By Josh July 25, 2018
Peer-to-Peer lending sites have been around for quite a while now, so you’ve probably heard of them or even considered checking them out. If you’re not aware of Prosper or Lending Club, or the concept of Peer-to-Peer (P2P) lending sites, WomenWhoMoney has a great write-up on the pros and cons of P2P.
I initially read about P2P lending from Financial Samurai and Budgets Are Sexy, and I took the bait in April 2015. My main goal was to diversify my investments so that not everything I have would be correlated to the stock market. I took a look at both Prosper and Lending Club, but it seemed like Lending Club was the larger of the two sites and offered more loans for investors such as myself.
Every loan offered on the site would be for amounts up to $35,000 (later increased to $40,000) and individual investors would make a claim on $25 or $50 of each loan, to spread the risk of every loan across multiple investors. In that same vein, investors will spread their investable cash across dozens or hundreds of loans to spread their exposure to the risk of any individual investor defaulting.
In all, I invested in 366 loans, and all of my loans were $25 initial value. I also bought a few loans on the secondary market to test out that feature and see how those loans would perform. My total contributions were about $7,500 of my own cash, and I initially had the account set up to automatically reinvest the proceeds of my monthly payments into new loans.
After a few months, I decided to start screening loans by myself instead of using the Lending Club preset conditions. My personal parameters included annual salary of at least $50,000 and credit score of at least 750. I also tried to fund loans that were for “Green Loans” but they were often very rare on the platform back in 2015 and early 2016 when I was funding new loans.
My initial results were pretty good. Excellent, even. In my first six months of investing on Lending Club, my returns were nearly 10.9%. But then little cracks started appearing. After a few months, I had several loans that were beginning to become delinquent. Sometimes the borrower would catch up and pay a minor late fee, but a few slipped to 31-120 days late. Around the 1-year mark, I had my first two loan defaults. My returns slipped to 8%, but I had more winners than losers, which was the whole purpose behind investing in a few hundred loans.
At some point, Lending Club made major news for a scandal that rocked the company to its core. The CEO resigned. The news stories talked about a scam going on within the company where fake loans were being offered to investors by insiders, in order to prop up loan returns and rates. Fortunately all of that has been corrected, but I can’t help but feel like I was sold a lie and my returns have tanked in the intervening couple years.
So where am I now? After 39 months of investing with Lending Club, many of my initial loans have been paid off. In fact, of the 366 total loans I funded, 182 have been fully paid off, which is nearly 50%. Unfortunately, those are offset by 75 loans that have been “charged off” with no expectation of ever seeing another dime from those debtors. Of the remaining loans, 103 are current, 2 are in their grace period (up to 15 days after due date), 2 are 16-30 days late, and 2 are 30-120 days late so there’s a good chance those 2 will be charged off as well.
I started off with over 10% returns, which was awesome because it’s comparable to stock market returns, albeit with the risk of complete loss of principal from any given loan. Those shrank to 8% by the end of year one. As of today, I’m down to an annualized return of 1.55% return, which is pitiful! My online savings account with Marcus by Goldman Sachs pays 1.80% and there’s no chance of losing any of my starting principal! For this reason, I am withdrawing all of my loan proceeds (principal payback and accrued interest) and investing that money in my taxable brokerage at Vanguard (VTSAX, of course).
Overall, I’m glad I took a chance at diversifying my investment income, but I’m disappointed by the results. P2P lending has turned me off of other crowdfunding options such as crowdfunded real estate. Those site may work for some people, but I’m afraid of what happens when the next real estate slowdown causes pain for those investments.
Thanks to Liz from Chief Money Officer for the feature on her Weekend Roundup!