:	$5,000.17
Investment: (includes In Funding)	( $5,000.00 )
Principal Received:	$0.00
Note Interest:	$0.00
Late Fees Received:	$0.00
Recoveries:	$0.00
Collection Fees:	$0.00
Service Charges:	( $0.00 )
Adjustments:	$0.00
Withdrawals:	( $0.00 )
Pending Withdrawals:	( $0.00 )
Referral Bonus:	$0.00

• In Funding
  17
• Issued & Current
  183
• Fully Paid
  0
• Late 16 - 30 Days
  0
• Late 31 - 120 Days
  0
• Default
  0

Account value as of writing: $5,015.54*

*Lending club counts 'accrued interest' as part of your account value, the amount of interest you are owed up to a given point of time and does not actually reflect any guaranteed earnings -- the cash value of my account is still $5000.17 as my investments are still too new to have received payments yet.

Conclusion:

I can't draw any meaningful results from my Lending Club account yet as it's obviously two or three weeks newer than my Prosper account and isn't even fully invested yet (about 8% of it is still pending). But I'm positive on the results of my Prosper account. I have one note which is <15 days late. It is possible it will go into default or that it will be brought back to current, but even if it goes into default, the gains from the rest of my loans already more than cover it. I'll check in again next month and see where things are at. So far I think it's a great alternative to leaving money in Savings. (I do not need it for an emergency fund as I have other liquid assets available elsewhere -- obviously this is not a good alternative to an emergency fund as it is not liquid at par.)

Before you start!


If you've found this looking to try out a peer to peer lending service, be aware there are some great tools at your disposal. All loan information from Prosper and Lending Club is accessible. People have used this to create some awesome pages and tools that allow you to create filters and then benchmark them against historical loans so you can see how well, or poorly, a given subset of loans performs. One such web page is http://lendstats.com/ I highly encourage anyone looking to get involved in P2P lending to play around with this page before investing. Also, remember to diversify! This can be said of any investment, but why buy one $2500 loan when you can buy a hundred $25 loans?

See the second update.See the third update.