By Josh Originally drafted July 11, 2016, Published March 4, 2018
A couple years ago, there was a scandal at leading Peer-to-Peer (P2P) lending platform Lending Club(Referral link, if you read this post and still think it might be worth it for your investment portfolio). I won’t go into any more details here, but this news was the final straw for me as I had already been contemplating my exit from P2P loans.
My P2P experiment began in April 2015 with a desire to invest some money that is not directly correlated with the Stock Market. For those of you who are unaware, P2P loans are made by groups of investors, each contributing $25-50 each, and the borrower pays back the loan with interest. Investors reduce their risk by investing across dozens or hundreds of loans, and can decide to take the profits as they come in, or reinvest the proceeds into new loans, similar to Dividend Reinvestment plans. The idea is that your money grows more money; rinse and repeat.
So that’s why I invested with Lending Club, and I have had 366 loans in the past 3 years. Unfortunately, I have already had 70 loans “charged off” which means the borrower defaulted on the loan and Lending Club was unable to collect any payments for a period of about 4 months, so they and their “advanced collectors” deemed the loan unrecoverable. I also have 4 loans that are 31-120 days late, so many of those will also default soon.
Some of my individual loans have been paid back early, in their entirety. 132 of those loans, to be exact. Most are still making steady monthly payments and progressing as expected towards $0 balance. But I have been disappointed and pissed off by a few that have taken out a new loan (up to $40,000 is now allowed) and summarily filed for Chapter 13 Bankruptcy. Others have taken out new loans to purchase expensive cars, and never made a single payment or only attempted to make a few before giving up.
P2P loans are unsecured (no collateral provided), so it is possible to lose your entire investment ($25 at a time). Lending Club advertises that no investor with at least 100 loans (minimum $2500 invested) has had a negative return, so the bad is outweighed by the good.
In the personal finance blogosphere, it is easy to get wrapped up in the idea that everyone is working to make progress on their debt goals, investment goals, and retire financially free. But the real world is still full of people making a lot of money mistakes and/or downright awful people looking to take advantage of the opportunity for an unsecured loan that they can decide to never pay back. I have made loans to people who make more money in a year than I make in 10 years, and they defaulted. I guess lifestyle inflation can really catch up to people, even those making a half-million dollars a year.
Not factoring in adjustments for loans that are late or on their way to default, I’ve earned about 1.52% on an annualized basis, which is not great (barely above my risk-free 1.5% interest in my savings account at Discover). But if I click the toggle button, it shows an adjustment down to 0.92% currently. Lending Club has data on historical losses from each category, such as loans in the Grace Period are likely to experience loss 28% of the time, versus late 31-120 days are likely to experience loss 74% of the time.
Due to these factors, I have begun withdrawing the principal and interest being paid on a weekly basis. I would rather work on paying a little extra on my mortgage than to continue investing in P2P loans with a chance of losing my entire investment into any individual loan.