LendingClub 10 Years Later: A P2P Investing Update

As part of their 10 year anniversary, San Francisco-based LendingClub reached out to me to sponsor an overview of their latest initiatives. It's been over a year since I wrote about P2P lending, so this is a good time for an update. All thoughts are my own.

Before 2007, the world was quite different. There was no such thing as an iPhone, blogs weren't very popular, and I was still in my 20s. Sigh. It was around then that I started to learn more about the peer-to-peer industry given both LendingClub and Prosper were born in San Francisco.

When the financial crisis hit a couple years later, I remember getting a rubber chicken sandwich downtown with a P2P executive who told me that based on their lending book, those who invested in 100 or more A-rated loans didn't lose money despite the collapse in the real estate and stock market. I was intrigued since about 35% of my net worth just got crushed.

Even though the defensiveness of a well-diversified portfolio was intriguing, I never fully went all-in on P2P lending because I was too sensitive to people not paying me back. It's one of my financial pet peeves, along with people who vote to raise taxes on other people without paying more themselves.

LendingClub has been through a lot over the past 10 years – successfully IPOing in 2014 on the NYSE to ousting its founder and CEO in 2016 due to faulty loans when they first started out, to expanding into small business lending and auto loans.

LendingClub was founded on the premise that an online marketplace powered by technology would operate at a lower cost than traditional banks, and those savings would be passed on to borrowers through better rates and investors through stronger returns. They've done just that. 

P2P Investment Landscape

My main questions as an investor centers around credit quality (default rates) and returns in a potentially rising interest rate environment. I say “potentially” because the Fed has and will continue to raise the Fed funds rate for the foreseeable future, but lending rates haven't necessarily moved up since the 10-year bond yield has remained suppressed.

Here's a 2H2018 update from LendingClub's CIO:

Economic Backdrop. The American economy remains robust but growth remains slow. Unemployment remains at historically low levels, measuring at 4.5% as of March 2018. On the other hand, GDP grew at an annual pace of 2.9% in the fourth quarter of 2017.

Borrower Performance. Recent vintage performance is coming in broadly in line with our expectations. We see delinquency rates stabilizing across most grades and terms which we attribute to changes made in 2016.

Interest Rates. The overall interest rate environment remains low, though the Federal Reserve raised its target rate multiple times in 2017 and in 2018. In total, interest rates for the platform are increasing slightly (by a weighted average of 50 basis points).

Projected investor returns (IRRs) for loans issued after today are substantially unchanged relative to last quarter. Please see the summary table below, which includes the impact of interest rates effective May 4, 2017 and the new forecast.

LendingClub Investor Returns By Rating

My Take On The Investor Update

The overall investor returns are projected to be between 4.12% – 9.62%, which is not bad based on the current risk free rate of return of 2.25%. All investors should demand a risk premium, otherwise, it wouldn't be worth it to take any risks.

What's interesting is that investors can take more risk going for 25% – 30% annual returns by lending to E and F/G category borrowers. However, with projected annualized net credit losses of between 17% – 18%, the projected returns are closer to 9%.

But 9% is still a fantastic return, which makes me wonder: if you're going to build a diversified portfolio with over 100 loans, why not just build a 100+ portfolio of low rated loans to try and get 9.62%? So long as you mentally expect 17-18% of your borrowers to never pay you back, you should feel fine.

The likely answer as to why some might not do this is because we don't know the exact rate of default increase will be if the economy turns sour. For example, the A-rated borrower averaging a 2% net credit loss might have a 2.4% (20% increase) net credit loss during a recession. But a F/G-rated borrower averaging a 17.24% net credit loss might have a 34.48% (100% increase) net credit loss during a recession, thereby wiping away all projected returns.

Hence, as a P2P investor, it's important to take a view on where we are in the economic cycle. So far, everything looks rosy, but everything looked rosy in early 2007 as well. If you are lending to C or lower borrowers, such borrowers have a history of poor credit, delinquencies, and questionable uses for your money e.g. buying a speedboat, starting a fidget widget business, etc.

I'd rather focus on the higher end of the quality curve where borrowers are looking to consolidate their higher interest credit card debt. It feels better to help people save money and be more financially responsible with their lives.

The biggest risk to P2P lending is higher delinquency rates (net credit loss in the chart) and the lack of liquidity in a downturn. Hence, the reason for focusing on quality and having a large enough number of notes to withstand a slowdown.

What's New With LendingClub?

There are two main features that may be of interest:

1) LendingClub Invest for iOS. They're working on an Android version. With the mobile app, you can:

  • Check their account value, returns, and their portfolio of notes
  • Manage their Automated Investing strategy or manually invest in Notes
  • Add additional funds to their account
LendingClub for iOS mobile ap. Click to download
LendingClub Mobile app for iOS
LendingClub Mobile app for iOS

2) $1,000 New Account Minimum. Starting May 18, LendingClub implemented an account minimum of $1,000 from $1 for all new investor accounts opened. The investment per LendingClub Note is unchanged and still sits at $25 per Note. This move by LendingClub is an act to motivate potential investors to start with a more diversified portfolio to minimize the effect from any singular loan defaults on potential returns. Whereas $2,500, or 100 Notes, is the optimally suggested amount by LendingClub based on their data, $1,000 is still a move in the right direction to hinder any folks who are looking to try the platform with anything lower that pushes their likelihood of a subpar experience.

This first chart shows that 16% of investors with less than 100 notes saw a negative adjusted net annualized return. Meanwhile, only 2% of investors with more than 100 notes had a negative adjusted net annualized return.

LendingClub Returns And Diversification

The next chart shows the long tail returns of investors with up to 1,000 notes broken up by the top 10%, the median, and the bottom 10% investor. Given the investment minimum per note is still $25, it's recommended to invest at least $2,500.

LendingClub Returns And Diversification

P2P Lending To Continue

It's hard to believe that LendingClub has been around for 10 years. Over $24 billion has been invested through its platform during this time period. Banks are still quite inefficient when it comes to lending money, which is why the fintech lending space has exploded to arbitrage out such inefficiencies to the benefit of the consumer.

But unlike most fintech lenders, LendingClub is listed on the NYSE. They've made it, whereas most private fintech lenders have not or will not. Being a public company means that they must follow NYSE and SEC reporting guidelines. With each quarterly result, they are scrutinized by thousands of investors. They've been through bumpy times in the past, but I believe that each setback is an opportunity to learn and grow stronger.

My hope is that if interest rates rise, investors will be able to partake in higher returns. The key is for the projected annualized net credit loss figure (defaults + prepayments) not to rise faster than the pace at which returns rise. This is exactly the struggle the Fed faces as it raises interest rates. How fast should they raise interest rates to step rising inflation without choking off employment. I'm looking forward to improved transparency and more sophisticated underwriting standards for improved returns.

Here's a great comment from reader Brian who has been investing in P2P since 2014 and has over $400,000 invested:

* Make sure you have the discretionary cash to invest in the first place. You must appreciate that for any investment return that you have to take on risk. What’s your level and will you be fine if you lost all that you put into P2P lending. If not, you best stay out.

* Also, think about liquidity. Do you have a separate emergency fund? Are you saving $ in case other investments become more attractive? From my experience, LC is not very liquid. My LC cash flow makes about 5% of my total investment available for income or other investments on a monthly basis. In other words, it would take 20 months for me to pull out all my money. I haven’t seen anyone publish good results with the secondary market folio option available separately for LC users. That’s an emergency exit with a cents on the dollar kind of outcome.

* As with any investment, you need to understand how it works, risks, returns, etc and *before* you put substantial sums of money in. I have spent 5 years learning about P2P and performed some small $ experiments before I invested substantially. There’s no magical investments with big returns and low risk!

* Be very aware that your P2P results will most definitely downtrend over the course of about 18 months and based on solid stats, stabilize in a 5-8% range IF you have a sufficiently diversified portfolio

* If you invest larger amounts, you will need an automation strategy or this vehicle will be very time consuming and likely won’t achieve the best returns.

* There are hundreds of P2P investing platforms but LendingClub is arguably the most solid. It has a 10 year published track record including during periods of economic downtown and rising interest rates.

Readers, anybody a P2P investor like me? Any existing LendingClub investors? How have your returns been, and where do you see the P2P lending industry going in the future? Will banks ever become more efficient in lending to beyond just the highest quality borrowers?  Please note that P2P ranks LAST in my passive income rankings. I'd much rather invest in real estate crowdfunding where you have a tangible asset that rises with inflation. 

55 thoughts on “LendingClub 10 Years Later: A P2P Investing Update”

  1. Fred Atwater

    Lending Club is another form of diversification of your overall portfolio. After 7 years with them, our mature ANAR is ~ 5.5%. $150k invested, with a blend between $25-$50/note. Auto-investing since we passed $50k invested as it was taking way too much time.

    The winning key, imo, with this investment is in the #’s. Have lots and lots of notes. Over time, our portfolio is around 10,000 notes. You have to expect non-payers. They typically kill off about 2-3% of the profit margin, and LC costs another 1% in management fees. 5-7% on widely diversified portfolio is highly acceptable in my opinion.

    $150k out of nearly $3M in our portfolio represents an acceptable (and minor) risk. Each of the other investments possesses their own risk footprint.

    Recommend don’t take it personal when someone defaults… its a natural consequence of investing. A bond portfolio is NO DIFFERENT. There are defaults within there, too.. you just don’t normally see them, unless you really really research the fund or bond itself.

    Other alternatives to LC are PeerStreet of RealtyShares where your note obligation is secured by first-lien (aka Senior Debt). We are currently rapidly expanding our footprint in these two markets (thanks to Fin Sam)

    If you don’t want to have defaults, then keep your money under a mattress, or in a savings account.


  2. ~~First time commentator~~

    My experience with LC has been mostly good and I plan to continue on the platform.

    I heard about p2p lending from a nerdy CISCO employee in 2013. He was on a platform that issued loans to residents of the state of Virginia. In late 2014 I had some freed up capital and was becoming involved in the lending space to a business I was employed. Long story short I found LC right when they went public and invested with an amount of about 70 squared @ $25 each note. I started with the intention of doing this for 10 years.

    Year 1 performance: 7.98% 2015
    Year 2 performance: 3.75% 2016
    Year 3 performance: 4.39% 2017

    2016 was disastrous. This was partially related to my error in loan grade allocation due to general inexperience and poor judgement. The first year produces the best returns and I did not reinvest interest well enough. I ceased purchase of all D and E grade notes in 2016

    I like to thank the CEO scandal for saving my 2016 returns because I made an immediate contribution and subsequent bulk buy of notes as a show of my personal support to the company… a 2nd 2016 contribution was made to push up interest/earnings from Huge charge offs.

    2017: Returns stabilized (interest increased and charge offs dropped). I like to think because of my due diligence. Two withdrawals were made. I’m only in the A,B,C grades *buying only C notes for the short term.* I will probably go to buying/reinvesting only “A” when the market crashes/recession comes. If the platform doesn’t collapse :) I will make a contribution and load up/reinvest proceeds on “A” notes thru whatever bear/contraction is coming.

  3. MachineGhost

    I’ve been involved with LC for five years.

    My observations so far is that LC doesn’t curate any loans; LC’s underwriting is junx and is just an academic quant model that ignores qualitative real-world factors; collection efforts have been really subpar until the CEO got kicked out (and there is no magic to that, this is unsecured loans and all there is to rely on is a borrower’s honor, implied threats and/or coercion); the borrowers are overwhelmingly “dumb money” that are scheming to acquire more time before (or to avoid) the SHTF as an amortized loan rarely lowers their actual monthly payments in any significant and life-changing way; it is mandatory to use some kind of loan selection optimization to avoid the feeble net returns that many have reported as of late and to be able so snap up the best loans as fast as institutions do; you must absolutely plan for the long-term to smooth out the economic volatility, do not lump sum invest, e.g. invest equally and continuously over the weighted period of the maximum loan terms that you’re willing to tolerate.

    For round two, I hit the three year mark a few months ago and with oh-yet-another acknowledgement that LC screwed up again with their junx underwriting model, I have decided to not to commit any more new cash and will let the current balance compound forever. My returns have steadily decreased from 11% to 10% and now 9% for a balanced risk approach. I expect to stay above a net 0% during the next recession, so that is a better outcome than the eventual 50%+ losses in stocks.

    So be careful and manage your expectations. 9%/0% is still better than 17%/-50% in stocks.

  4. Hi Sam,
    You’ll recall that you and I have discussed P2P lending and LC 1:1 in the past. It remains about 40% of my 7-digit investment portfolio. I’ll share some insight into my experience and also some thoughts and other things that I’ve seen/learned. I started investing with both LC and Prosper about 10 years ago. So I’ve been familiar with the platforms and investment vehicle for years. Given low interest rates and my preference for lower risk investments, I committed $150K for a LC portfolio that I launched in Aug 2014.

    First, some stats on the portfolio. By grade: B-14%, C:51%, D:22% and E:13%. I consider this to be a moderate risk portfolio in terms of potential default during an economic downtown. One thing I especially like about P2P lending, is that we have good statistics on how consumer credit performs (see interesting article below) during downturns including specifics for how LC performed during 2007-2009. My given portfolio would have had about a 2% return during that period according to published data on the platform performance during that period. Given current interest rates, I wouldn’t cry if I got 2% out of P2P during a downturn. Also consider that you would have likely been down ~40% if you were invested in the stock market during that period.

    I am not at all tolerant of the stock market’s volatility and only invest my 401K in it because of the longer horizon. I like that P2P lending has historically had a very low correlation to stock market results. My net return from 2014 until now has dropped from 12.78% and seems to have leveled at about 7.43% according to LC account view. My personal IRR calculation shows closer to 6.86%. I expect this number to improve slightly as money is reinvested and based on LC calibration of loans last year.

    I’m just fine with the return if it remains there because it’s about 3X what best CD rates are right now. Regarding the portfolio mix, I pay a small fee to use the NSR Invest platform to automate investment and have selected their balanced growth strategy (a mix of about 45% B and 45% C grade notes). This takes all the hassle out of loan selection and that’s critical given my level of investment and substantial cashflow. Negative cashflow drag is often a key impairment in investment results. And is critical given at I have about a $30K cashflow to reinvest monthly just from my P2P investments.

    I also love that the notes they have selected have performed almost 2X the ones that I selected manually and using the LC auto-investing feature (which I think is insufficient). Over time, the platform will adjust my overall portfolio note distribution which I anticipate will boost my performance by possibly as much as 3-4% based on current trends. BTW, my losses to date are just about to hit $10K. I know that many are turned off by people not paying loans back. Personally, my integrity would never allow for that. However, the risk/reward is not unlike banks and credit card companies take on. And quite frankly, I’d rather take a share of that return from institutions that I often consider to be greedy and take advantage of customers.

    I like that my investment can help others–especially solid borrowers (the A-C grade notes). I also invest moderately in several other platforms: Peer Street (Real Estate), Yield Street (Litigation), Funding Circle (Small Business) and Fundrise HeartLand (per Sam’s advice). This helps diversify my portfolio and boosts the blended return to ~8%. I realize that I take on a little more risk in the other platforms given their longevity. I’m still deciding on my longer term mix. Another option with this is that you can find several funds that will take your money and invest for you. They are mostly invested in LC, Prosper, and Funding Circle given their longevity and relative stability. I choose not to do this because of the fee to manage my money which I can achieve more cost effectively with NSR.

    So my key observations to share:
    * Make sure you have the discretionary cash to invest in the first place. You must appreciate that for any investment return that you have to take on risk. What’s your level and will you be fine if you lost all that you put into P2P lending. If not, you best stay out.
    * Also, think about liquidity. Do you have a separate emergency fund? Are you saving $ in case other investments become more attractive? From my experience, LC is not very liquid. My LC cash flow makes about 5% of my total investment available for income or other investments on a monthly basis. In other words, it would take 20 months for me to pull out all my money. I haven’t seen anyone publish good results with the secondary market folio option available separately for LC users. That’s an emergency exit with a cents on the dollar kind of outcome.
    * As with any investment, you need to understand how it works, risks, returns, etc and *before* you put substantial sums of money in. I have spent 5 years learning about P2P and performed some small $ experiments before I invested substantially. There’s no magical investments with big returns and low risk!
    * Be very aware that your P2P results will most definitely downtrend over the course of about 18 months and based on solid stats, stabilize in a 5-8% range IF you have a sufficiently diversified portfolio
    * If you invest larger amounts, you will need an automation strategy or this vehicle will be very time consuming and likely won’t achieve the best returns.
    * There are hundreds of P2P investing platforms but LC is arguably the most solid. It has a 10 year published track record including during periods of economic downtown and rising interest rates.

    I’m not sure what my long term commitment will be with P2P. For the next couple of years, I’m pretty committed to it given 1) I’m comfortable because of my knowledge, 2) my results to date, 3) interest rates for safe investments aren’t likely to go up much for a while and 4) I have very little confidence in the stock market which is overdue for another significant correction in the 1-2 year period. P2P Lending remains an emerging financial tool and while many will fail over time, I don’t think P2P will go away long term. Lessons will be learned and the market will consolidate. Of course returns might also go down as the market becomes “more efficient”. Those that do their homework and manage wisely can use P2P as one reasonable investment vehicle amidst a market today with few similarly “safe” options.

    Consumer Credit Return History as a basis for P2P

    How Will P2P Lending Perform During a National Recession?

    1. Fantastic feedback Brian. I’m going to incorporate your feedback in the post so that readers have the most about of information possible before making an investment decision. Thanks!

  5. I’m with Maschinist…. something has gone seriously wrong at LC. Have had an account with them since 2014. Very large, diversified portfolio of small notes. Account size peaked at around $300k. Used their automated investing with their recommended credit banding allocation. Returns the first year were 7 – 8% for 2015, a little over 3% for 2016, and negative so far for 2017, despite the fact they keep projecting a 3.7% return after writeoffs. It appears in their quest to get big they lost sight of quality (and their platform investors). Have not been reinvesting for over a year and pulling my money out, although not selling notes.

  6. I invested $1000 in 2014 to test them out, bought around 10 notes of mixed quality and I’m about even, so grand scheme of things I lost money. It makes sense that you should buy 100 notes because if it weren’t for a few bad apples I would have had decent returns. I also turned an private investment manager on to them and they have done well.

    I would still invest again but be me cautious and make sure you buy at least 100

  7. Grant @ Life Prep Couple

    I have strongly considered getting into this but can’t stand the thought of so many people not paying me back. I am pretty sure I would take it a bit (very) personally. It just seems unlikely that this would produce better returns over the long term than low-cost index funds.

    And I have read articles from other bloggers talking about losing money or making 1% over the last few years while the market has been experiencing double digit growth.

    Very nice write up though.

  8. Go Finance Yourself!

    I’ve been investing in Lending Club notes for almost a year now. My returns average close to 10% thus far. I’ve only invested a very small portion of my portfolio in P2P loans. For me, it’s fun to play around with just a little bit of money at stake and learn a new industry. I don’t see myself investing a significant portion of my portfolio in it though. In my opinion it’s too much risk to take on just to eek out 8-10% returns.

  9. P2P still intimidates me too much. I don’t trust folks based on the behaviors I see every day in the world. Probably far too pessimistic, but it feels like a recession is coming and being invested in individuals rather than companies just does not quite scratch me right.

  10. Because my state doesn’t allow for direct investment, I also had to go through Folio. My returns were a little over 3 percent per year, I had investments for over 3 years, about $5,000. Not the worst investment ever but I won’t do it again until I can access the primary platform.

  11. Tim Kim @ TubofCash.com

    Sam, thank you for the review. I haven’t dipped my toes into P2P lending yet. I’ve always been an equities-guy because for the past 10 years I’ve averaged 15%+ annually being so stock heavy (lucked out graduating college during the recession of 08-09 because it allowed me to pick up stocks at bargain-bin prices, just as I started out my career). In the past couple of years, I titled heavy towards emerging markets (roughly $200K allocation in this segment alone), which has worked out very well so far. Cumulatively, I’m up 35%+ in my emerging market allocation. I’m big on using the CAPE ratio (Shiller P/E, PE10) when re-balancing and with new contributions to our 401K’s and IRA’s. Not sure how I would fit P2P lending into the way I invest. I tend to be conservative with what I don’t know. Hyper aggressive with what I do know.

  12. Vancouver Brit

    Interesting, I’d never heard about this whole P2P lending thing at all and now I see there is a brand new company that recently opened in Canada (Lending Loop) offering this service. It only took 10 years for us to catch up!

    Can’t say I’m overly impressed with the returns though. Losing 1.5% as a fee to Lending Loop is akin to buying a mutual fund, then another 20-30% of profits goes to the tax man so your 11% return quickly becomes 6.5%. Not bad but for the risk you’re taking it’s hardly worthwhile.

    As a Canadian if you have any room at all in your TFSA and RRSP it is considerably better to focus on those before using any P2P lender. If they’re both full though, it might be tempting once it becomes more established here.

  13. It would be interesting to see how LC returns compare to just buying a high yield bond index over the medium to long term. I suspect HY bonds have comparable returns, but with greatly enhanced liquidity.

    1. MachineGhost

      Apples vs oranges. Yield-chasing behavior doesn’t occur in LC since it isn’t a secondary market. Nor will HY bonds have returns like the recent past going forward as they’re priced too expensively. The time to buy fixed income products is not when the Fed is tightening monetary policy as that favors zero duration exposure (e.g. cash) and which almost always presages a recession.

  14. i have just over 80K in LC and have been using them since 2010.

    Adjusted Net Annualized Return 7.18%

    My Notes at-a-Glance 1596
    Not Yet Issued ?1
    Issued & Current ?539
    In Grace Period ?7
    Fully Paid ?886
    Late 16 – 30 Days ?2
    Late 31 – 120 Days ?11
    Default ?0
    Charged Off ?150
    Displayed by Number | Adjusted Amount

    A(0.9%) B (56.0%) C(31.0%) D(9.1%) E(1.8%) F(1.0%) G(0.2%)

    Weighted Average Rate 11.98%
    Accrued Interest $532.46
    Payments to Date $198,274.02
    Principal $159,150.94
    Interest $39,115.91
    Late Fees Received $7.18

  15. This post brings to mind a related topic and possible post subject for you. Why in 2017 am I unable to invest in Lending Club simply because I live in Pennsylvania? Pennsylvania and other states don’t allow LC but yet I can buy and trade penny stocks, play the lottery, go to the racetrack and bet on a horse at 500 to 1 etc..

    It’s time for our state to get with it and allow people to invest in P2P lending

  16. Over $100K in Lending Club and Prosper at the moment.

    I’m very happy with the returns, although they have been dropping over the past year as the default rates have been stabilizing. Personally, I target homeowners with no defaults and no recent credit inquiries who are looking to consolidate debt. I did my research on NSR and am hoping historical data colored by my personal opinions will successfully negotiate the eventual down cycle.

    I too am concerned about the exit process, especially on Prosper since they closed their secondary market. The returns are attractive, but you pay the price in lack of flexibility.

  17. Sorry Sam, I generally really like your work but Lending Club sucks. Big time.

    I’m with them for more than two years and in the best times had nearly 10% of my (7 digit) net worth with them. I had more than 1000 loans, spend countless hours on yield optimization via systematic loan buying. The first year was great, I had a yield of more then 10% after written off loans.
    But the last ~9 month are just horrible. My loan defaults went trough the roof.

    When people are publishing their Lending Club performance online it looks everywhere the same since the second half of 2016. Yields tanked close to zero or are even negative.

    Why is that? Are we in a big recession? No! Lending Club just lowered requirements for new Lenders and and also lowered yields of their loans to attract more lending. Now, we see the results.

    On top of that, profits are taxed as ordinary income, initial taxes in the first year are very high, because defaults are mostly kicking in later and like all bonds even the inflation part is taxed.

    I would never recommend Lending Club to anybody with this current high loan defaults and the general bad shape of this company. Not only is Lending Club losing money every quarter but even revenue went down in the last year. The current risk is completely detrimental to the currently achievable returns. All my other investments are doing much better (Stock ETF’s, single stocks, REIT’s and some Fundrise).

    1. Thanks for your feedback. What do you think there was such a fundamental shift? As an investor, I would think that returns would be stable to maybe hire given economy is strong and interest rates are rising.

      Perhaps there needs to be improvement in the underwriting algorithm.

    2. I noticed the same thing with my loans.

      Invested $5500 in $25 loans March 2014 and had solid 7-8% loans. Invested another $5500 late 2015. My returns have dropped steadily from 7 percent (mid 2016) to 3.36 percent today. The risk of having borrowers not pay me back and the risk of lending club going under don’t justify an 8 percent return in my opinion, let alone a 3 percent return.

      The other downside is if you are invested in a Roth account you have to keep $10k invested or you get charged $100 a year for the account. There are also transfer fees to roll over your Roth (which is standard) but makes liquidating your account and reinvesting into something else tough with the fees eating into your returns.

      Obviously this post will attract biased replies (good and bad) but I really would not recommend P2P lending to anyone at the moment.

  18. I can’t say anythung about LC b/c I am from Europe and was never able to sign up.

    However almost a year ago I got into P2p lending through 4 different European platforms. Bondora, Mintos, Viventor and Twino.

    So far so good, the returns are 11-12% net. Also some of the sites have default protection so when a borrower defaults you don’t loose anything. Some loans are also backed with assets such as cars and houses.

  19. I had a small P2P account with Prosper. I’m guilty of cherry picking loans and having a small portfolio of roughly 20-30 loans at the peak. So once I had someone default on me I didn’t take that well. And when it happened a second time I got even more upset. Diversifying with a large number of loans is definitely the way to go.

    Lending club has a sweet looking office in downtown SF by the way. I remember the first time I saw it and was quite impressed. It’s in a great location at Market and 2nd.

  20. David Michael

    I’ve enjoyed investing with Prosper for the past four years. Started off with 12% returns, then 10% and now down to 6%. There were lots of great loans in the beginning with excellent returns available for the small investor. Today is a different ball game. Hard to find the same quality and strength as in the past, so I started taking out $500 a month and purchasing dividend paying high yield stocks. The problem with P2P is that the big boys have moved in and pick up the best loans long before the average investor can find them. Corporations again hold sway over the small investor. Great for the first few years. Now…not so much.

    1. chitown-2020

      I had a similar experience with Prosper. I was so excited about it in the beginning and the early experiments were great. They also provided a lot of data to satisfy my fin-geekish mind. But then they started to reduce the amount of information provided on each borrower — and — they began to let the institutional investors pick up whole loans, and I suspect the institutions got the cream of the crop through automation and optimized investment criteria. I gave up and moved on to RealtyMogul and RealtyShares — and have been very happy so far. Worried that the same thing could happen on those platforms, but so far, it has been really good. Fingers crossed.

  21. Thanks for providing this updated post on p2p lending. I have not yet jumped into this type of investingt. I am still doing research on how it implement it to my asset allocation. I am considering starting with a few loans to high quality borrowers to get my feet wet.

  22. Long time reader, first time poster!

    The timing of this post is amazing, as today marks the launch day of my P2P investment fund. After seeing first-hand the exceptional returns that can be generated from a strategic investment in this asset class, I decided to create a fund to provide others easy exposure to P2P loans.

    I’m very bullish on P2P for several reasons, including:
    – Loans made through P2P platforms make up just 3% of the total unsecured loan market, but are growing at compounded annual rate of 47%.
    – Credit card defaults are at their lowest levels since the mid-80s, and consumers have more disposable income relative to their debt than we’ve seen over the past 30+ years.

    I’ve invested in tens of thousands of loans over the past few years and have returns that outperform the projected returns above substantially. As Sam recommended above, I’ve focused on the higher end of the quality curve and spend a ton of time analyzing all of the factors that influence default rates.

    I’m a strong believer that even in a rising interest rate environment or if macroeconomic conditions deteriorate, returns will remain strong if you focus on the right credit quality characteristics.

  23. Interesting update.

    So if I have less than $1000 currently in Lending Club am I grandfathered in to just chilling right now, and could add money as I see fit? Or would I be forced to add a minimum amount of money to hit the $1000?

    Ex: I have $500 currently in Lending Club. I want to add another $250. Is that okay, or would they ‘force’ me to add at least $500? I assume I’m cool to just chill and it only applies to new accounts. :)

    I like Lending Club a lot and am going to be putting more money into it over time, just want to get an idea on the cadence of that.

  24. 9 percent IS a fantastic return! That was my rate a few years ago. It’s now dropped to below 1 percent. Mr money mustache is losing money on his account. It’s one thing to expect some risk in the form of defaults and charge offs. But LC doesn’t seem to be doing anything at all to ensure repayment. It’s very frustrating.

    1. Mr. Freaky Frugal

      Sorry to hear that. Were the loans in any particular group – A, B, C, etc? How many loans did you have?

  25. Mr. Freaky Frugal

    Sam – Great analysis as usual!

    I’ve thought about trying Lending Club or Prosper, but I always come back to your concern:

    “…The likely answer as to why some might not do this is because we don’t know the exact rate of default increase will be if the economy turns sour.”

    I wonder if there is any way to estimate increases in default rates based on increases in unemployment? I don’t know. It would help bound the possible default rates.

    I also wonder if the risk premiums will gradually be arbitraged away as the estimates for defaults become more accurate.

  26. I started investing with Lending Club in 2015 and went the higher risk route. My returns however are nowhere close to what they are projecting. Over 15% of my notes have been charged off and 10% have paid off early which has combined to bring my adjusted annualized return to under 1%.
    From what I have read elsewhere 2015 had some poor underwriting (a large portion of my portfolio) so we’ll see how things adjust as those loans get diluted.

  27. FS,

    I’d like to see you make a post on exiting the lending club platform. I’d also like to see LendingClub publish the average time to sell notes on Folio as well as the average premiums or discounts that the notes sell for.

    I’m in the process of unloading the notes now. I invested $10k in $25 increments. Over the course of about two years my rate of return dropped steadily and my rate of default increased steadily. Along the way, LC sent out some updates to their default rate estimates, etc. I don’t love the idea of the data changing along the way while I’m stuck in a 5 year contract, so I decided to unload. That was around the end of Q3 last year. Here we are approaching Q3 of 2017, and I have notes that I still can’t get rid of, even listed at a 75% discount. That’s right, it’s not a typo. Potentially the worst part of this is that, since this money is in an IRA with them, I can’t close it out until all of the notes are unloaded (I believe). So, the notes that have sold have been sitting idle in the account as cash for the better part of a year. The low yield notes tend to sell at a discount on the secondary market. These discounts combined with steep discounts for delinquent notes have erased all of the gains I made during this two-year experiment.

    This is just one man’s experience. I’d be really interested to hear your take on the exit strategy.

    1. The Alchemist

      I, too, have been less than enchanted with LC’s diminishing returns. At one point I was making something on the order of 7%, which was enchanting, but that rapidly began to fall off once the scandals started to hit LC in the past couple of years. I had gradually increased my position with them to $10k, but last year I “paused” automatic investing and have been withdrawing cash as the loans close.

    2. I only held a thousand bucks with them a couple years ago (as an experiment) and I too soured on the experience. Like Sam, each time I saw a default, I felt personally affected. Before long, my portfolio projected a negative return so I started selling everything at cost or at slight discount on folio. Even today, I have a $100 or so still sitting that I can’t manage to sell or get rid of. I’ve literally written it off as if it doesn’t exist.

      For me there are a million more attractive ways to deploy capital at this time.

  28. Sam thanks for the detailed look at lending club. I’ve been interested in P2P lending as a potential way to diversify my investment portfolio. Right now I’m a little overweight equities and while that’s worked well in this current bull market, it certainly won’t be that way forever. So thanks for the information and motivation to further explore this option!

  29. What are the tax implications of P2P lending? Isn’t earned interest taxed at ordinary income rates?

    1. Unless you want a headache at tax return time, do yourself a favor and invest only from an IRA. Keeping track of losses on notes is a hassle that is not worth it.

      Not to mention that income from the notes is considered interest and therefore is taxed at the general income tax rate, and not at the favorable capital gains or qualified dividends rate.

      1. That’s what I thought about the tax rate. I hadn’t considered investing from a tax-advantaged account, though. I’ll have to think about that idea.

        Other concerns I have with P2P lending include the possibilities that the platforms themselves shut down, go out of business, suffer a data loss, or get hacked – especially those that are still privately held and, in many cases, still taking on angel or VC funding.

        Between the tax implications and the platform risk, I’m not sure whether P2P lending is worth the trouble for this investor.

  30. Thanks for the update!
    I was an early adopter of LC, buying notes on the secondary market before my state permitted P2P, and moving to the primary platform thereafter. I invest in the “platform mix,” and have gotten a 6.5% annual return, though defaults are always a bit higher than LC predicts.
    I had the opportunity to meet LaPlanche a few years back (before his unfortunate departure), and I was quite impressed and quadrupled my investment. And now that bonds and stocks look unattractive in aggregate, I like the diversification factor of held to maturity loans. I even got some shares from the LC IPO!
    The worry always in the back of my mind is that P2P hasn’t yet seen a downcycle. Will they behave like unsecured credit card loans? Do people feel less obligation to pay back their fellow man than a huge banking institution? I dunno!

    1. Steve Adams

      The down cycle question is really important. When the next down cycle happens defaults will go up then what will be the return, 2-3%? Negative?

      I’ve done prosper and lending club for years and am no longer adding money. For 6-7% ROI with additional downside risk, buying overpriced real estate has more upside and is much more secure.

  31. I have to admit that I’ve looked into P2P but haven’t pulled the trigger yet. I keep on thinking that interest rates are going to go up and that it will cause more people to default on loans. But clearly my thinking is incorrect since interest rates have been pretty much down except for some recent hikes.

    I definitely need to look into Lending Club again and see if it makes since to get some of my cash working for me. Thanks for sharing!!!

  32. Charleston.C

    Thank you for including the long tail returns chart. Without it, the $2500(100 notes) recommendation feels arbitrary. Myself being a younger investor, the barrier of entry at $1000 and recommended $2500 is very achievable even considering the State and Financial Suitability conditions.

    Would love to invest through RealtyShares as well, as you have pointed out in the Heartland article, but it’d be a while before I can become an accredited investor.

    Suggestions for other ways to invest with low barrier of entry ($10,000 or less) welcomed!

    1. chitown-2020

      Hi Charleston.C… a similar option to RealtyShares is RealtyMogul. They are a similar platform, but also offer a REIT (Real Estate Investment Trust) that has been returning 8% cash + the opportunity of equity appreciation. It is open to all, subject to certain limits, based on your income I think. I’ve been using the ReatlyMogul platform for a few years for individual projects and have had a good experience, but have declined to use the REIT, because I like to pick my own projects… but in your situation, it could be interesting. Hope it helps!

      1. … it’s still hard to beat a dollar cost averagaging strategy in the S&P through a low cost index fund.

        Best way to get great returns and low barrier to entry in my opinion.

    2. Charleston.C, you might also want to check out Fundrise. It’s very similar to RealtyMogul (Fundrise has several different REITs), but it has much lower organizational fees, which may increase investor returns. I haven’t used RealtyMogul personally, although it seems like a very similar type of product. Do check out both if you’re interested though.

  33. I haven’t tried Lending Club yet but I’ve been doing Prosper for about 2 years now. I have just short of 100 notes and my annualized rate is a good clip higher than your 90th percentile line chart. It’s good to see that chart. I might guess that as I get more loans and the economy changes my rate of return will come down some as suggested in the chart.

    1. Interesting reading back though the various comments. I must be in the top 1% of P2P investors as far as rate of return. Haven’t seen a post on here with a higher rate of return. Didn’t realize people were doing so badly on P2P. It’s good to read others stories. I only hand pick and never use the random generated algorithm. I buy in batches of 100 instead of the $25 that others are doing. I lend to the people that I feel really need it, not those who I think don’t. Been doing it for 2 years and have made it a regular part of investment strategy.

      1. I have done the same with picking loans by hand. So far I’ve been making over 20% with no defaults. I’ve only been on Prosper for about a year though, and it looks like you’ve only been investing there for about two years. That’s just not enough time to see real returns in my opinion, and the economy hasn’t seen any real problems in the past few years.

        I actually stopped investing more money in Prosper recently because all it would take is a market event that influenced a wide range of people (i.e., the 2008 housing crisis), and my returns would be gone.

        1. Two years is a good sample size. Don’t see why you would stop after one year because you fear a market event that hasn’t happened yet. I do fear a mad man pressing a button but won’t let it stop me cause it hasn’t happened yet. It’s more likely that rates rise.

          1. To each his own! It’s not that I fear an event (certainly not one as unlikely as the “button”–because that would make all investment decisions meaningless anyway), it’s more about managing known risks. When something happens to shake up the economy (as it will eventually), I feel that non-recourse loans are not the best class of investments to have. On the lending side, I’d much rather have a short-term bridge loan with 50% LTV for instance. We’ve seen how property values react during really bad times, but no one has seen how non-recourse P2P loans will react. So I guess I respectfully disagree that two years is a good sample size because two years of heavy economic growth and low unemployment doesn’t take beta into account.

            I think my 20% returns are either inflated because of the short time period, or just lucky. From what I’ve seen in the other comments on this page and elsewhere, 10% would be considered a very good return by most. I can get pretty close to that with collateralized lending, which is much easier than hand-picking hundreds of loans, and I feel gives me a little bit more safety. If rates rise on Prosper, I’ll definitely reconsider the risk/return analysis, but for me right now, I’ve decided to let my current portfolio ride without new investments. I explained my thinking a little more on my website recently if you’re interested.

          2. Cool, read your blog. I’m not going to prove out a model then abandon it. At least you did better than 99 percent of the P2P community for a short moment. Good luck.

            1. Thanks, good luck to you as well! Definitely stick to your guns–especially since it’s worked well for you so far. I still think there’s a lot of room for increased performance by hand picking the loans like you’re doing.

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