It’s been a while since I gave an update on my P2P lending account at Prosper. That’s because I’m not as enamored with it anymore. I started investing in P2P lending with Prosper.com in 2011 with $1,000. Eventually, I increased my investment to $10,000 and it’s been a generally positive experience over the last 5 years. In fact, P2P lending performed much better than my stock market investments in 2015. Here are my annualized returns over the last 5 years.
P2P Lending Performance
|Purchase Period||Total Invested*||Average Note Age*||Annualized Returns*||Lender Promotion
Usually the ROI decreases as the notes get older due to defaults. The 2014 and 2015 ROI will drop a little over time. The S&P 500 index gained just 1.4% in 2015 so P2P was much better than stock during that period. In previous years, the stock market performed better than the P2P lending account, though. So why am I not excited with P2P lending anymore?
- Idle cash – I set up automatic investing at Prosper and invest whenever a loan meets my criteria. My ROI improved noticeably since I started doing this in 2013. However, the automated screening isn’t able to invest all the money in my account. By the beginning of 2015, I had about $3,000 sitting idle in my account. Institution investors have moved into P2P lending and they are picking up a lot of the good notes. From what I understand, you can screen the loans manually at 9 am and you will be able to pick up more loans that way. I can’t do this because I have to drop RB40Jr off at school. So the 9.69% ROI in 2015 is inflated because I had a bunch of idle cash sitting around. Prosper calculates the ROI based on money invested.
- Borrower income verification – I feel like P2P lending companies are not doing enough to screen the borrowers. While they check the FICO scores of all borrowers, they don’t verify every borrower’s income. This does not seem to affect the default rate, though. The default rate of the income verified loans are higher than those that weren’t verified.
- Illiquid – I know you can sell notes on the secondary market, but I haven’t tried it yet. For me, the investments are not very liquid. If I need to withdraw some money, it would take a while to get it out of Prosper.
- Consumer recession would raise default rate – The last few years were pretty good years for the US consumers. The unemployment rate has been decreasing and most borrowers can pay back their loans. However, credit card default rates always increase when people lose their jobs. I’m afraid the default rate would go through the roof upon a recession.
- Uncollateralized loan – The P2P loans are unsecure. This is basically the same as credit card loans. You can borrow money based on just your credit history. P2P lenders are taking on the same risk as the banks, but we don’t get the same ROI. Credit card rates are usually higher than P2P lending rate. I feel P2P lenders should get better ROI for the level of risk we’re taking.
These are the reasons why I’m drawing down on my P2P lending account. I will check in periodically and if I see idle money, I’ll withdraw it to my checking account. I want to build my cash position this year and invest when the stock market is down. I also want to try investing more at Kickfurther.
Kickfurther is similar to P2P lending, but investors lend to small businesses instead of individual borrowers. The big difference here is the money will be used to finance inventory. The investors own the inventory and we can vote to liquidate the inventory if the business can’t sell it. Usually, I try to pick loans that already have buyers lined up. You can find out more and receive $5 to start through this link. Currently, I only have $600 invested and haven’t made much money yet. I’ll invest more when I have more cash available.
Kickfurther has some of the same problems as P2P lending. Investors have to manually go through each loan and figure out which business to lend to. It’s pretty easy to lend at this time because it’s not widely known yet. If institution lenders get in on this, then I expect it will be much more difficult to find good loans. Also, it is not possible to diversify with Kickfurther because there are only a small number of borrowers. At least it is more interesting to go through business notes than consumer notes. Some products are pretty cool.
My biggest problem with P2P lending is the idle cash. Actually, there are services that can invest money for you now. There are robo-investing and fund management services which could be very helpful. I will give these companies a chance to go through a recession before I let them manage my P2P lending account. Who knows what the return is going to look like when defaults become more common.
In any case, I wouldn’t put more than 2% of our net worth into P2P lending. It is still relatively new and I would like to see how they do over the next 5 years or so. I still trust the stock market more even with the recent volatility. Particularly, I don’t think stock market losses are real until we sell. If we can hold on through the tough years, our investments will recover. With P2P lending, once a borrower defaults, that investment is gone. I’m not sure if that’s the right way to look at it.
Here are the links to Prosper and Lending Club if you’re interested in P2P lending.
Prosper – Open an investing account at Prosper.com
Lending Club – Open an investing account at Lending Club
Have you tried P2P lending? Are you happy with how your investment is doing?
More from my Prosper account
|Cash used to purchase notes:||–||$31,091.60|
|Principal paid off:||–||$18,729.25|
|Payments in excess of principal:||=||$6,143.20|
|Gain/loss to date:||=||$3,004.81|
Image by davebarger