Author Topic: Peer to Peer Lending (Investors)  (Read 5064 times)

frugalchic

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Peer to Peer Lending (Investors)
« on: February 04, 2016, 04:14:35 PM »
Has anyone one ever invested in peer to peer lending as an investor (not a borrower)? If so, what are some of the cons and risks? Benefits?

aFrugalFather

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Re: Peer to Peer Lending (Investors)
« Reply #1 on: February 04, 2016, 04:25:10 PM »
radical personal finance podcast had at least one good overview of this area if you are interested.

The main risk is default risk because most companies don't seem to be doing a good job at going after people that default so you are just hoping they repay based on their desire to maintain their credit.  Also, as more people get into the space it seems that it is become more and more difficult to get enough quality loans.  It is a difficult balance for them to have enough investors and enough quality people to lend to. 

mdharmandm

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Re: Peer to Peer Lending (Investors)
« Reply #2 on: February 04, 2016, 05:04:06 PM »
I have since mid 2014 and thus far it has been pretty good. I have about 10% of my overall portfolio in Lending Club.
Pros:
-Not directly tied to the market (yes, I'm sure the market does play an indirect role in the default rates)
-So far I have had 10.47% returns (LC says I should expect 6-9%). I am only about half way through any of the first 36 month loans I have invested in (and 1/4 the way through 60 month loans), so they might go down as the loans mature.

Cons:
-I believe the interest received is taxed as income so probably higher than other other investments
-Lending club has decreased the overall data they provide for each loan so it can be hard to decide which loans to invest in.
-As Frugal Father stated, there is a cash drag while you try to find loans to invest in and you wait for them to issue the loans. I started using Lending Robot which has decreased the time for finding the loans, but it does cost.

I recommend checking out http://www.lendingmemo.com/. He has a lot of info on the site to help you make a decision. It has been positive for me and I probably will increase my involvement to about 15% (maybe even up to 20%) of my portfolio. 

AM43

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Re: Peer to Peer Lending (Investors)
« Reply #3 on: February 05, 2016, 12:47:16 PM »
I have been investing since 2010. Mostly positive experience.
Average net returns 9%-10%, adjusted net return 8%-9%
Invested in 800 notes, about 5%-6% in default.
All and all I would recommend to have 5%-10% of portfolio in peer to peer lending depending on your risk tolerance.

TheAnonOne

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Re: Peer to Peer Lending (Investors)
« Reply #4 on: February 05, 2016, 01:16:03 PM »
I have about $40,000 in lending club. Making about 9.5% over the last 3ish years.

This return number is going down slowly, I am guessing it will stop around 7-8% and hold.(Once I get through a full 5 years of a loan cycle)

MustacheAndaHalf

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Re: Peer to Peer Lending (Investors)
« Reply #5 on: February 05, 2016, 02:45:44 PM »
I bought notes between 2011-2014, but I've been winding down my Lending Club holdings.  I saw default rates that didn't match statistics, which is unfortunately what you expect - that you can't predict default rates.  But the situation got worse when big investment firms were allowed to buy up large portions of Lending Club's inventory - leaving individuals to pick up whatever they left.

I used online tools built off Lending Club's data to fine tune my approach.  Back then, high income was an excellent filter for default rate.  I'm sure you'll find other factors involving credit inquiries, loan purpose, etc.  Keep in mind default rates can change and leave you with greater losses than you expect.  I would categorize lending club as a high yield bond fund with 1.00% expense ratio (they charge your principal and interest 1%).

You're also stuck with liquidity problems, which is why I'm taking years to wind down a few hundred notes.  Lending Club notes could only be sold on PortfolioFn as of a year ago (probably still true).  And the loans for sale on PortfolioFn were much lower quality (higher default risk) than the average Lending Club loan of the same category.

If you go with Lending Club, consider it a very high risk loan program without liquidity that charges 1.00% per year.


svndezafrohman

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Re: Peer to Peer Lending (Investors)
« Reply #6 on: February 05, 2016, 04:29:22 PM »
Peer to peer lending has too many CONS to be a good investment vehicle:

1. Illiquid Assets: Need to wait for life of Loan
2. High Costs: Charge when collecting on defaulted loans, etc.
3. High Taxes
4. Money not working 24/7: waiting period for loans to be fully funded

Conclusion: Do not do P2P lending. Investing in stocks, ie index funds are much better.

PS. If people default on loans = you lose money
       IF stock market goes down = it will eventually come back up = you do not lose money in the long term


popcornflying

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Re: Peer to Peer Lending (Investors)
« Reply #7 on: February 05, 2016, 06:26:28 PM »
I have about 30k of my investment portfolio in a LendingClub taxable account, and have been investing with them for around 4 years.

PROS:
Truly diversified return that's independent of what the markets are doing.  My LC account made 8% last year, and that performance beat stocks and bonds
Once you have a lot of notes, the account value rises steadily and you hardly notice the defaults  (not volatile like stocks)
Easy to invest  - I log in from my phone, select filters and buy new notes, it takes 2 minutes a few times a week

CONS:
Illiquidity - you can choose between lending 3-5 year notes, so basically you're not guaranteed your return unless you wait 3-5 years
Tax filing is a PITA
Unknown what the borrowers are really doing with the money, they could be funding terrorism
If the economy worsens, default frequency could go up leading to decreased returns   (or at least that's my expectation anyway)
LendingClub could go out of business... investment account is probably worth $0 if that happens


RWD

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Re: Peer to Peer Lending (Investors)
« Reply #8 on: February 05, 2016, 06:59:27 PM »
I invested ~$7k in 2007 in Prosper. I lost $2k of that. Prosper sucks at collections... But I'm getting a few hundred back from a class action lawsuit, so there's that...

stockjohn

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Re: Peer to Peer Lending (Investors)
« Reply #9 on: February 10, 2016, 02:31:54 PM »
I'd be interested in hearing more reports from P2P lending investors as well. I have very small amounts invested at both Prosper and Lending Club. Around $2,000 for each and I contribute an additional $25 per month to each as well. (I also played with Mosaic solar for a bit but the returns were way low and there were never enough investments and that had the same liquidity issues as P2P lending). I guess I've been taking the ultra-cautious approach due to the fact that these platforms are relatively new and it seems like a million things could still go wrong. 

I have never achieved the 10%-12% returns that others report.  My returns on both platforms have consistently bounced between 6.5% and 8.5%. This is probably due the fact that my portfolios are so small and when I started I went for the higher rated and lower yielding notes - mostly A, B and C. Over the past year I've moved towards higher yielding notes (B, C, D, and E) but it has yet to show up in my returns.

Echoing popcornflying's concerns, I am uncertain what will happen if Lending Club gets into trouble but I am also working under the assumption that my investment will be lost. The notes are not actual promissory notes. You can't transfer them off the platform and you cant independently demand payment or otherwise pursue collection against the borrower. So if Lending Club disappears you have nothing. I would guess this issue is addressed somewhere in the fine print but I haven't looked. If anyone knows the answer I'd love to know.

Right now I basically view P2P lending as a source of mild entertainment. I am reluctant to put more significant amounts in given the liquidity and risk issues. In my mind, the tax and website issues are secondary to these more fundamental issues.

doggyfizzle

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Re: Peer to Peer Lending (Investors)
« Reply #10 on: February 10, 2016, 04:43:05 PM »
Why not just invest in Bank Preferred Shares instead (depending on risk tolerance)?  The interest in most cases is QDI, and there are literally tons of preferreds that aren't yet callable trading near par with yields between 6-9% (again depending on risk tolerance - Wells Fargo, BAC, JPM, Ally, etc).  So you get "lending" exposure while also enjoying liquidity that comes with the stock being NYSE-listed.  Not to mention you have the "Too Big To Fail" backstop, so if you get another fantasic market correction (eq 2008, 2011 for BAC preferreds) you can with near certainty use any below-par trading period to ramp into a position that will show both capital gains and QDI.

mdharmandm

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Re: Peer to Peer Lending (Investors)
« Reply #11 on: February 11, 2016, 02:26:07 AM »
While a lot of people have been saying that the assets are illiquid; I would say that there is cash flow. Yes, you can't cash it out like you can with a stock (unless you sell on the secondary market-I have not actually tried to do this and don't know how long the process normally takes). I currently have about 6k in Lending Club, and last month I received $248 (principle+ interest-fees). I reinvest it all back into new loans, but if you needed the cash you could remove these funds. It all really depends your timeline for needing to get the cash.

money_bunny

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Re: Peer to Peer Lending (Investors)
« Reply #12 on: February 11, 2016, 05:34:14 AM »


Tax filing is a PITA


Can you elaborate on this? I moved over 1K to test the waters but I have not pulled the trigger yet.

RWD

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Re: Peer to Peer Lending (Investors)
« Reply #13 on: February 11, 2016, 08:24:24 AM »


Tax filing is a PITA


Can you elaborate on this? I moved over 1K to test the waters but I have not pulled the trigger yet.

Every individual loan generates its own tax form. For me with $7k of mostly $50 loans that became very tedious. Also, since you round to the nearest dollar for taxes sometimes you'll have gains that round down to zero... Presumably you can combine all of these into one form, but Prosper's reporting hasn't made that easy and I worry that what I file might not match what was provided to the IRS.

RWD

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Re: Peer to Peer Lending (Investors)
« Reply #14 on: February 12, 2016, 05:00:40 PM »


Tax filing is a PITA


Can you elaborate on this? I moved over 1K to test the waters but I have not pulled the trigger yet.

Every individual loan generates its own tax form. For me with $7k of mostly $50 loans that became very tedious. Also, since you round to the nearest dollar for taxes sometimes you'll have gains that round down to zero... Presumably you can combine all of these into one form, but Prosper's reporting hasn't made that easy and I worry that what I file might not match what was provided to the IRS.

In addition, I got this e-mail from Prosper today... I guess it could happen with just about any investment, but could be annoying to someone trying to file their taxes early:
Quote
Your 2015 tax documents have been updated. Changes to tax forms are fairly common. Prosper will report the updated information to the IRS in April.

Your updated 1099-B's are now available on the Statements section of your account. Please download these updated documents and use them for tax filing purposes. If you have downloaded your 1099-B form prior to receiving this email, please do not use the prior version of your 1099-B for tax filing purposes.

MustacheAndaHalf

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Re: Peer to Peer Lending (Investors)
« Reply #15 on: February 12, 2016, 11:41:51 PM »
Yes, you can't cash it out like you can with a stock (unless you sell on the secondary market-I have not actually tried to do this and don't know how long the process normally takes).
Notes return both principal and interest, so a 3-year loan returns 33% of your money in the first year.  There's still a liquidity issue, and the secondary market doesn't help in my opinion.  The secondary market is usually defaulting notes.

As an experiment a few years back I bought lots of notes about 85-95% off.  Supposedly there could be value to this using Lending Club's data.  In practice, nearly all notes defaulted.  So I'd avoid looking for deals on FolioFn - and you should also expect to lose money when you sell there.  The expectation is that unwanted notes are being dumped for a reason.

There's also a flaw in Lending Club's performance calculation, so it might pay to run your own numbers.  When my 90% discounted notes defaulted, Lending Club acted like I paid the full $25 per note, and lost $25 when I had only spent $2.  Very strange, but my performance dropped like a rock in their numbers... 5%... 2%... -3%.  Lending Club treated my $2 loss as a $25 loss, which is incorrect.  I lost what I paid.  It makes me wonder what else they got wrong in their performance numbers - did the person who sold a $25 note for $2 see $0 loss?  While I saw the full $25 loss?

So my second bit of advice with Lending Club is run your own numbers.  For example, with very small payments and a 1% fee, a little rounding up can increase their fee.  If you receive 0.80 / month, Lending Club takes out 0.01 - but that's 1/80th, not 1/100th.  Their fee in that case was 1.2% owing to rounding.  So as with any investment, check your own numbers rather than trust Lending Club.

TheAnonOne

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Re: Peer to Peer Lending (Investors)
« Reply #16 on: February 16, 2016, 10:39:34 AM »
Yes, you can't cash it out like you can with a stock (unless you sell on the secondary market-I have not actually tried to do this and don't know how long the process normally takes).
Notes return both principal and interest, so a 3-year loan returns 33% of your money in the first year.  There's still a liquidity issue, and the secondary market doesn't help in my opinion.  The secondary market is usually defaulting notes.

As an experiment a few years back I bought lots of notes about 85-95% off.  Supposedly there could be value to this using Lending Club's data.  In practice, nearly all notes defaulted.  So I'd avoid looking for deals on FolioFn - and you should also expect to lose money when you sell there.  The expectation is that unwanted notes are being dumped for a reason.

There's also a flaw in Lending Club's performance calculation, so it might pay to run your own numbers.  When my 90% discounted notes defaulted, Lending Club acted like I paid the full $25 per note, and lost $25 when I had only spent $2.  Very strange, but my performance dropped like a rock in their numbers... 5%... 2%... -3%.  Lending Club treated my $2 loss as a $25 loss, which is incorrect.  I lost what I paid.  It makes me wonder what else they got wrong in their performance numbers - did the person who sold a $25 note for $2 see $0 loss?  While I saw the full $25 loss?

So my second bit of advice with Lending Club is run your own numbers.  For example, with very small payments and a 1% fee, a little rounding up can increase their fee.  If you receive 0.80 / month, Lending Club takes out 0.01 - but that's 1/80th, not 1/100th.  Their fee in that case was 1.2% owing to rounding.  So as with any investment, check your own numbers rather than trust Lending Club.

For these reasons I have not put any more in. Not that I have a small amount @$42,500. I put in about 38k.... So I have "Made" money.

Though I am curious as to how I am going to get this money 'out' when needed. I can't just get $42.5k out of the system tomorrow, nor could I liquidate it on the 2ndary market and expect $42.5k to be the final number. It could actually go UP on the 2ndary market, or more likely, down.

Waiting out the 5 years is probably the best way, and the majority of the money would be out within the first 1-2 years.