As I mentioned in an earlier post, peer-to-peer lending (P2P) is part of my financial freedom/retirement plan because it allows me to diversify my investments while earning 6%+ on my money.
But I didn’t know much about P2P. Late last year I decided I needed to change that.
FYI, I actually wanted to try P2P many years ago but I lived in a state that didn’t allow you to lend money via P2P.
Now I live in a state that allows it so the only thing stopping me was myself.
I was contemplating getting started when I was made an offer I couldn’t refuse…
An Offer Made the Difference
I was close to opening a P2P account and investing when I got an offer from Lending Club. The details were as follows:
To be eligible for this bonus offer, you must use the link provided in this email and follow the instructions provided. Offer valid for funds that are 1) transferred to your Lending Club account on or before December 31, 2015, and 2) invested through the Lending Club platform on or before February 15, 2016.
Bonuses available: Transfer and invest $5,000 to $9,999 and get a $50 bonus to invest; transfer and invest $10,000 to $24,999 and get a $75 bonus to invest; transfer and invest $25,000 to $49,999 and get a $100 bonus to invest; transfer and invest $50,000 to $99,999 and get a $300 bonus to invest; transfer and invest $100,000 or more and get a $700 bonus to invest. The amount of any bonus will be determined based on both the amount of new funds transferred from external accounts and the amount of those funds invested on or before February 15, 2016.
Bonuses can be used solely for investing through the Lending Club platform and will not be available for withdrawal or transfer from the account to which they are credited. The bonus, if earned, will be awarded as an account credit within 30 days after February 15, 2016. Bonuses and account credits may be subject to U.S. withholding taxes and any taxes related to the bonus or credit are your responsibility.
“Invested” means that the funds have been used to purchase Notes issued through the Lending Club platform. Transactions on the Folio Investing Note Trading Platform do not count toward the “invested” amount for purposes of determining eligibility or calculating bonus amounts for this bonus offer.
So with the chance to lock in a bonus and add to my returns, I decided this was the time to make the move into P2P.
My Homework and Plans
I had already been doing some research on P2P by reading articles on Lend Academy. There are many good ones there, but the ones I like best are:
- P2P Lending Investor Resources
- How to Get Started with Peer to Peer Lending
- P2P Lending Best Practices 2016 – An Investor’s Guide (This one is more recent, but a good one that I just had to include here)
With that research and the offer above, I decided to:
- Open an account with Lending Club
- Invest $50,000 in late November (I added $5k more in mid-December and then $20k more just last week)
- Set the money up for automated investing (I have no work to do here except set the parameters and let them invest the money)
- Invest in increments of $25
I picked funds that had the following expected results:
- Effective Interest Rate: 15.96%
- Expected Charge Off Rate: 6.95%
- Estimated Fees: 0.76%
- Projected Return: 8.25%
- Historical Returns Range: 6.38% – 9.44%
FYI, here is how my allocation broke down by loan type (“A” is the safest and thus lowest paying loan, “G” is the most risky and thus highest paying):
- A – 3%
- B – 5%
- C – 28%
- D – 33%
- E – 23%
- F – 7%
- G – 1%
Status So Far
As of this writing, here’s where I stand:
- 2,192 notes issued and current
- 12 notes in grace period
- 27 notes fully paid
- 860 notes not yet issued (waiting to be fully funded by other investors, this is such a large number because of the $20k recent investment)
The projected net annualized return it’s showing currently is 9.69% which is great! But this number fluctuates wildly. Sometimes I log in and it’s 12% (yes!) and sometimes I log in and it’s 1% (ugh!). So I really won’t know what I’m getting until more time passes.
The process has been simple, easy, and required little time. If I get anywhere near 9.69% net back that will be much higher than I’d expect. I’d be satisfied with 8% and could live with 6%. Whatever I do get, they will add the $300 bonus to it, so that’s nice.
So that’s my initial experience with P2P. Any thoughts or advice from those of you out there with a bit more experience?
[Update: I’m now done with Lending Club (Prosper too) and am withdrawing my money from them both.]
Noah says
I opened my Lending Club account in 2011 with $500 and have slowly been adding money to it over the years. My adjusted return (after factoring in charge offs) is 9.90% so I believe it has been worth the risk. I haven’t made the move to switch this to a Roth IRA account because I’m only 34 and not fully confident on locking it in for another 30 years. I would welcome thoughts on that topic though.
I too use the automated investing method and only bother with higher risk loans. I was including A and B for a long time and was doing about 6-8%. I then switched to only investing in D-G loans and it is now averaging 9.9%. As long as you can ignore the charge off rate and focus on the percent, I think it’s worth the extra risk. LendStats website is a good one to play with and will help you fine tune your selection filters. Unfortunately mine is rather narrow so assigning out even $500 seems to take forever.
I also enjoy the idea of taking a little business away from banks and allowing me to me make higher returns than a CD. It is a win for everyone involved and I’m excited to see the future of P2P.
ESI says
Good to hear that your return has been that good for that long. If I do that well, I’ll be very happy.
I wonder how people invest large sums using the outside tools. They may get an extra % out of the time, but it seems like doing so would take HOURS.
Cole says
Is this in an Ira? If not , have you started your taxes? Do you have concerns? Some other bloggers mention that once defaults exceed 3k a year your have to have Capitol gains to use those losses or carry them forward. Is that a concern for you? I guess I’m just curious hat your tax strategy is, because I would expect you will have 12k or more or interest and easily more then 4k of capitol losses a year once this portfolio starts to age. (I made these number up based on what I recall seeing on other blogs, I could be wrong.
ESI says
Cole —
It’s not part of an IRA.
My plan with P2P is to help provide income (along with my real estate investments) for retirement, which will more than likely come way before I have access to my retirement funds in our IRAs.
As for the tax issues, there shouldn’t be any last year as the money wasn’t invested fast enough. As for 2016, we shall see. That’s part of the learning! 🙂
John B says
I began looking into P2P @ 2011 or so. I was not even aware of it during the Great Recession but from what i heard it did not do well at all during those strenuous times (lots of defaults i suppose). While i was researching it, as it was doing better the balance shifted from being in favor of the lender to the borrower as a lot of institutions starting lending in this asset class which made it extremely time consuming to lend according to your desires. I just stated fading away as it seemed like it was no longer consumer to consumer but institution to consumer.
It’s interesting to re-visit the asset class but other than for diversification i can’t really make a case for P2P in my portfolio as my returns average 12-15% annually both in up and down cycles.
Coopersmith says
I am not sure if it is me or if I am tired after a busy week but the websites of Lending Club and Prosper really don’t offer the information of minimum to invest, minimum required for automatic investing or ???.
Am I missing something? I looked at the articles and think $10k for automatic invest with Lending club but where is it on there website?
ESI says
I couldn’t find anything either. Perhaps there is no minimum?
Noah says
$25 minimum is what I’m seeing everywhere on Google.
Coopersmith says
I found out the minimum for automated investing and it is $2500
http://kb.lendingclub.com/investor/articles/Investor/Who-is-eligible-for-PRIME/?l=en_US&c=Investor%3AAutomated_Investing&fs=Search&pn=1
Coopersmith says
And the minimum to start an account is currently $25
Hrant says
Hi All,
I’ve been investing with LC since 2008.
Also started w/50$ Lending Club “gave” me:) …now am involved in tens of thousands of notes thru direct picking, investing thru NSR Invest, as well as other funds.
My returns are net, net, net 7%+, and 9%+ on two of my portfolios, along with multiple funds ranging between 6-13%+.
To all not invested thru multiple cycles, and maturation of notes, you will have trailing charge offs..reality check.
Overall am VERY happy to have discovered this asset class as an investment, and know someone who was with this since 2006!, And yes, w/positive, albeit low, but positive returns thru 08, 09, with NO negative years!
So, the gains are wonderful…What are you all getting in the banks these days again? How about the stock market? Did I ask the bond market? 🙂
This is steady…don’t get carried away, and only diversify w/ $25. notes till you build at least a 20G portfolio, then you may want to do $50 loans, and so on.
As far as taxes…yes, you will pay a lot of taxes once you get the amount of returns to be substantial, yet, currently, am happy to do so, as long as I am also making the money. Even at half the returns (because of taxes paid) where is anyone getting returns?
As my CPA states, it’s ok to pay taxes, as long as you’re making money:)
I am working on a vehicle to explore deferring taxes thru an entity, requires huge capital commitments, and will keep all abreast of, but not happening any time soon:(
By the way, John B states 12-15% returns…if over a longer term, where are you achieving these types of returns? I’d be very interested to read about your ideas.
Thank you all for reading my comment.
By the way, if you really want to learn a LOT about this space, all MUST attend the LendIt 2016 Expo in SF in April 11-12. (see http://www.LendIt.com/usa). Do not think twice. Do it now as you will learn more in those two days, meet more serious players in that space, and jump start your future by meeting anyone, and everyone that really knows about marketplace lending.
I will also be attending as an investor, and it was one of the best investment experiences I had at last year’s event in NYC…Looking forward to it in April, also seeing all of you there as well…only if you want to make money:)
Make sure to say hello, and or get in touch with Peter Renton, Jason Jones, and Bo Brustkern to sign up for NSR Invest, as I have. (NSRinvest.com)
Also, all should subscribe to Lendacademy.com for FREE:) education, as well as e mail newsletters, and podcasts, which I always look forward to, for free.
Please feel free to reach out to me there as well, and we’ll catch up a bit.
By the way, thank you ESI for your transparency in your writings. Do really enjoy every issue of it.
ESI says
THANK YOU for your comment!! Great wisdom and experience!
I’d love to attend LendIt at some point in time but can’t this year. Perhaps you’d be willing to write a summary for us all?
I do hope to connect with Peter at some point and perhaps interview him for a post here. Stay tuned.
Aaron M says
That sounds great. I would love to see a write up from Lendit and also an interview with Peter.
Danny C says
Hello – Found your site today through Financial Samurai and gave it a read, like what I’ve seen so far.
I got into P2P lending at the very end of 2014 and have built up portfolios with both Lending Club and Prosper. Figured I’d give both a try and see which one I liked better. I felt the website and interface at Lending Club was easier to use so they got more money up front. I maintain very similar filters for both platforms now after initially being more aggressive with LC.
P2P lending makes up 7.9% of my net worth with a current target of 10%.
Lending Club
$10.5k invested with 8.1% return so far. It has been coming down from ~11% as the notes season and I start to see some defaults. I mostly stick with debt refinancing but have recently included a few other loan types to increase loan availability. With 2016-2017 looking to potentially be a rocky year, I changed my target %’s and put a little more in the A’s and B’s to be a little more conservative.
I gave my portfolio a review via NSR before commenting and made a few tweaks to my filters based on some analysis. Hopefully returns will creep higher over the next 12 months. LC is showing historical returns for my loan grade allocation of 5.13% – 7.52% so we’ll see how I do against that as well.
Current – 469
Grace Period – 4
Fully Paid – 46
Late 16-30 – 1
Late 31-120 – 7
Charged Off – 5
I’m expecting this to level off a little more after the dust settles from my larger initial deposits.
Prosper
$2.5k invested with 5.91% for seasoned and 5.96% for all notes. I went with very safe filters initially while I focused more time and energy on my LC portfolio. Now that I’m a bit more experienced with the platforms and the P2P lending space I’ll put more focus into increasing the funds and returns here.
Current – 118
Late 1-30 – 1
Fully Paid – 8
ESI says
Welcome!
I LOVE FS and have read it for years. Sam always thinks of some of the most interesting spins on money.
I just added some money to Prosper (I’ll post an update in a month or two) so we’re on the same track.
I’m starting aggressive too. We’ll see how that goes.
Isn’t it time consuming to filter all those possible loans? Maybe there’s a simple way to do it that I just don’t understand.
Danny says
I run both platforms on auto invest with preset filters I created so it doesn’t take up much of my time. It was more work upfront to create the filters and give them a periodic review but I’m happy with the results so far. If I could get to 10% returns that would be awesome. Occasionally, if I’m on the platform and have the cash in my account I’ll hand pick a few loans myself.
Danny says
*edit/follow up*
you mentioned you were using auto invest as well. How much time are you spending filtering and selecting loans? I feel like the auto invest based on your preset criteria is pretty simple so curious what you mean when you say it’s time consuming and thinking there’s an easier way.
ESI says
I simply picked the pre-developed category they had that best fit my philosophy.
Is there a way to develop your own parameters and set it to fund those sorts of loans? If so, how is that done and what parameters do you use?
Danny says
Ah, yep, there is a way to create your own parameters. Easiest way to get there would be go to the Automated Invested page and then down at the bottom below the Grade allocation, Investment Per Note, and Note term radio buttons is a button that says “Special Instructions”. Click that to expand the section and it’ll give you a quick rundown of the instructions to create and save your own filters (they’re simple). Once you’ve got a saved filter you can link it to your Auto Invest. Let me know if that isn’t enough to get you started and I can put together a a complete doc with screenshots and email it over to you. Also feel free to email me directly with any questions and I’d be happy to answer.
My criteria
– Home owners or mortgage only
– Credit Card Refi, Consolidate Debt, Home Improvement Project, & Car Financing
– All States except FL, NV, & CA
– Monthly income > $5,500 (this was a recent change up from $5k/mo. After looking at NSR I was getting a very poor ROI in that 5-5500 range)
– 2 yrs minimum employment
– 0 Delinquencies in the last 2 yrs
– Credit Score 685+ (Another recent change due to the NSR review. I was getting some 650 – 684 loans that had a lousy ROI)
– 0 inquiries in the last 6 months
– 60 months since last delinquency (I realize now this is overlaps with my other delinquency filter, hooray for the forced review)
– Max 35% Debt-to-Income ratio
– 6-30 open credit lines
Anyone else care to share their filters?
ESI – Perhaps a follow up post or at least a comment on the reasons for selecting your preset filter criteria once you define them?
ESI says
Thanks! Appreciate the info.
Here’s an alternative I’ve found:
http://www.lendacademy.com/investing-lending-club-prosper-2014/
Not sure how I’d determine my own criteria…I will need to ponder it a bit.
Noah says
Use lendstats or do what I did and steal a few from people getting results I liked 🙂
The preset filters are too lax and you can do better with your own research.
John B says
CFPB opens door to complaints against P2P lenders
The Consumer Financial Protection Bureau has started accepting consumer complaints about online peer-to-peer lenders.
Here’s the link: http://www.mpamag.com/news/compliance/cfpb-opens-door-to-complaints-against-p2p-lenders-29189.aspx
Mayank Singhal says
Great Blog ! I am also new to peer to peer lending. As I am an Indian I have invested my money in Rupaiya Exchange, which is also based on the concept of Lending Club for the loan tenure of 3 years and 18% Interest Rate which is giving a very high return on my invested money. It seems like investing your money on such peer to peer lending companies is a good option and It is also improvising the traditional way of providing loans.
Ben E says
ESI –
Do you plan on posting a follow up article on how this turned out for you? In other words, what sort of ROI are you obtaining? What filters are you using. Very curious about this experiment.
ESI says
Yes!
I will give it 6 months or so from when I started, so expect an update in June or July.
Dividendsdownunder says
P2P is a really cool idea and something that we may be interested in the future. The one drawback is the risk of another recession, there would probably be a lot of defaults and that could destroy a lot of the previous returns made. Are you concerned about that?
Tristan