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.
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%.
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.
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?
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 Club – Open 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.