The following post about peer-to-peer investing is by ESI from ESI Money, a blog about achieving financial independence through earning, saving and investing (ESI). It was written by an early 50s retiree who has achieved financial independence, shares what has worked for him and details how others can implement those successes in their lives. To learn more about retiring early, you can get his free e-book Three Steps to Financial Independence.
In the fall of 2015 I realized that I wasn’t long for the working world. I had reached financial independence, moved to Colorado, and started a job that was “fine” but not all that exciting. I knew retirement was just around the corner.
As I started becoming more serious about early retirement, I began to consider re-deploying some assets to create new sources of income.
One of those was peer-to-peer (P2P) lending. My hope was that it could generate at least 5% returns and be a supplement to what I was earning with my rental real estate.
This post details my experience with P2P over the past two years, provides my current investment holdings and lists future plans.
I was researching P2P best practices in October 2015 when Lending Club (see Investor Junkie’s review) made me an offer I couldn’t refuse.
There were tiered offers available based on how much I wanted to contribute. I invested $50,000 and received a $300 bonus to invest. Why not get some extra money for something I was going to do anyway?
I set up automated investing to buy in increments of $25. My research had shown that diversifying with tiny amounts in many loans was the best option when investing a large sum of money.
I picked funds that had the following expected results:
- Effective Interest Rate: 15.96%
- Expected Charge Off Rate: 6.95%
- Estimated Fees: 0.76%
- Projected Return: 8.25%
- Historical Returns Range: 6.38% – 9.44%
FYI, here is how my allocation broke down by loan type (“A” is the safest and thus lowest paying loan, “G” is the most risky and thus highest paying):
- A – 3%
- B – 5%
- C – 28%
- D – 33%
- E – 23%
- F – 7%
- G – 1%
Started Out Well
Lending Club began to invest my money, and here’s where I stood after a couple of months:
- 2,035 notes issued and current
- 17 notes in grace period
- 15 notes fully paid
- 194 notes not yet issued (waiting to be fully funded by other investors)
The projected net annualized return showed an estimate of 6.33%, which was fine with me. But the number fluctuated wildly. Sometimes I logged in and it was 12% (yes!) and sometimes it was 1% (ugh!). So I decided to wait and see how things settled out.
As 2016 marched on I made a couple additional moves:
- In late February I invested $25,000 with Prosper. I did this to diversify between companies.
- In April I invested another $25,000 with Lending Club as things were going well.
- For both Lending Club and Prosper, I had the money automatically invested as soon as it was transferred to each account.
- I kept funding the loans at $25 each, keeping the same risk breakdown as above.
Turmoil at Lending Club
Then in May 2016 things got a bit rocky at LC:
- Lending Club’s CEO resigned after the board “found problems with its lending practices and what it called the executive’s lack of disclosure surrounding a personal investment.” Yikes!
- As you might imagine, this news made me hesitant about investing more with Lending Club (and even worried about the amount I already had with them). But I decided to wait it out. I suspended automatic investing until the smoke cleared. Their investor relations department called me and asked if I had any questions, how I was feeling about the company, etc. I told them I was waiting to see what happened.
- Then they sent me an offer to invest various amounts and get a bonus. I added $25k to my loans and received a $500 bonus for it.
That said, I didn’t feel comfortable with how much money I had at Lending Club. So in September I stopped automatic investments again and started pulling cash out.
Current Results With Lending Club
I continued to pull cash out of Lending Club every week or so.
As of May 2017, the LC site shows I’m getting an adjusted net annualized return of 3.09%. These results have been depressed by two things: 1) higher levels of defaults overall and 2) money “sitting around” in the account and not being invested. The former may be related to the CEO’s issues — perhaps people thought it was OK to default, given the company was “shady.” Or perhaps Lending Club just attracts people more likely to default. The latter is caused by me stopped automatic investing.
Here are my current holdings:
- Total Notes: 6,011
- Issued & Current: 4,242
- In Grace Period: 79
- Fully Paid: 853
- Late 16 – 30 Days: 61
- Late 31 – 120 Days: 244
- Default: 17
- Charged Off: 515
As you can see, lots of notes are either in the grace period (potential trouble), late (probably trouble), or defaulted/charged off (certainly trouble).
My total balance at LC is detailed as follows:
- Account Value: $89,088.60
- Adjustment for Past-Due Notes: ($5,250.23)
- Adjusted Account Value: $83,838.38
That’s a huge hit in problem notes! I will continue pulling out money as notes are paid off. My plan is to get down to $50k, though I might go lower if the returns don’t come back. I want at least 5% back and if I can’t get it, I’m moving on. I can get 3% with dividend stocks and have much more liquidity.
Current Results With Prosper
At Prosper, I’ve let my money ride.
As of May 2017, I’m getting an adjusted net annualized return of 7.6% at Prosper. (See Investor Junkie’s review.) This is good news and bad news. It’s good in that 7.6% is a pretty good return. It’s bad because until the beginning of May, the return was showing as 13% or so. Then I received a note from Prosper saying the way they had been calculating my returns was incorrect and it was being adjusted (to 7.6%). It makes me wonder: If they can’t get those basics right, what else might be an issue there?
Here are my current holdings:
- Total Notes: 1,641
- Active Notes: 1,335
- Paid Notes: 201
- Past Due Notes: 95
- Charged Off Notes: 21
As you can see, Prosper has a much lower charge off percentage than Lending Club. Lower past due as well, though not nearly as large of a gap comparatively.
Here’s my balance at Prosper:
- Account Value: $27,463.88
- Current Notes: $25,517.92
- Late Notes: $1,945.95
For now, I’m going to stick with what I have at Prosper. I’ll watch it through the rest of this year and may add some more since the returns are much better.
If I can earn 5%, that’s fine with me. I’d be willing to go up to $50k if the returns hold solid.
So those are my experiences at Lending Club and Prosper. Anyone else having different results?