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Peer to Peer Lending Is A Pretty Good Passive Investment

by retirebyforty on August 16, 2013 · 49 comments

in investing, passive income, Uncategorized

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The last time I wrote about peer to peer investing was 6 months ago and I complained that it wasn’t passive enough. As the interest payments and loan payoffs rolled in, I had to take the time to reinvest the income. It didn’t take a lot of time per week, but it still was an interruption to my routine. I also outlined a new strategy to increase my annualized return. Let’s see how we did over the past six months.

If you want to start peer to peer lending, stick around until the end of this article. You can check if it’s available in your state and get started.

Increased ROI

First of all, our annualized return increased from 8.19% to 9.45% on the seasoned loans. Seasoned loans are over 10 months old. However, the ROI from all the notes decreased from 11.6% to 10.19%.

Prosper.com p2p peer to peer lending ROI

I tend to focus more on the seasoned return, so I’m quite happy about this. When you look at all loans, the ROI is inflated a bit because the borrowers haven’t had a chance to default yet. The seasoned return is a better indicator.

Automated Investment

Another good news is that P2P lending has been a lot less work since I set up automated investment. Previously, I manually looked over each loan and figured out which one I liked. This took time and the result was a little ad hoc. I didn’t have a good system and I was wasting a lot of time.

Thankfully, Peter at Lend Academy freely shared his system and results. I leveraged his loan filters and we can now see some improvement. See how Peter is investing in P2P in 2013 and for more info on his filter.

Here is my current filter on Prosper.com

  • Loan rating: B, C, D, E, HR – The lower grade loans will default more, but they also have higher interest rate.
  • Now delinquent: 0 – This shows how many defaults the borrower has.
  • Inquiries in last 6m: 0 – This shows the credit inquiries. Less is better.
  • Debt/income ratio: 0 to 30% – Lower is better
  • Open credit lines: 5 to 50
  • Total credit lines: 10 to 50
  • Revolving credit balance: $0 to $12,000
  • Bankcard utilization: 0 to 60%

Currently, I’m investing $25 per loan and it is difficult to reinvest the income. I have almost $300 in cash and it is slowly building up in my account. To increase the ROI, I probably need to increase the amount per loan and also remove the B rating from my filter. I’ll try this for 6 months and see how it goes.

Anyway, the automated investment really reduces the time I spent selecting the loans. Now I log on about once every two weeks for a quick overview of the account. The ROI also improved so that’s great.

How is your account doing?

How much did I make?

I started with $2,500 about 2 years ago and increased the investment to $10,000 over time. The account is worth $11,342 now so that’s not too bad.

How many loans defaulted?

We have 39 defaults, 497 active loans, and 100 paid off loans. The default rate is about 6%. (39/636) That’s a total of $972.38 charged off.

How do you feel about defaults?

I don’t really care at this point as long as the ROI is positive. I’d probably be more worked up if I had a negative ROI.

Are you using the income from P2P lending?

I’m just letting it ride at this time. We don’t really need to withdraw at this point. It will also make it easier to track how much money I made overall if I don’t keep transferring money out.

Would you invest more?

At this point, I’m pretty happy with $10,000. Initially, I wanted to increase the investment to $20,000, but then I’d have a really hard time lending it out. It seems like the number of borrowers at Prosper.com have decreased quite a bit this year. Also, I found out that I couldn’t invest with Lending Club so I’ll stick with $10,000 for now.

Peer to peer lending is a relatively new concept so I wouldn’t invest more than 5% of your net worth in it. Who knows what will happen when the economy crashes next time?

Performance Detail

prosper.com peer to peer lending p2p performance

How to start lending

The first thing you should know about P2P lending is that you will see defaults. To protect yourself from defaults, you should have at least 100 loans. Don’t invest a large amount of money in one loan because if it defaults, then your ROI is shot. The minimum amount you can lend is $25 so 100 loans means $2,500. It’s probably fine to start at $500 and increase it to $2,500 over time.

Not everyone can lend

The bad news is not everyone can participate in peer to peer lending. You have to be at least 18 years old and have a valid social security number.

Prosper - Open an investing account at Prosper.com

Prosper is currently available to investors in the following states: Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, West Virginia, Wisconsin and Wyoming.

Lending ClubOpen an investing account at Lending Club

Lending Club is currently available to investors in the following states: CA, CO, CT, DE, FL, GA, HI, ID, IL, KY, LA, ME, MN, MO, MS, MT, NH, NV, NY, RI, SD, UT, VA, WA, WI, WV, or WY.

It’s a bit strange that there some of us can only invest with Prosper or Lending Club.

Good luck!

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{ 49 comments… read them below or add one }

[email protected] August 16, 2013 at 3:54 am

It seems if you had $20,000 invested wouldn’t it get much harder to find quality loans. At $25-50 that’s a lot of loans. In the two years you have invested it seems that it has trailed the S&P 500.
If the economy does go south you can see defaults rise. Aren’t the borrowers people who couldn’t get the best rates or loans from banks? There are reasons why bankers are rich.

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retirebyforty August 16, 2013 at 8:41 am

It trailed the SP500, but it’s much better than bonds. I’m sure the defaults would rise if the economy goes south, but hopefully it will still say positive. We’ll see.

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Holly@ClubThrifty August 16, 2013 at 5:19 am

I am a little jealous because peer-to-peer lending isn’t available in Indiana. I can only buy/sell notes on their secondary market. I did put money in an account at one point but I took it out after realizing that I didn’t want to buy on the secondary market =(

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retirebyforty August 16, 2013 at 8:49 am

Hey, you gave me an idea. What if I buy a bunch of loans and just put them on the secondary market. That will give investor more choices and it might be an easy way to make a quick 1-3%… Seems like a lot of work though unless it can be automated.

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Robert Gotchall August 20, 2013 at 9:53 pm

Yeah being in Texas I have to buy on the aftermarket. Sometimes I give up a few percent to buy them. Many have made 1 payment, so it seems that is exactly what some ppl are doing: leveraging the fact that they are in a lucky state, getting a bunch of notes and marking them up for saps like me.

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retirebyforty August 20, 2013 at 11:57 pm

Wow, a few percent? That’s pretty good margin. I’ll have to try this out when I have a bit more time. It’s probably not that easy though. If you just buy a bunch of notes without good screening, then you’ll probably be stuck with the ones nobody want to buy…

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Robert Gotchall August 21, 2013 at 9:28 pm

No excuse for doing bad screening. buy notes you don’t mind keeping, and put all or half on the auction block marked up a percent or 2. If they sell you can thank me for your new instant income stream. As a frustrated buyer trying to spend $2000 on new notes I start to not care if a 18% note will cost me enough to lower the YTM to 17%. In the end the risk I am taking for that note is not so different, so I buy it. (The non-marked up good notes are snapped up fast). So yeah, join the throngs who are making money doing this.

Mr. Utopia @ Personal Finance Utopia August 16, 2013 at 6:32 am

When I get a bit of money freed up, I’m going to have to look into P2P lending some more. I’m assuming it’s an illiquid investment since you don’t get your money returned to you until the notes are fully paid back, right? Meaning, it’s not like a stock or mutual fund where you can sell at anytime? Generally how long are the loan terms?

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retirebyforty August 16, 2013 at 8:50 am

You can sell your notes on the secondary market, but I don’t know how it works. I haven’t sold anything.
The loans are 1, 3, or 5 years term.

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Robert Gotchall August 21, 2013 at 9:37 pm

Ok, I think I need to write a guest post or something. I have been obsessed with Lending Club for 3 years. I have had about 20-30k in it for that time and honestly, I wonder why I bother with anything else. I have detailed data over that time and I can say I am doing almost 9% like clockwork. Like most people I keep waiting for the “yeah but” but there just isn’t one. Its 9%, end of story. Your balance goes up every day. Plus since it works like a mortgage, most of the money you are getting is actually principal back. The downside is you have to reinvest that principal. The goodside is that it provides built-in liquidity. For instance, in my account (about 18k) in July I had $214 in interest, and $717 in principal paid back (and $34 in charge-offs). So if I have kind of a major purchase coming up I just lay back on reinvesting and take out cash if I need to. It also plenty liquid on the aftermarket. You have to pay a 1% sellers fee. And yes, bad notes won’t sell without a mark down, but those are a small minority by definition. 12 month trailing interest of 9.5%.

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retirebyforty August 21, 2013 at 11:45 pm

Sure, I would love a guest post on peer to peer lending. 9% is pretty good.
I like it too, but I’m just afraid what will happen when we have another economic downturn. The default rate will go way up right?
Thanks for the info about the secondary market. I’ll keep that in mind when I have more time.

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John S @ Frugal Rules August 16, 2013 at 6:45 am

I didn’t realize it wasn’t available in our State. I’ve always been intrigued by this, but have never done enough research to know if it was for us or not. Like you said though, I’d not put much more than 5% in.

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retirebyforty August 16, 2013 at 8:51 am

That’s too bad. I don’t know they get license to work in each state.

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No Waste August 16, 2013 at 7:09 am

That’s terrific, I guess by acting as a bank and diversifying your risk across a large basket of notes, you’re in fact acting like a real bank would, and it seems to be working.

I’m been very tempted, and this may get me to pull the trigger.

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retirebyforty August 16, 2013 at 8:52 am

You should try it for a year and see if it works for you. Lend academy is a very good resource.

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MonicaOnMoney August 16, 2013 at 7:51 am

I’ve never read much into peer to peer lending, but it sounds like a viable option. I’d have to research it more but thanks for the info.

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retirebyforty August 16, 2013 at 8:52 am

You’re welcome! Let me know if I can answer any question.

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UrbanSaltLake August 16, 2013 at 8:29 am

Thanks for sharing. The first time I heard about P2P lending is through your blog. I did my research and it sounds very intriguing. It’s worth testing it out. I am setting up an account with Prospers today. It’s available here…yay!

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retirebyforty August 16, 2013 at 8:52 am

Good luck! Let me know if I can answer any question.

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davidmichael August 16, 2013 at 9:00 am

Congatulations Joe on trying a type of money making transaction investing a little at a time. Frankly, I never heard of P2P lending previously. Not sure I would ever use it, but it’s an interesting way of adding to diversification. Thanks for sharing your results.

By the way, we did have some exta monies available this past month from a house sale. At age 76, we wanted a safe place to store it and save up for a condo sometime in the future after we retire from full time RVing. So after searching the net for risk free investments, we placed $20,000 in I-Bonds. As you know the fixed interest rate today is zero. And the variable rate is 1.18%. Low, but better than nearly all of the CDs I could find. I suspect that the rate in November will jump to nearly 2% (based on increased interest rates over the past few months.) We placed the rest in American Express Hi-Yield Savings at 0.85%. Not great, but we have immediate access to the money if we need it. Our initial IBond purchases over 12 years ago are giving us a risk free 5-6%. I expect the vaue of bonds to go down and interest rates to increase over the next two years. The main thing…no risk, no worry…as long as we spend beneath our income.

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retirebyforty August 16, 2013 at 9:03 am

I’m waiting until October to see the new rate too. If it’s up a bit, I’ll add some money, but otherwise I’ll probably wait.
It would be great to see 5-6% again. I’ll load up next time the rate is that high.

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davidmichael May 7, 2014 at 9:54 am

Update for 5/7/14

Well…I’m hooked on P2P Lending. I am using Prosper and have about $12,000 invested so far aiming for over $25,000. In general I have a return of about 12% in the early stages (first six months) with no defaults but one on the way. Investing mainly A-C with a few in D and E when available to fit my filters. I like this, as compared to Dividend Paying Stocks which seems a lot easier but further out on the time scale because when we reach the $25,000 level we will use the monthly interest towards living expenses. That’s in two years. I figure this will be about $300 a month. For us that means ages 80-89. We’ll use the Dividend Paying stocks for ages 90-99. Yeah! I know…crazy. Right? But I keep meeting more and more people living active lives to 100. The new age wave is upon us!

By the way…the only problem I experience with P2P so far is that I am updating my available funds about three times a week at 9AM and 5PM so I can reinvest the funds immediately. Since I am semiretired, it’s no big deal for me. I prefer to do it myself rather than the API route.

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Kurt @ Money Counselor August 16, 2013 at 9:02 am

Joe, I tried Prosper, but as usual my timing was exquisitely bad–I invested $10k in 2007, just before the meltdown and Great Recession. I experienced lots of defaults and ended up losing ~$500. But maybe that’s not too bad given the horrible economic conditions at the time. I’m thinking I’ll try again, though I hate to jinx the economy again! :-)

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retirebyforty August 16, 2013 at 9:06 am

I think they revamped the screening process so the ROI should be better now. I’m sure the default rate will go way up if the economy tanked. Actually, 5% loss isn’t too bad. The stock market dropped much more than that, right?

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Done by Forty August 16, 2013 at 10:08 am

I’m in Arizona so it seems I’m out of the loop, for now. But I’m really intrigued by the concept. Mom & Dad Money put out a good article recently on the subject…I worry that defaults might rise significantly during a recession. I think the double digit returns are great, but as with any good return, there’s some risk of big losses, too.

Thank you for sharing your results — I always appreciate seeing the granular detail of a case study.

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retirebyforty August 16, 2013 at 2:07 pm

I heard there are a lot of corporate money in P2P lending now. Some loans just get snapped up pretty quickly by big investors.

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Pretired Nick August 16, 2013 at 10:10 am

I think I’m going to try it, but with a very limited amount of money until I learn what I’m doing. I like it but I feel like there are a lot of unknowns out there.

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retirebyforty August 16, 2013 at 2:08 pm

Lend academy is really good. Yeah, try a little bit to get your feet wet. Good luck!

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Lisa E. @ Lisa Vs. The Loans August 16, 2013 at 11:13 am

Whoa, great progress! I’d love to try my hand at P2P lending, but right now I need to focus on getting rid of my debt.

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retirebyforty August 16, 2013 at 2:08 pm

Definitely. Debt comes first.

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Sustainable Living August 16, 2013 at 11:39 am

glad that you’re doing so well joe – I’m still getting slaughtered with a less than 2% ROI, and right now I havent really figured out what to do with it. Im currently satsified with the way what I do have is going, so Im going to let that ride. I’ve had 4 defaults off of a $1000 investement, so it’s stung quite a bit as almost 10% of my loans have gone bad.
Perhaps I need to change my screening settings.
Im still reinvesting, but I’ve piled into lower return notes because i’m spooked.

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retirebyforty August 19, 2013 at 6:53 am

Sorry to hear that. What is your screening? Have you looked at Lend academy?
I don’t know… Hope your ROI improves in the future.

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Andrew@LivingRichCheaply August 16, 2013 at 11:57 am

I have a very small amount in lending club…it’s fun, I manually pick the loans since it’s a small amount. I had a couple of defaults in the beginning, but after setting different filters…I’ve done decently well. Does Prosper offer 60 month loans? One think about P2P is that I don’t really know how easy it is to liquidate…never tried selling on the secondary market.

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retirebyforty August 16, 2013 at 2:09 pm

Prosper has 1, 3, and 5 years term. I haven’t tried selling on the secondary market either. A small amount is tough because it can easily turn negative with a few defaults. What’s your ROI?

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Andrew@LivingRichCheaply August 19, 2013 at 12:49 pm

6.27% but I have very little money in it and I had a couple of defaults in the beginning. I was investing in loans of people who were financing weddings, businesses, etc…now I only finance those who are consolidating debt. Not sure why, but they seem less likely to default.

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The Warrior August 16, 2013 at 12:12 pm

I’ve been toying with the idea of P2P lending. So far, I’ve read primarily good things when well diversified. Definitely something this Warrior Family will be testing once we get our savings and cc debt taken care of.

Bookmarking this page as you provided some great info to common questions. With P2P lending being all new to me it helps having a well detailed explanation of approach.

The Warrior
NetWorthWarrior.com

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retirebyforty August 16, 2013 at 2:10 pm

Good luck! Let me know if you have any questions. Yeah, get rid of the debt first. :)

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cj August 16, 2013 at 12:16 pm

Texas sucks (except Austin). Not surprised at all they do not allow P2P. It might help someone who is not a CEO. Thanks for a great article though!

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Daisy @ Prairie Eco Thrifter August 17, 2013 at 9:02 am

I tried to look into peer to peer awhile ago but they didn’t have it in Canada. I’m not sure why, I just don’t think it’s allowed. It may be different now – I’m intrigued.

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retirebyforty August 18, 2013 at 2:30 pm

The government is probably a little more restrictive.

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Jay August 18, 2013 at 1:43 pm

I’ve always wanted to borrow money from Prosper, but the limits seem to be at around $30k, which is too low to get a rental property with. But, I’ve heard that there are real estate investors using P2P lending instead of traditional mortgages.

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retirebyforty August 18, 2013 at 2:31 pm

The limit at Prosper is $35k. That’s not really enough to get a rental property. Maybe in certain part of the country?

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Jay August 19, 2013 at 2:25 pm

I’ve checked it out a little bit and the only viable option I found is Detroit, where suburban SFH rentals in nicer areas run around the $35k range. (Some are less than $30k, but you’d have to buy multiples to get that discount)

To go anywhere else, you’d have to pony up some of your own money. But, still, with a “mortgage” from Propsper, you’d have a free-and-clear property in 5 years (I think that’s the longest-term loan they give.)

If you can pull it off, it doesn’t sound like a bad solution, especially if that 5-year timeframe coincides with your expected retirement date.

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CF August 18, 2013 at 9:51 pm

We’ve been interested in trying it out, but it’s not available in Canada, as far as I know. Maybe some day!

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Little House August 19, 2013 at 7:07 am

I think this is something we’d be interested in sometime soon. We’ve looked into it, but haven’t committed to anything. I think I like the idea of lending small amounts to multiple loans so if any of them default, it’s not a huge amount.

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Brett @ wstreetstocks August 19, 2013 at 11:34 pm

I will look into doing this. 10% returns are very nice, but as you point out it is risky.

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Jerry Culpepper December 1, 2013 at 4:05 am

How would you invest $10,000 in each of the 2 ,Prosper and Lending Club?

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retirebyforty December 1, 2013 at 1:24 pm

I’d just put $5,000 in each so I can compare how they do. Good luck.

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Ryan December 11, 2013 at 9:44 am

I like the prospect of peer to peer loans and microloans, but the default rate would make me nervous. Additionally, I think it would almost have to be money I’m playing around with, rather than seriously investing, because I would like my chances better by doing a traditional valuation of a company and purchasing stock at a discount to intrinsic value (alhtough that is getting harder and harder to find these days). Unfortunately, it’s a moot point, as neither option is available in my state. But thanks for opening my eyes to it, and showing me that even with defaults, you can still have a positive ROI!

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