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How did I do with Peer to Peer lending in 2013?

by retirebyforty on March 19, 2014 · 35 comments

in passive income

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It’s been over six months since I gave an update on our P2P lending investment at Prosper. Last August, I wrote that Peer to Peer lending is a pretty good passive investment. I finally got my automated screening dialed in and I was seeing fewer defaults. Let’s see what happened since. I was waiting for the yearend report so I can show you how we did in 2013.

Some changes over the last 6 months

Here is the account summary from August 2013

peer to peer lending 2013

This is the latest account summary from March 2014

prosper peer to peer lending retirement

It looks like the last six months didn’t go as well as the beginning of 2013. We gained about $400 and the rate of return has steadily decreased. You can also see that the cash is building up in my account. My automated screening isn’t picking up many loans lately and cash sitting around will drive down the total ROI.

I started with $1,000 in 2011 and gradually increased my investment to $10,000 in 2012.

How we did in 2013

Our account value increased from $10,850 to $11,697. That’s an increase of $847. That’s way better than our savings account, but we take on a lot more risk with peer to peer lending.

Interest received: $2,057

Charged-offs: $1,133

That’s a lot more charged-offs than last year, but I guess as long as we take in more interest, then it’s not too bad. In 2012, we had $1,072 in interest and $220 in charge-offs. I did not add any new money in 2013. I just reinvest everything.

Net charge-off recoveries received: $27.45

Collection fees paid: $13.23

It’s no surprise that we don’t see much recovery once someone defaults on their loan. I’m surprised that we see anything at all here.

Biggest problem with P2P lending

The problem now is the lack of listed loans. I just logged on and there are 19 loans listed. Last year, there were many more loans available. From what I understand, the institutional investors are getting into the peer to peer lending game and they are snapping up a lot of the loans very quickly.

The good news is Prospers.com is making some changes to level the playing field for small investors. Previously, an investor could invest up to 50% in a loan and it only took two investors to close a deal. Prospers is changing this to 10% so more investors can get in on the action. We’ll see if this works in our favor.

P2P Lending

I have been really busy lately and I haven’t paid much attention to my P2P account. Once I have a little more time, I’ll tweak my screen a bit and see if I can pick up more loans. I also heard that you can log on at a certain time (9am and 5pm) and run your screen manually. This way you’ll pick up new listings before the big investors. I’m not sure how effective this is because I don’t have time to try it right now. If I can’t reinvest the money quickly, then I might pull it out and invest it somewhere else instead. 

I still think P2P lending is a good diversification for your portfolio. I would put less than 10% of my net worth in P2P lending because I’m sure the default rate will rise when we have a downturn.

Have you tried P2P lending? How did you do in 2013?

How to start lending (if you are interested)

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.

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{ 35 comments… read them below or add one }

jane savers @ solving the money puzzle March 19, 2014 at 3:09 am

This is still not legal in Canada. I am not sure if our government is trying to protect the lenders or the borrowers.

There are those high interest cheque cashing places that do short term loans all over the place but no peer to peer lending.

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retirebyforty March 19, 2014 at 9:28 am

P2P lending isn’t available in every state. I think it’s much better than the payday loans places, but it’s pretty new so everyone is trying to figure out if it works.

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Justin @ Root of Good March 19, 2014 at 5:48 am

Looks like a pretty good run! I was tempted to get into P2P lending, but never pulled the trigger. The fact that the charge offs were completely offset by outsized interest payments means the whole risk-based pricing model for credit is working, and it’s neat to see evidence of that.

Given the time requirements to oversee the lending portfolio and the relative lack of loans available today, do you think you’ll increase your stakes in P2P lending?

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retirebyforty March 19, 2014 at 9:30 am

I don’t think I’ll increase my stakes unless the whole industry become friendlier to small investors. The lack of loans just doesn’t work for me. I don’t spend much time on the lending portfolio right now. I probably need to spend more time so I can get more loans.

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Ryan March 19, 2014 at 7:03 pm

Just curious if you have considered automation? I have been aggressively adding to my portfolio and have had no problem staying invested. I believe it is the key to peer to peer lending and keeping up with those pesky institutional investors. :)

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Roseanne March 19, 2014 at 6:54 am

I’ve just opened a P2P account with Lending Club last month, so I do not have any results to share. There hasn’t even been a first payment yet! I was wondering what kind of tax documents you receive? 1099-Int? Others? I only invested the minimum of $500 and in my mind I wrote it off, so any gains/interest received will just be reinvested. I enjoy your blog very much. Thanks!

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retirebyforty March 19, 2014 at 9:34 am

I get a consolidated 1099. There are 1099 B, INT, and OID. The 1099 B is the losses (write offs) and the 1099 OID is the interest. $500 is a bit low. You really should try to get 100 loans. You can always increase your investment a little bit at a time. Good luck!

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Ravi March 19, 2014 at 10:32 am

A general rule I heard was to try and get a minimum of 100 loans in order to be somewhat diversified. At $25 each, that’s around $2,500.

For your case, even if your average rate is 15% (annual interest earnings of $75), a single default will wipe out 1/3 of your earnings. By extension, 3 defaults will wipe out all of your interest.

It seems that once you get into the 100, 200, 300 or more total notes, then the numbers start to even out so your returns will be less volatile. I don’t know exactly what the “minimum” number of loans is to be ideally diversified, but I would imagine it’s at least 100, maybe more.

Good luck! I’d love to hear how it turns out.

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Spencer March 19, 2014 at 7:09 am

I ran in to similar issues. My cash was piling up, not enough loans were matching my criteria, and the loans that did match were snapped up in seconds when they were listed. Honestly it became too much work for what is supposed to be a “passive” investment. I called it quits last month after three years. P2P definitely has a future and I won’t be surprised to see REIT like ETFs for P2P loans available soon. Maybe then I’ll get back in. Until then, more traditional asset classes for me (US and international stocks, US bonds).

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retirebyforty March 19, 2014 at 9:35 am

Thanks for sharing. I will give it until the end of the year. Then I might just take the money out and invest it in dividend stocks.

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Ravi March 19, 2014 at 10:38 am

Consider reading through lendacademy website. He uses a few filters and has well over $100K invested among multiple p2p accounts. I do believe he manually invests some, but it’s not possible to do all your own investing with those kinds of balances.

Maybe your filters are too restrictive? I have around $10K as well and usually have anywhere between 100-500 pending (cash + pending investments awaiting verification). I also looked at my note history and on average there are several notes originating each week.

Right now, my mix is 50% A, 25% AA, and 25% B/lower. I’d like to have 50%B, 15%AA, and 35%A, but will do so passively through reinvesting and some small contributions each month (maybe $100 or so).

It can definitely be done. Manual investing will probably get you an extra 0.5%-1.0% (depending on how aggressive you are… more if you’re into the C/D/E loans); however, I too would like to see p2p as a passive/semi-passive investment. If i have to spent more than an hour a week on it, it’s no longer very passive. Maybe if I’m retired I could play with it each day, but right now that’s definitely no tpossible.

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Mr. Utopia @ Personal Finance Utopia March 19, 2014 at 8:21 am

It was on your post over 6 months ago that I commented how I would like to try P2P lending once I get some funds freed up. Half a year has passed and it’s exactly the same case for me! Question on how you treat the earnings for tax purposes: do you net the interest income with the charge-offs?

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retirebyforty March 19, 2014 at 9:36 am

You get three 1099 and you just fill out the appropriate tax forms. So yet, it’s just net, but not that straight forward.

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writing2reality March 19, 2014 at 5:20 pm

I actually believe that netting the interest income and charge-offs is the incorrect tax treatment. Realize that when you net, your interest income will no longer match the amount reported to the IRS on the 1099, which will potentially trigger a notice from the IRS.

I report my charge-offs as losses on Form 8949 (flows to Schedule D). I actually just posted about this Tuesday if you’re looking for further details.

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Sarah March 19, 2014 at 9:00 am

I have had my IRA at Lending Club for over three years. I’m making over 6% including all the charge offs. Totally happy and never run out of loans to choose from.

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retirebyforty March 19, 2014 at 9:37 am

I heard that Lending Club is doing a bit better than Prosper. They are bigger and issue more loans. I can’t open an account with Lending Club, though. My state can only invest in Prosper… Thanks for sharing!

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Gen March 19, 2014 at 11:04 am

I’m in same situation as you are. PA doesn’t allow Lending Club. However, I can buy/sell Lending Clubs loans on secondary market FolioFN. They have plenty of loans available there (at markup), but I’m pretty happy and can usually find plenty of loans that way. I’m seeing about 10% return right now. Take a look at it.

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davidmichael March 19, 2014 at 9:53 am

Joe…thanks for your update on P2P Lending with Prosper.

I hear alot about lack of loans available with Prosper but this has not been my experience. I’ve been with Prosper about four months so far, and have nearly $11,000 invested earning in the 12-13% category spread over more than 400 loans. I expect the interest to decline with defaults over time but so far I have not had any problems with getting top notch loans in the A-C category with a few in D-E. Prosper has opened up more loans in the B-E category in the past two months. The key is to be online ready to catch the new loans by 9:05 AM and 5:05 PM (M-F) or 12:05 PM weekends. And…the good loans are gone within 20 minutes or so with more leeway on the weekends. With a little effort, one can make 10% and up with Prosper over time. I’ll give you an update in a year or so. But…compare this to 0.85 % return annually with a Savings Account, 1.35 % with I-Bonds, or 3-4 % with dividend paying stocks.

This has got to be one of the most trouble free, easiest ways to make decent interest on money out there. The keys rest with diversification (over 400 loans) and the use of the proper filters besides being online at the proper time. Several good sites help out with a review of filters, such as Lending Memo, Lend Academy, etc. I am diligent in the selection of loans bypassing any with delinquencies of any kind, and require zero inquiries, minimum income of $50,000 with preference of $100,000, employment of five years plus, and borrowing history of at least 15 years. So far, no defaults.

I think that if you put in more time to update your returns on a daily basis or even weekly, your returns would be better. I do not use automatic selection and prefer to make my own selections using my own system of filters. I realize you have expressed much of the same information in your past blogs about P2P but I just wanted to update you with my own results. So far, this has been a winner.

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retirebyforty March 19, 2014 at 10:07 am

Thanks for the update. I will try to log on at 9am and see if I can pick up some new loans. It’s hard with the little guy around. I’m glad you’re having good luck with this.

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writing2reality March 19, 2014 at 5:14 pm

I agree there is a lot to like with P2P Lending, but manually investing is not for everyone. I know I enjoy being elbow deep in all things P2P Lending, but for others a more passive approach is desired. With the recent changes, the AQI should be able to help those not interested in manually investing.

Best of luck with your young account, but recognize that it is young and needs a year or two to really mature and stabilize, especially if you’ve been investing in 60-month notes. You’ve nailed the diversification concept right on the head. Accounts of your size and others here will not be big enough to emulate an index, but large enough to provide a high level of return stabilization and predictability.

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Ravi March 19, 2014 at 10:47 am

I’ve enjoyed P2P, only have 1 account with Prosper right now, so far. I consider it sort of like high yield debt in my portfolio in terms of an asset class. However, it is not inversely correlated with yield like bonds are, so it’s a little unique.

My thinking is this:

If you have $25K in cash earnings 0.75% (online banks), that’s around $188 a year in interest. If you take only $2.5K and invest in high grade notes, with a net yield of 5% (after defaults):
– Cash: $20K @ 0.75% = 150
– P2P: $5K @ 5.00% = 250
Total Interest = $400

HUGE potential by even putting a relatively small amount in P2P. Perhaps things will change once you can get CD’s yielding 3.5%+ again (highest I’ve seen lately is around 2%), but for now it’s about the best you can do. I also imagine that if CD rates go up, so will P2P borrowing rates. Of course, you can’t refinance your loans, but with so much liquidity each month it shouldn’t lag too far behind.

I too pray for a good future for P2P. It would be interesting if they could get into securitization of P2P loans. Credit card issuers, beware.

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Done by Forty March 19, 2014 at 11:10 am

For better or worse, we can’t participate in our state of AZ. I think it’s just as well, as I’m not totally on board with the idea of lending my peers money just yet. It’s not a moral thing or whatever…I just don’t like lending others money. :)

The returns sure do seem nice though.

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retirebyforty March 21, 2014 at 9:31 am

I think P2P lending is a much better option that payday loans or something like that. The rate is much more reasonable.

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Bryce @ Save and Conquer March 19, 2014 at 12:14 pm

I had a Lending Club account with around $9k in it. It made good money, even through the Great Recession when there were lots of write offs. I closed out the account, over the past 4 years, because it was a lot of bother, and my wife asked that I simplify our accounts.

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retirebyforty March 21, 2014 at 9:35 am

Yeah, I just don’t have time to deal with manual investing. I’ll try logging on at 9 am and see if I can find anything.

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Fredrik March 19, 2014 at 2:13 pm

Hi
I read that you have problem with reinvestment of the cash. Have you tried Trustbuddy?
Trustbuddy are a p2p company that reinvest all interest in new loan automaticly. I think they have just opened up for people in the us to to invest money, but people from us are not able to borrow money yet. Most of the borrowers are scandinavians and europeans.
I suggest you go to there website and read about them. They are also listed on stockholm stock exchange under the ticker TBDY.
I have both money in the stock as well in there p2p platform and it works very good.
Good luck!

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retirebyforty March 21, 2014 at 9:35 am

I haven’t tried it. I will check it out. Thanks for the tip.

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writing2reality March 19, 2014 at 5:03 pm

As a fairly big proponent of P2P Lending myself, I think the industry and offerings are still relatively plentiful for retail investors. For rate chasers, things have certainly gotten harder, but with relatively simple filters (both Peter @ Lend Academy and I have posted some), you can achieve above average returns with plenty of options to choose from, especially around the release times.

At Prosper specifically, the recent changes are extremely favorable to retail investors, and tweaking your filters to broaden you exposure will result in that idle cash getting invested. The automated quick invest isn’t the best, but with a simpler filter, should do better than leaving you with so much idle cash.

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retirebyforty March 21, 2014 at 9:36 am

Thanks for your input. My old screen was a bit restrictive. I’ll probably need to loosen it up and see if it can pick up some new loans.

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Holly@ClubThrifty March 20, 2014 at 5:43 am

I haven’t done any P2P because we aren’t allowed to originate accounts in my state. I briefly looked into the secondary market, but decided to just do something else instead.

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Jeremiah March 20, 2014 at 10:17 pm

I’m interested in your take on the risk of P2P lending.

For the last several years, these sites have had good performance, and preforming loans have been the norm. But during that time, the economy has also been improving at a pretty steady basis.

I worry that if the economy slides again, that the default rate in these loans will skyrocket, and those 8-12% returns over the last few years will be replaced with a year well in the red.

Am I missing something?

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retirebyforty March 21, 2014 at 9:39 am

If we have a big recession, then I’m sure the ROI will drop like a rock. I haven’t gone through one so I don’t know how we’ll do. I’ll be happy if we can get around 0% in that kind of environment. The stock market can drop too and we have had many negative years. Over many years, the ROI should average out to be positive…

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Carlos @ TheFrugalWeds March 21, 2014 at 7:23 pm

Thank you for sharing this. My wife and I have discussed the idea of P2P lending and it helps so much to see some tangible numbers and real world experience.

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retirebyforty March 21, 2014 at 10:05 pm

Good luck if you decide to invest!

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A Frugal Family's Journey March 25, 2014 at 2:02 pm

Our family also invests in both Lending Club and Prosper. With that said, I thought I’d offer up a suggestion to find more quality notes. Many investors do not know but most of the “good” loans are snatch up in a matter or hours (or sometimes minutes) after they are listed.

I’m not sure when Lending Club posts their notes, but Prosper upload their notes twice daily, once at 9AM and again at 5PM. On the weekends, they post notes once a day at 12Noon. If you check moments after these timeframes, you will find better quality notes. I’ve noticed that if I check even an hour or two after these timeframes, mostly higher risks loans are left.

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