One of my passive income streams is peer to peer lending, which can be described exactly as it sounds. You can lend money to borrowers directly and receive interest payments, but you also take on the risk. This type of investment is attractive because of the high interest rate and minimal work; however, it is not really passive either. There is a lot to learn about peer to peer lending and I found that I need to do more work here.
When I first started out I knew that diversification was key. If you are investing $1,000, you don’t want to put it all on one loan. You need to spread it out your investment to as many loans as you can because the fact is, borrowers will default. After that, I really didn’t know what I was doing. I gravitated toward home improvement loans because I figured homeowners are more likely to pay back what they borrowed. I also looked at the borrower’s income, revolving credit balance, Debt/income ratio, and other stats. However, it wasn’t an exact science and I didn’t have a good set of filters to screen out bad loans.
It took me a while to find and figure out how to use the Prosper statistics page. Here, I can review the historical data and come up with a filter that should give me fewer defaults. If I look at the loans that originated between September 2011 and February 2013, I can get an idea of how the loans performed.
My inclination to lend to home improvement loans was right and I should have less delinquency than if I just invested broadly in all types of loans. Up until now, I invested in 509 loans total.
Out of those 509 loans: 55 are paid in full, 14 defaulted, and 24 loans are in various stages of lateness.
In 2012, I slowly increased my peer to peer lending investment at Prosper from $1,000 to $10,000. Things were going well in the beginning and my seasoned return was quite good at around 12% for a while. Over the last couple of months, I had a rash of defaults and my ROI dropped to around 8%. Now, I realize I need to do more research to reduce my defaults. However, I don’t have a lot of time to crunch all the numbers and run them through the statistics page.So, it looks like I’m doing better than if I had just invested in any loan. The Past due loans are quite high though and it could drive up the default soon. Also, my seasoned ROI is lower than expected. Seasoned return is the annualized return of loans older than 10 months.
8% seasoned ROI is less than the advertised 9.69% average seasoned return, so I need to make some changes.
A little help from Lend Academy
Luckily, Peter @ LendAcademy.com had done quite a lot of research already. He has been lending for a while now and he put a lot of effort into analyzing the statistic. See How he is investing in P2P in 2013. I picked up some tips from Lend Academy and I’m starting to implement them in 2013.
Let’s run them through the filter at Prosper Stat.
Of course after running all these filters, the number of loans originated drop from 20,067 to 3,549. From what I understand, you want the sample size to be pretty big so the statistic is meaningful. If we keep adding filters, the number of loans will keep reducing. I read somewhere that the number of loans should be over 1,000 for the statistics to mean something. Also as we increase the number of filters, it become more and more difficult to find a new loan that fits the criteria. If the filters are too restrictive, your money will be invested very slowly. It’s not good to have idle cash in your P2P account since it is not generating any income.
My loans still have some hope yet. My All note ROI is still doing OK at 11.60%. For now, I am implementing these new filters as I reinvest the payments. My original goal was to generate $100 per month from P2P lending and I think we’ll be pretty close in 2013.
Original Investment: $10,000
Current value of the account: $10,941.19
This year I am also planning to open an account at Lending Club. Lending Club is bigger and they originate more loans than Prosper so I want to compare and contrast it with Prosper. I’ll also keep reading Lend Academy because Peter is writing great articles to help investors like me who doesn’t have time to dive into the statistic.
Investing in Peer to Peer lending requires some efforts too. It’s like investing in the stock market. You get better as you keep doing it. Have you tried peer to peer lending? How is your ROI?
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.
Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.
Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.