Earning 13% With Peer To Peer Lending

Regular readers will recall that I am investing up to 5% of my portfolio in Peer to Peer Lending (P2PL) through Lending Club and Prosper.  This is an update on my investments.  I’ve written before about the downsides of P2PL, including:

  • Time-consuming (the biggest downside to me)
  • Illiquid
  • Subject to serious P2PL company risk – I would probably lose a lot of money if Lending Club went out of business
  • Short track record- we probably don’t understand all the risks yet

That said, I’ve continued the investment because it shows excellent returns and low correlation with the rest of my portfolio, not to mention satisfies my urge to tinker.

My Strategies

I’ve written before about my strategies for choosing loans.  I’ve also decided to manage my loans rather strictly.  Frankly, I want a portfolio full of loans to people who pay their loans on time.  So as soon as their loan goes into the grace period, I sell the loan.  I have been unable to obtain the data to determine if this strategy is a good one or not, but one benefit of it is that I haven’t yet had any complete defaults.  I frequently sell loans at a small discount and occasionally sell loans at a large discount, however.  Lending Club allows investors to sell loans that are late, but Prosper does not.  Lending Club is also bigger and I like the interface more, so after trying out both platforms, I’ve decided to concentrate on Lending Club, despite apparently higher average returns on Prosper (for all lenders, not me.)

My Initial Taxable Prosper Account


I invested $500 with Prosper in February 2012.  The account is now worth $522.63, for an annualized return (XIRR) of 3.45% per year.  Prosper claims I have a “seasoned return” (includes only notes 10 months or older) of 1.68% and an overall return of 3.22%.  I have owned a total of 29 notes, of which 1 has been paid off, 4 have been charged-off (defaulted), 1 is less than 15 days late, and 23 are current.  The four defaults happened after 2 payments, 4 payments, and 7 payments (twice.)  The currently late loan misses payments all the time but pays extra when he does make payments.  He has only made 7 total payments but has paid off 60% of the loan.  Returns on this account also suffer from a serious cash drag, since the minimum amount for investment is $25 and the entire account is only $500.

My Initial Taxable Lending Club Account

I invested $1000 with Lending Club in November 2011.  The account is now worth $1,173.52, for an annualized return (XIRR) of 12.3% per year.  Lending Club claims this account has a return of 13.71%.  I have owned a total of 79 loans.  10 have been fully paid and 57 are current.  I have sold a total of 12, all at a loss.  I find I can sell loans in the grace period for a 10-20% loss but late loans generally sell at a 50-80% discount.  My initial strategy in this account was focused on lower risk loans, but reinvestments are invested in high risk loans just like my Roth IRA account.

My Lending Club Roth IRA

I rolled over some Roth money to Lending Club in September 2012 ($5K), October 2012 ($5K) and May 2013 ($2K.)  That account is now worth $13,043.76, for an annualized return of 15.9%.  Lending Club claims this account has a return of 22.94%.  I have owned a total of 535 loans.  21 have been fully paid, 443 are current, 32 are in-funding, and 1 is in the grace period.  I have sold off a total of 38 and 5 more are currently for sale.  A few have been sold for a large loss, many are sold in the grace period for 10-20% off, and many are sold for almost full price (grace period loans that went current while they were for sale- no mercy from me, I still sell them, just for more money.)

Grand Total

My total annualized return (XIRR) on P2PL is 13.19%.  I expect long-term returns between 8 and 12% using my current strategies.  I’m not quite up to 5% of my portfolio yet, but expect I’ll reach that in a few more months.  All returns and statistics are as of June 5, 2013 when this post was written.  If you’d like to give it a try, I suggest you start with a small account so you can gain a sense for the effort required prior to committing a large chunk of change.  Disclosure:  If you open an account at Lending Club or Prosper through the links on this page I get a small commission.

Are you involved in P2PL?  How have you done?  What do you like/hate about it?  Comment below!


Earning 13% With Peer To Peer Lending — 11 Comments

  1. I am currently at -3.46% return but according to lending club i am at 3.27% return. I guess because I had to sell some notes at a slight loss to try to get rid of the lates. Now I have just been letting the notes ride and I have had a total of 14 default. I probably sold another 10 at a small loss. Overall my strategy has been terrible and I don’t understand why lending club is saying that I am positive when I have clearly lost money. My initial investment was $5000 but after about 6 months I cashed out 4000 and left the remaining $827 dollars in. I currently have 5 more loans that are late and will probably default. Either I am extremely unlucky or these sites are going to go bankrupt and everyone should get out while the getting is good. I had over 200 loans at one time so I would think that that would be a good sample size to at least get the average return. I also think it is interesting that lending club is saying i have a positive return when the return is definitely negative. I guess with all the selling, somehow the calculation is off.

  2. The Lending Club website states that if it were to go out of business, then a backup company, Portfolio Financial Servicing Co., would service all of the issued loans.

    Does this mean that the third downside you listed is unfounded, or am I missing something?

  3. Investor Beware! I transferred several thousand dollars into a Lending Club IRA and found out too late that:

    1. You have to keep at least $9,000 in the IRA account ($10,000 after the first year) or you get charged an annual fee of $100 by the custodian;

    2. When you want to withdraw your money–say you decide to put it into a different investment–the custodian charges $150 for the privilege of closing your account, regardless of the size of the account or how long you’ve been invested (!!!);

    3. Lending Club seems to calculate return only when a loan is funded, but I’ve been at this for six weeks and I haven’t succeeded in getting all of my original funds invested. So they’re saying my return is currently 8%+, but if I count the returns against the total funds in my account, the actual return is more like 5%.

    While I understand how it makes sense from their POV to calculate returns that way, it’s very deceptive for the individual investor. If I put money in a CD tomorrow, it starts earning money immediately–it doesn’t take weeks until it “counts” as invested.

    I thought #2 was particularly egregious but have spoken with both Lending Club and the custodian and basically they couldn’t care less.

    • All you say is true. I’m surprised you didn’t look at the fees prior to opening the account. I’ve written before about the issues with Lending Club’s calculated return. That’s why I calculate my own.

  4. I started investing in Lending Club loans in a Roth IRA about 6 months ago and I’m very pleased so far. The returns look pretty attractive and the low correlation with stock indices is a huge plus.

    I recently scaled up the investment to 7.5% of my portfolio. I’d be tempted to allocate even more to Lending Club loans, but I don’t want too much to be at risk if Lending Club were to go out of business, and I don’t have a good enough feel for how the rate of loan defaults varies over the life of the loans and macroeconomic business cycle. Because of this, I won’t be adding significant new money to my Lending Club account for the foreseeable future.

    I’d be thrilled if I managed to achieve 8% returns from Lending Club (true IRR, not the calculation they do). Currently I’m doing even better than this, but I realize that loan defaults will probably increase as the loans age. Even if my eventual return only comes out to 5% annualized, that still sounds a lot better than holding cash or bonds instead.

    • Expect your returns to go down a bit from this point, but I otherwise absolutely agree with you. I’m still making 13% two years into it. Every few months I transfer a few thousand from my Vanguard Roth IRA and invest it. I’m almost to 5%, my goal. I’d be careful putting too much into this, not only because it is risky, but also because it is really illiquid. I would take serious losses liquidating my portfolio before the notes came due. The secondary market just isn’t that easy to sell notes on unless you sell them at a significant discount.

  5. I always did well with lending club. I started with them back in 2009. Just as part of my diversification plan I had up to about 10k in that account. I used to have returns in the 11-12% range but now I’m in the 8% and still slightly decreasing. Which is still fantastic but I’m holding further funding of the account until I see where I can stabilize at. I tried their automatic investing and it was so-so. A lot of loans get called for but I usually get the email saying that the loan didn’t get funded. Again, still a great investment, just a matter of seeing where it stabilizes for me.

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