Author Topic: Lending Club - Is your experiment over?  (Read 17337 times)

MarkM

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Lending Club - Is your experiment over?
« on: February 26, 2014, 07:45:53 AM »
It's been about 15 months since I opened my Lending Club account.  I think I've decided my foray into P2P lending is pretty much done; I've stopped reinvesting and will begin to pull out.  Like most there was the initial euphoria of opening an account, pouring through the notes to "pick the best ones", setting my ideal filters, and then watching the initial returns calculated by LC showing ~20% returns.  Woohoo, big money! In the back of my mind, I knew those weren't sustainable long-term returns, but it was still fun to see.

Over time, reinvesting became more of a chore and hassle.  Then the institutional money poured in and it became nearly impossible to actually fund my C - F grade notes.  That was annoying.  Availability seems to improve occasionally and the Prime feature can also save you the hassle.  After you get past a year or so, you're maybe looking at 10-12% actual returns in the riskier classes.  Long-term, hard to say.  MMM basically says as much as I think he noted an adjusted return of 11% on his portfolio after projecting in expected defaults by class.

Anyhow, the tipping point came when I did my taxes this year.  What a pain for Lending Club, particularly trying to deal with the defaulted loans.  You have to enter them in individually and there's not even clear agreement on exactly how and where to do this.  Not to mention, you receive very unfavorable tax treatment on the gains.  They're short-term holdings that get walloped with taxes.

At the end of the day, you'll achieve much better long-term post tax gains from a proven low cost index fund in something like the S&P 500.  I tried to convince myself it was a good diversification option to stocks, but for the hassle, I'd probably be better off just investing in the junk bond class at Vanguard.

Anyhow, Lending Club has clearly lost its luster on me.  For awhile, it satisfied that itch for wanting to do more active investing that I felt I had more control over.  No more.  I'm curious to hear about the experience of others and if you plan to stay with Lending Club as part of your investment strategy long-term.
« Last Edit: February 26, 2014, 07:53:08 AM by MarkM »

arebelspy

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Re: Lending Club - Is your experiment over?
« Reply #1 on: February 26, 2014, 07:49:11 AM »
It's been about 15 months since I opened my Lending Club account.  I think I've decided my foray into P2P lending is pretty much done; I've stopped reinvesting and will begin to pull out.  Like most there was the initial euphoria of opening an account, pouring through the notes to "pick the best ones", setting my ideal filters, and then watching the initial returns calculated by LC showing ~20% returns.  Woohoo, big money! In the back of my mind I knew those weren't sustainable long-term returns, but it was still fun to see.

Over time, reinvesting became more of a chore and hassle.  Then the institutional money poured in and it became nearly impossible to actually fund my C - F grade notes.  That was annoying.  Availability seems to improve occasionally and the Prime feature can also save you the hassle.  After you get past a year or so you're maybe looking at 10-12% actual returns in the riskier classes.  Long-term, hard to say.  MMM basically says as much as I think he noted an adjusted return of 11% on his portfolio after projecting in expected defaults by class.

Anyhow, the tipping point came when I did my taxes this year.  What a pain for Lending Club, particularly trying to deal with the defaulted loans.  You have to enter them in individually and there's not even clear agreement on exactly how and where to do this.  Not to mention, you receive very unfavorable tax treatment on the gains.  They're short-term holdings that get walloped with taxes.

At the end of the day, you'll achieve much better long-term post tax gains from a proven low cost index fund in something like the S&P 500.  I tried to convince myself it was a good diversification option to stocks, but for the hassle, I'd probably be better off just investing in the junk bond class at Vanguard.

Anyhow, Lending Club has clearly lost its luster on me.  For awhile, it satisfied that itch for wanting to do more active investing that I felt I had more control over.  No more.  I'm curious to hear about the experience of others and if you plan to stay with Lending Club as part of your investment strategy long-term.

That about sums it up for me.

I agree with everything you said, and I also think there's institutional risk (and even moreso in Prosper than LC) that isn't compensated for that potentially could happen in which the company has troubles, has to fold, and suddenly your returns are negative as an expensive third-party servicer is brought in.

There are much better opportunities for my money, IMO, than chasing yield on P2P notes.

Good post, I'll be linking people to this.
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senecando

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Re: Lending Club - Is your experiment over?
« Reply #2 on: February 26, 2014, 08:39:52 AM »
I haven't had any defaults, so my taxes were simple. I'll reassess after I have to deal with that a bit. I wonder now if I did the taxes on it wrong. For me, it was just a single number I fed into turbo tax.

I wish there were a way to do more of it safely. I get satisfaction from taking a tiny bit of interest away from BOFA and Chase.

That said, I'm not investing a ton of cash in there, so I don't really have the problems with finding loans that other people have had.

MustachianAccountant

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Re: Lending Club - Is your experiment over?
« Reply #3 on: February 26, 2014, 08:44:55 AM »
Anyhow, the tipping point came when I did my taxes this year.  What a pain for Lending Club, particularly trying to deal with the defaulted loans.  You have to enter them in individually and there's not even clear agreement on exactly how and where to do this.

You're technically *supposed* to enter each defaulted loan individually:
Quote
A nonbusiness bad debt is reported as a short-term capital loss on Form 8949 (PDF), Sales and Other Dispositions of Capital Assets, Part 1, line 1. Enter the name of the debtor and "bad debt statement attached" in column (a). Enter your basis in the bad debt in column (e) and enter zero in column (d). Use a separate line for each bad debt. It is subject to the capital loss limitations. A nonbusiness bad debt deduction requires a separate detailed statement attached to your return.
From here: http://www.irs.gov/taxtopics/tc453.html

But you'll notice that it also says, "A nonbusiness bad debt deduction requires a separate detailed statement attached to your return."
What I've done the past two years is just do a summary line - "Lending Club - Bad Debt - Stmt Attached" and attached the statement that you get from LC (which I have to anyways). If you efile, you do this with Form 8453.
So, I know that's not the "official" way to do it, but I haven't received a notice from the IRS either. And all the information is there for them.

As to "getting out" of LC, I am too. However, I don't want to pay the 1% selling fee, so I'm just letting it all ride, and not reinvesting anything. Like you said, it's too much of a hassle. Plus, I live in a state where we can only buy notes on the secondary market, and the folioFN platform is abysmal.

Villanelle

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Re: Lending Club - Is your experiment over?
« Reply #4 on: February 26, 2014, 09:11:10 AM »
I too am on my way out.  LC was always mostly a hobby.  I didn't put much in and treated it like I would day trading or anything else risky.  Right now, my returns are just over 10%, projected to be a 9.9 with the LC filters on (but likely will be a bit lower than that as I think their numbers are overly optimistic).  Certainly a decent return, but not worth the effort.

I have pulled some money out and will continue to do so periodically.  I'm still browsing new notes and occasionally pick on up, but Ill only do 36 notes now, and since I have some 60s, I'm not extending my LC involvement. 

I have not yet done my taxes, and I'm not looking forward to it. 

MarkM

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Re: Lending Club - Is your experiment over?
« Reply #5 on: February 26, 2014, 09:16:01 AM »
^^^ Thanks for the advice on reporting the defaulted loans.  I'll look into that.  I'm no accountant and have just been reading a lot of differing reports on various forums on the appropriate way to handle taxes for LC.  Now that LC releases a 1099-OID covering all interest, that part is easy, but the bad debt aspect is still dicey.

One thing I didn't mention in the original post is that I haven't reinvested any notes in the last 6 months.  In doing so, you really start to see the impact of loans maturing.  MMM's figures can be a bit misleading (though he's tried to provide clarification and a long-term perspective).  He keeps juicing his account with more seed money (another 10K in mid 2013) and that keeps the average age of his loans very young, which is when returns appear the best. 

Anyhow, that's not to say there isn't some money to be made in P2P, but best to understand the full picture before diving in.  Even though I'd prefer just to be done with it at this point, it's not like you can easily just sell your shares and move on like a normal stock or bond/equity fund.  To do so, I'd have to mess around with the trading platform or pay extra fees, and create extra hassles for myself.  So I'm letting mine bleed out over time and expect my posted current return of 15% to dwindle down to 8-10% when it's all said and done.  i.e. Not a bad investment, just not an ideal use of my time nor an efficient investment from a tax perspective.

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Re: Lending Club - Is your experiment over?
« Reply #6 on: February 26, 2014, 09:26:16 AM »
I've never invested with Lending Club but there's always been something that bothered me a bit about its level of success. 

I once had a financial adviser suggest I look at a particular mutual fund that had a long history of great returns and was just about to close its doors to new investors.  When I asked why they would do that, he said it was because they were a fund that had things they wanted to invest in but they didn't want to keep overextending themselves looking for something to invest in just because they had the money since this would likely lead to more bad investments than good.

I feel like with their level of investor interest, LC ought to be taking a similar route to both protect the interests of their current investors as well as maintaining their quality standards for lendee qualification.  I have never heard of them taking such steps but I have heard a ton about their supposed amazing returns even as people complain about a shortage of worthwhile notes.  Makes me leery.

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Re: Lending Club - Is your experiment over?
« Reply #7 on: February 26, 2014, 09:46:39 AM »
It is true that worthwhile notes are becomer harder to get, but generally all you have to do is wait a day or two. If you are patient, you can get higher-yielding notes. I will admit it is kind of a hobby investment.

As far as the difficulty of filing taxes and the general unfavorable tax treatment of the P2P, this entire issue can be solved by putting the money in a Lending Club IRA. I wouldn't use the unfavorable tax treatment as a reason to not invest in P2P.

One of the main reasons I invest in P2P is because I see it as a decent-yielding alternative to bonds, which have a pretty dismal outlook right now. The track record of P2P isn't yet long enough to show low correlation over the long-term to stocks, but I would guess the correlation to stocks would be lower than for junk bonds. (No empirical evidence for this though, just shooting from the hip.) Also, if you believe the stock market is high right now (http://www.mrmoneymustache.com/2011/06/09/how-to-tell-when-the-stock-market-is-on-sale/), then an asset class with low stock correlation such as P2P makes sense, especially if your asset allocation has become stock-heavy due to the huge stock gains over the past year or so.

With that said, I would prefer to own real estate that gives 10% cash on cash any day over P2P notes.

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Re: Lending Club - Is your experiment over?
« Reply #8 on: February 26, 2014, 09:49:14 AM »
Anyhow, the tipping point came when I did my taxes this year.  What a pain for Lending Club, particularly trying to deal with the defaulted loans.  You have to enter them in individually and there's not even clear agreement on exactly how and where to do this.  Not to mention, you receive very unfavorable tax treatment on the gains.  They're short-term holdings that get walloped with taxes.

I haven't been doing LC for very long (didn't earn anything in 2013), so I'm still trying to figure things out. I'm not really sure how the defaulting works but I've read you should plan to sell any notes that go beyond the grace period to minimize your loss on those. Would you treat those individually on your taxes as well?

Anyways, I tend to agree with your sentiments already. I only have $2k in it right now, but that's already proving to be a bit of a chore. I find myself setting alarms for three minutes before they post new notes (I need to get on it in a few hours...). I assume as your total note count goes up you would just start investing more in each note. I'm currently doing the minimum but once if I get to 200-300 notes I would start transitioning to $50 per note.

arebelspy makes a good point about the institutional risk. I think you'd have to really be clear on what your allocation is so that you don't overextend into a very risky investment. I'm treating my LC account as play money right now, but if it doesn't get more fun I'll just stop playing.

hoyahoyasaxa

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Re: Lending Club - Is your experiment over?
« Reply #9 on: February 26, 2014, 10:46:19 AM »
I made a good return 1.5 years in.  Have about $6k in my account, but given that almost all of my 280 notes are current, would I be better off tax-wise selling them for a markup on FolioFN or just withdrawing the $200 a month or so in interest each month?

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Re: Lending Club - Is your experiment over?
« Reply #10 on: February 26, 2014, 11:02:16 AM »
The few new loans is the main reason I have yet to commit more funds this year in my ira I have with LC.  I find LC takes WAY more of my time than all the other investments put together.  And yes the institutional risk has always been in the back of my mind.  Might consider letting it dribble out and moving funds back into index etfs in the main ira account.  I really dont see LC as a hobby and dont want to have to set an alarm to get the good contracts, if you see it as a hobby great-just not my thing.

Nords

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Re: Lending Club - Is your experiment over?
« Reply #11 on: February 27, 2014, 10:05:45 AM »
I'm curious to hear about the experience of others and if you plan to stay with Lending Club as part of your investment strategy long-term.
Peter Renton is one of the biggest long-term "retail" investors in P2P:
http://www.lendacademy.com/investing-lending-club-prosper-2014/

Last I checked he was over $200K spread among various accounts.

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Re: Lending Club - Is your experiment over?
« Reply #12 on: March 18, 2014, 05:54:14 AM »
Little late to the party but thought I'd chime in.

I've put in $10k over the past 6 months.  One of the common comments here is the lack of loans but I can report that for the last 2-4 weeks there have been tons of notes to choose from.

1-2 months ago there might have been 100-200 total notes in the system and as of this minute there are 987 and that's before the first posting of the day.  The other day there were actually 32 that matched my filter after a note drop.  I usually have been adding money in $3k increments (after my initial $1k) and I got my whole batch invested within 2 weeks.

I've certainly been lucky overall. As of yet, no defaults and a 16.11% return. The statistics show that between months 4 & 12 are the largest default times so I'm sure that they will come but I'd be happy with 8-10%. Yes, there are risks involved with them as a company and/or with what would happen in an economic downturn but as of right now it's an interesting process with decent returns and the money I have in is just a small part of my portfolio.

Villanelle

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Re: Lending Club - Is your experiment over?
« Reply #13 on: March 18, 2014, 07:06:09 AM »
As I said above, I am continuing to reinvest some of my returns, but only in 36 month notes since I don't want to extend my timeline for being out.  (I have some 60 months notes that are only ~12 months in.)

But it does seem to me that in the last week or two, there have started to be more notes.  For a while, I was lucky if I got even one note. now, as long as I log in when they new notes drop, I am able to get a few, and I can take a moment to review the info, rather than know that if I delay, the note will be fulfilled before I can complete my investment.  So it does seem like they are doing something to improve the situation, which doesn't surprise me given how widespread the complaints about availability are.  It doesn't change my mind about phasing out, but it might mean that I pull out a little less while I wait for everything to expire, and reinvest a little more. 

DaveSch

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Re: Lending Club - Is your experiment over?
« Reply #14 on: March 18, 2014, 09:51:47 AM »
Hi all,
I started lending on LC in Feb 2013, with 3 year only loans, mostly B and C grade loans and a few A and D loans too. After a while, I found the "best loans" were not there any longer. I then found out that the institutional investors were grabbing large portions of the loans within seconds of them being issued.

I set my alarms for the 09:00, 13:00, 17:00 and 21:00 ET feeding times. I could get some good loans but I had only seconds to decide. At the end of October 13, I stopped buying notes (I had over 300 then) and started pulling money out as it became available. But I still looked at loans every day but wouldn't pull the trigger.

Then I heard that the big boys were being throttled in the amount of a loan they could purchase. I noticed that the number of loans were higher and better. Last week I started purchasing notes again. I won't add more money, but I will just reinvest what becomes available. Later, I might add more funds to the pot.

I have one charged off, one default and 3 <120 day late with Lending Club. The taxes weren't too difficult to figure out with the help of Turbo Tax. I don't buy and sell notes on the secondary markets.

I am excited about this investment, but only if I believe I'm being treated fairly. So unless something changes, I am back in!

Dave

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Re: Lending Club - Is your experiment over?
« Reply #15 on: March 18, 2014, 12:00:23 PM »
Interesting to see the comments and opinions. I still have the low-hanging fruit of debt repayment and then tax advantaged accounts to fill, but the evolution of P2P lending has been interesting to follow.

FuckRx

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Re: Lending Club - Is your experiment over?
« Reply #16 on: March 18, 2014, 11:21:19 PM »
i've been investing since 2008 maybe 2009 and I've invested a total of maybe 13k and plenty of defaulted funds but still at 8.13%... that isn't too bad is it?

arebelspy

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Re: Lending Club - Is your experiment over?
« Reply #17 on: March 19, 2014, 06:07:33 AM »
i've been investing since 2008 maybe 2009 and I've invested a total of maybe 13k and plenty of defaulted funds but still at 8.13%... that isn't too bad is it?

That depends on you.

I'd be pretty unhappy with that return from 2008-09 to now.

Had you been DCAing into the S&P, you'd have a lot more money, depending on exactly when you started investing it.  The S&P has doubled in that timeframe.

I personally didn't do much equity investing in that time though, as I got into real estate, and I have had amazing real estate returns from stuff picked up from 2008-14, many multiples of 8.13%.

So yeah, opportunity cost-wise, I'd be very unhappy with that.

But if it's what you were targeting, you might think it's not too bad.  It depends on your goals, AA, etc.
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FuckRx

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Re: Lending Club - Is your experiment over?
« Reply #18 on: March 19, 2014, 02:18:13 PM »

shit i thought 8.13% is what i've made every year since i've had the account. if that's the total amount then that kind of sucks balls.

arebelspy

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Re: Lending Club - Is your experiment over?
« Reply #19 on: March 19, 2014, 02:24:59 PM »

shit i thought 8.13% is what i've made every year since i've had the account. if that's the total amount then that kind of sucks balls.

I'm sure they're reporting it as an annualized return, yes.  Double check, but I'd be shocked if it was a "total" amount.
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Re: Lending Club - Is your experiment over?
« Reply #20 on: March 20, 2014, 05:24:38 AM »
I've been out for a while and collecting down my account.  I may stop and throw a little back in at $5k, but not right now.

The returns early were overstated in my opinion because it was taking LC longer to realize defaults/chargeoffs than banks are allowed.  It was around 120 days verses 90.   This was overstating my return as I was growing my portfolio.  Now that I'm collecting it down, my total annualized return was 6.75% over the past three years.

Combine that with the lack of true liquidity, I'm thinking a blue chip dividend stock is a better choice.  I could have invested the money in Chevron earning a little over 3% and get a nice bump in the dividend each year, better tax treatment of said dividend, and have a more liquid asset.

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Re: Lending Club - Is your experiment over?
« Reply #21 on: April 11, 2014, 08:05:15 AM »
Yup. The big number is annualized.

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Re: Lending Club - Is your experiment over?
« Reply #24 on: September 26, 2014, 04:54:26 PM »
google bypasses paywalls:  http://lmgtfy.com/?q=peer+to+peer+lending+comes+of+age+as+wall+street+muscles+in

The basic summary is that hedge funds have begun buying up P2P loans on an industrial scale.  They think they are better than your average Joe Consumer at risk diversification, so they buy a whole bundle of loans and securitize them into a single product that they then resell at a markup, touting their value-added price stability due to owing all of the P2P sector instead of any individual loans.
« Last Edit: September 26, 2014, 04:58:44 PM by sol »

chasesfish

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Re: Lending Club - Is your experiment over?
« Reply #25 on: September 26, 2014, 05:27:36 PM »
It drives up the supply of money and Lending Club has to reduce standards and lower rates to get more money in.

I've been hovering at 7.25% - 7.75% for the last year.  I had been withdrawing money, decided to try something and plug a nice chunk in, still sitting around the same returns.  Its not the 10-12% I saw in 2011-2012.

So, at that return and lack of liquidity of the investment, what would you do?  I don't need the money and have around 1000 notes.