Sometimes P2P borrowers stop paying. Then what?
I’ve been an investor with Prosper, a peer-to-peer (P2P) lending company since 2012. I usually check my account once a quarter to view my performance and to re-invest cash that has come in from borrower payments. Per my latest passive income update, the annualized return of all of the notes in my portfolio is 7.41%. Better than a swift kick in the nuts!
With rates expected to rise by perhaps as much as 2% over the next several years, I suspect the returns on P2P lending will also commensurately increase. As a result, I plan to allocate more of my free cash flow into Prosper in $10,000 increments.
P2P BORROWER STOPS PAYING
One of the reasons why it's taken me so many years to put real money behind P2P lending is because I absolutely hate debt welchers. Even though debt welchers are now glorified in the media thanks to the accepted norm of blaming other people for our financial situations, I still have a hard time dealing with people who don't honor their promises. My fear of lending money to a debt welcher finally came true the other day.
When I logged in this week, one of my notes was in collections! The loan status was highlighted in yellow “Late (15-30d) In collections.” I felt betrayed! What surprised me even further was this particular loan isn’t one of my “C” or “D” rated notes, it is a “B” rated loan!
As soon as I found out one of my notes was in collections, I wanted to know everything I could about the P2P borrower and this particular note. Here’s some of the information I pulled about this particular note:
Loan category: Debt consolidation
Rating: B
Principal: $10,000
Borrower rate: 14.85% over 5 years
Borrower’s monthly payment: $237.11
Lender effective yield: 13.04%
Estimated loss: 5.99%
Estimated return: 7.05%
And this is a snapshot of the P2P borrower’s credit profile at the time they applied for the loan:
Based on the data, it still seemed strange that this particular borrower was in collections. Was there something I was missing? Had he lied about their income, become unemployed, or gotten buried in medical bills?
If by some chance you're the one whose stopped paying their loan, we need to have a serious talk! I had a call with Prosper to find out more.
THREE VALUABLE LESSONS LEARNED From A P2P Borrower Who Doesn't Pay
Check if a P2P borrower has already taken out a Prosper loan – The maximum number of loans any borrower can have through Prosper is two. Not all borrowers can qualify for multiple loans, however. They have to meet certain credit score requirements, have to be current on their existing payments, and need to meet a minimum number of consecutive monthly payments.
Also, the total amount of the loans combined cannot exceed $35,000. I like to handpick my notes instead of using the Quick Invest feature because I like to shop around and find the most promising investments available by rating.
Unfortunately, I completely failed to notice the borrower who has stopped making payments had already taken out a $25,000 loan. I thought they were only trying to borrow $10,000. To top it off, the $25,000 loan was for a vacation! If someone is borrowing that much money to take a vacation, they are not properly managing their finances! If I had seen that red flag at the time, I would have declined to lend immediately.
Investigating A P2P Borrower Using Prosper
When you’re browsing listings, the quick way to tell if an applicant has already borrowed from Prosper, is the Prosper Activity section at the bottom. It seems so obvious now, but I totally overlooked this in the past. The Prosper Activity section will simply be absent if an applicant has never taken out a Prosper loan – in other words you won’t see a loan history of zero. Here’s what you do:
1) Browse to the bottom of an active listing and check if the Prosper Activity section appears. If it does, take a look at their past/existing principal borrowed, principal balance, payment history, and credit score history. Take note if their credit score has declined since their first loan.
2) Scroll back up to the top of the listing summary and click on their borrower profile link.
3) This screen is where you can see the category of their first loan and when they applied. It’s a bit of a roundabout way to get the information, but I find it’s valuable information when determining whether or not to invest in an applicant’s current listing.
P2P borrowers aren’t able to change their loan due dates – When I was talking to Prosper to learn more about the collection process, one item that came up was due dates. Borrowers can’t change a loan’s due date, which is something Prosper could improve on in the future. As of now a loan’s payment due date is determined by each loan’s origination date at the start of the loan and stays that way for the full duration.
Since payment dates aren’t flexible, if a borrower has two loans the due dates likely differ. Borrowers can’t combine loan payments either, they have to made separately for each loan. As a result this can trigger late payments on one or both loans if they are tight on cash short-term due to timing issues.
I noticed that although my borrower was late on my particular note in June, he/she made the June payment for the Vacation loan on time.
A loan's listing summary is static – My fears that this borrower had lied about his/her income were quickly overcome. The Prosper rep assured me that during the listing process, if any information the borrower input is found to be false or if he/she can't supply documentation, the listing falls through and the P2P borrower would have to start all over again. This means that since my note was successfully funded, there was enough data provided to verify he/she had income over $100,000.
This means that anytime you are browsing for new notes, you don't have to worry about any of the listing's information changing between the time you put in an order and the loan getting funded. If false information is found or the borrower doesn't supply all the required documentation, your order simply won't get filled.
I also found out that once you purchase a note and view the listing summary, none of the information changes. Thus, you can't access the borrower's current credit score. You'll only see a snapshot of their financial profile at the time the listing was created. If the borrower so happened to take out a second note with Prosper later, then you could navigate to see their credit score at the time of the second listing. You won't be able to view a borrower's current credit score, income, revolving credit balance or any other updated profile information.
WHAT HAPPENS WHEN A BORROWER STOPS PAYING?
The collection process – Here’s the rundown on what happens if one of your borrowers is late on a payment and stops paying.
1-15 days: Prosper sends emails and calls borrowers about late payments. Two attempts to withdraw funds electronically are made. Missing the first payment results in a $15 fee. Failing the second attempt results in the greater of $15 or 5% of the unpaid installment amount.
16-30 days: Prosper’s in-house collection agency is engaged first to try and collect funds.
31-120 days: Prosper then engages a 3rd party collection agency to take over and attempt to collect the amount due including accrued fees. Late fees continue and are charged at day 46, 76, and 106 days past due. Experian and Transunion are notified on a monthly basis of the delinquency, which now shows in borrowers’ credit history. Borrowers’ credit scores start to take a hit.
121+ days: Things aren’t looking good at this point and the loan is charged-off. What this means is a P2P borrower is still obligated to make payments, but the entire balance gets accelerated and is now collectible in full as of the charge-off date. Late fees stop but interest continues to accrue. Experian and TransUnion are notified, the charge-off appears in the P2P borrower’s credit history, and their credit score takes another hit.
These borrowers are immediately disqualified from taking out any loans with Prosper in the future. After a loan is charged-off, it is put up for sale. If a debt buyer purchases it, any proceeds will be distributed to lenders. But there are no guarantees it will be sold. Lenders just have to wait at this point and hope to get some money back. There’s no set time frame on how long it could take or how much the charge-off could be sold for.
Collection agencies will charge fees (up to 40% any recovered funds, plus legal fees and expenses) for any recovered funds that get deducted. What sucks for investors is these fees are deducted from any recovered funds and paid to the collection agency. But at least lenders do not have to front any collection fees if no funds are recovered at all.
NON-PERFORMING LOANS IS AN INEVITABILITY
With a large enough loan portfolio, having a non-performing loan is an inevitability. For big banks, the ratio is generally between 1% – 2%. But given I've got less than 50 loans out, most of which are A's and B's, I'm rocking a much higher NPL ratio.
With my planned injection of capital, I will get my NPL ratio down so that no one loan can do that much damage to my overall returns. The way things stand right now, if another loan goes into collection, this year's return could easily drop by 0.5% to under 7%.
I've come to terms with the fact that there will always be people out there who don't make due on their promises. So long as I don't know who they are or run into them, everything will be OK. It's just a part of doing business.
I hope this article helps you better deal with P2P borrowers. Instead of lending over P2P, I'd rather invest in venture capital.
Invest In Private Growth Companies
Finally, consider diversifying into private growth companies through an open venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
Check out the Innovation Fund, which invests in the following five sectors:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. You can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.
Wealth Building Recommendation
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Before Empower, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances on an Excel spreadsheet. Now, I can just log into Personal Capital to see how all my accounts are doing, including my net worth. I can also see how much I’m spending and saving every month through their cash flow tool.
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About the Author:
Sam began investing his own money ever since he first opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college on Wall Street. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered.
In 2012, Sam was able to retire at the age of 35 largely due to his investments that now generate over six figures a year in passive income. Sam now spends his time playing tennis, spending time with family, and writing online to help others achieve financial freedom. P2P borrower is an FS original post.
As an investor I have privately borrowed from Lending Club twice, and often to bridge a gap for investing in RE or rehab as we do property investing usually for long term rentals. When we can’t get a loan elsewhere for these deals, then Lending Club or Prosper can be a great option to fill the gap that typical banks and other lenders don’t want to lend for. Based on a couple comments, we should note that sometimes if someone earns say 100k or more and has great credit, they may be trying to fill a gap for a deal and in this case could be a good investment. Their overall income may say a high figure but continually reinvesting it can actually limit what cash they have available. Now understand if they’re an investor too, they are taking on risk which can also be passed to you. However, these folks often care about protecting their credit and paying back what they promised they will.
As an investor we are also looking to more diversify our investments and start investing in either LC or Property and learning about those who default and the process that both P2P Lenders have is important before we start putting money into it.
There are some people who are not bad borrowers they did have excellent credit history who faced things in there life that took them all the way down. The financial world is numbers. Numbers do not show the temperature of the borrowers. Some people have gotten rich of taking from others and they don’t care about their debts and paying them back. Then there is people like me who worked hard to get my credit worthyness and without it wouldn’t have gotten my children rasied. Then I seen the opportunity made a strict plan for myself to be completely debt free in five years if not prior to that but gave myself the 5 years for a small window of having to take the full five years. I would have been 52 years old and every penny after that could go to my cost of living and my retirement. I knew it would be a tight 5 years but I knew I could do it without a doubt. I seen nothing short of my death that could get in the way so I buckled down and start planning the I did my research and took the route that I felt would be best to meet my goal. Good job 10 plus years in never ever fired from a job in my life. I’ve always taken my responsibilities very serious and worked my fingers to the Bone. The day after I signed the papers on my final step of my plan my world was totally truned up side down and it has been 1 year and 2 months and I can’t get it truned around. It is killing me I cannot catch a break because it’s numbers they use. I want to pay my debts but it’s like all or nothing and the debts keep multiplying. So what do I do?? Something similar happened in 2005 but I didn’t have as much against me financially and a year later I got the job I have now and I plugged away even though some wrote me off and truned me over to evil debt collectors. Guess what I paid off my debts anyway! This time it’s not happening and I am loosing my mind trying to survive and figure out how how to pay my debts. Not for my credit score but because I owe money I gave my word it is my debt. At my age and the stuff I went through with my brother for 2 months before he died and then my own illness that followed quickly on the heels of that it got so bad that I had no idea what was real and not real for sometime. I am very blessed that I still have my job and that I am starting to heal but this financial burden I am under it is affecting my ability to get my mental and physical health back. I want to pay my debts but no one seems to get that they will not work with me only one company has and it gives my hope that I will at least get that paid off in time if I can’t continue to get well and not lose my job. I only see one way out and I’m scared to death to make the step or even know how to get it started after this past year I am scared if my ability to conduct business is stable. But untill the day I die I will be trying to pay my debt! If I could sale my land I could pay it all off but I don’t know how. So there are people who would pay their debts if they were given ore of an opportunity to do it. Instead most become so beat down that they give up. Myself I am runt but it still matters to me that I owe!
Hi Sam,
Sam here. It’s interesting that you didn’t go with Lending club. Any thoughts there?
Also, what happens to the borrower’s credit score when they decide to stop paying? Are there any legal ramifications?
Thanks,
Sam
I am really just getting started with “extra” cash I have. I have invested into 7 different loans so far – pretty diversified as far as ratings go and each loan had $250 invested.
1- A
1- B
2- C – 1 Deliquent
1- D – Paid off early FICO of 660-679
1- E
1- HR
Roughly got started 8 months ago. In that period, 1 loan paid off early and I just recently had one go delinquent – sitting at 46 days now, that one was for debt consolidation and FICO was 680-699. So, in actuality, the ratings I figured would be risky have done just fine *so far. The ones that I figured were “safer,” A-C’s, one has bit me – not too bad, but still a bite. Overall, my returns are still holding about about average of 13.78% – not including the hit from delinquent one I am guessing. Still pretty happy with the results even if I have had a 14% Delinquent rate although I haven’t invested anything else in months (since Jan). We shall see and time will tell…
Perfect credit. Never missed a payment in 19 years. Unexpected medical bill. Called and tried to lower payment amount temporarily. Was told it was pay it all or nothing. No room for someone who doesn’t want to file bankruptcy to actually pay something. Maybe it’s not the integrity of the borrower and the system is broken.
I was told thee exact same thing – what was your outcome – I am just getting ready to default….I am at end of grace period.
I know this is an old post, but I was wondering if anyone had any luck with this? I am literally 2k from a 15k loan which I have never been late on, and I asked Lending club to postpone my next two payments and then take the full amount out in the 60-day mark. Which means the loan would be paid in full in 60 days. However they flat out refused, my child has heart surgery out of state and I dont have an option now other than let my loan go default which SUCKS.
For me a red flag would be someone with $100,000 income needing to borrow $10,000 in the first place, that shows me they don’t know how to handle money, reasonably good credit score notwithstanding.
A logical conclusion!
So you are saying that only poor and stupid people take loans?
Another thing you can do to screen your P2P investments is to run a public records search on the individual borrower for a previous BK. Some commercial lending companies won’t approve anyone who has ever had a BK ever in their entire lives, even it was 30 years ago. And if you really hate debt welchers, this could be a criteria for you too. You can find this info easily with Lexis Nexis or Westlaw. You can also look up their criminal background (you’d be looking for fraud arrests or convictions), tax lien activity, and/or suits or judgements. Yes, someone can fool you with stellar credit but have all this stuff in their background!
Hi Sam,
Good info. I only have 5k to work in Prosper as a trial, but I plan to increase it to 10k by end of year. I have a 10.05% return and only do $25 loans ranging from A-C (75%) D-HR (25%). I have 3 loans in collections (1 A rating 1 B rating and 1 C rating). I have only had them for 12 months so we will see how it looks in another 12-18 months. I see a charge off as a part of doing business. Stocks, go down and they go up, business is good and business is bad. As long as I see over 6% returns I am happy.
Caonex
Hello Sam,
Any update on the loan that did not pay you back?
Maybe it’s just me, but I have had minimal chargeoffs, like 5 in 100, and a 6.5% return. The one thing that’s bugging me is Personal Capital wants to categorize Prosper and Lending Tree as CASH accounts and I can’t change it. Perhaps Sam or others, can you comment on how you deal with this. Just leave your Prosper account out of PC?
A question for all you prosper/LC veterans incl Sam, do you think this is a good time to get into p2p lending? I read in some articles that most of the loans are now poached by the institutional sharks.
The number of loans you can fund are endless. You don’t have to worry about not finding enough investments, unless you have like $100 million + to put to work.
I don’t think I have the risk tolerance for these types of loans. I’m in the same boat as a few other posters and I don’t see it being a great choice to lend to people who aren’t getting approved at larger banks. But I guess the risk/reward ratio might be a little higher…I’m very interested to see where everything goes. I expect updates in the future!
The thing is.. I’ve done this with little money for three years. So far, it’s at 7.4%. If we look at the end annual return after three years, that gives me enough comfort. Any results before then, it’s hard to know for sure.
Gotta do first and experience for yourself!
I just cant seem to find any interest in doing p2p loan investing. Ive so many bad stories out there and the returns are not that great. Wouldnt you rather use that 10k on real estate or something else you know you could get more then 7% back on?
Also, I was always curious about how the taxes work on these. Is filing taxes on all the loans (interest income) a nightmare?
Aren’t the clients of Prosper people who couldn’t get a regular, lower interest, loan from a bank? Why should I lend to them?
It’s called subprime lending, it made the Angelo Mozilo’s of the world very wealthy…
Wait, you don’t past-due and charged-off loans all the time?
Granted, I’ve only been at this for about a year and a half, but with 550 loans, I currently have:
Charge-offs: 8 (1 sold off)
1-30 days past due: 10
31+ days past due: 7
However, I still have an 11.13% seasoned return and 11.24% overall return. (Again, remember that I’m only about 18mo into this, so let’s see where I am in a couple years).
I only do debt consolidation and I do not do more than the minimum investment in each loan (I want diversification so the odds are in my favor). I look for people with generally good ratings, long work history, long credit history, and not terrible debt to income ratio. My portfolio is a little over 50% Bs and about 20% Cs, 20% Ds, and the rest are Es, As, AAs.
The consistent thing, so far, is that those who default pretty much do so right out of the gate and have long-term loans. If they *ever* pay any payments at all, it’s only about two or four payments before they just stop. (Which, to me, indicates that they probably never had any intention of repaying their loan).
Of my currently charged-off notes:
AMOUNT@ RATE | PROSPER RATING | STATUS
$25k@14.85% | B | charged off
$22k@18.55% | C | charged off – in collections
$20k@21% | D | charged off
$20k@23.44% | D | defaulted – discharged in bankruptcy
$12k@20.30% | D | charged-off
$13.5k@13.14% | B | defaulted – discharged in bankruptcy
$25k@16.55% | C | charged off – in collections
Of course, so far, the number of actual charge-offs only comes to about 1.5% of my loans.
So tell me, how did these past due and charged off loans make you feel?
I have been on Prosper since 2007! The first few years had a lot of defaults and I only ended up with a 3% return. A lot has changed since the early years, that is for sure.
Theses days I stick to AA, A, and B notes and have a solid 10% return. I have 123 total loans. 121 of them are current, 1 is 1-30 days late, and 1 is 31-60 days late. That is 98.4% current.
I have only had 3 loans charged off in the last 3-4 years (AA, B, and a C). I lost $70 on $127.5 total for the 3 loans. Anyone can default as evidenced by my having an AA note fail, but I am comfortable that Prosper verifies enough information for me to trust my returns at this point.
Making sure you spread your risk out with lots of loans is important. Don’t put in $500 and do 5 loans. You should try to do 20 loans with that $500, but plan to try to get to at least 40-50 overall.
I wrote about my experience with Prosper last fall and am probably due for an update:
Great info. I haven’t tried peer-to-peer lending, but it is an intriguing idea. I’m especially interested in some of the more “altruistic” companies that lend small sums to people in developing nations to start businesses. Anecdotally, I’ve heard that the default rate on these loans is next to nothing. Do you have any experience with this type of P2P lending?
I avoid those supposedly altruistic loan services, like Kiva. The loans are still processed through local lenders under their terms and as far as I can tell, it’s nothing more than indebting people in third-world nations who are looking desperately for simple things like a little extra grain to feed their chickens to sell eggs at the local market. Feels shady.
Well, I think allowing people to consolidate their debt to a much lower rate is pretty altruistic. So that’s my stance :)
Here is a very detailed post on Kiva Loans on FS. You’ll learn everything there is to know. Just annoyed it got ZERO shoutout from Kiva when I sent it to them.
I am a wealthy individual who doesn’t have to work. But alas I am also selfish and greedy, and enjoy mischief. Give me one reason why I should not log on to Prosper, take out huge loans, and never pay back a dime?
Well, you can’t get a loan larger than $35k… but there’s nothing stopping you from screwing people over the same way there isn’t anything to stop you from screwing over any other lender anywhere else. Like any loan outside of student loans, the only penalty is the harm it’ll do to your credit score… which if you’re wealthy enough to never need a loan, doesn’t matter in the first place.
These services (prosper, at least) don’t even have any way to verify what you claim your profession is. Or.. I think.. your income. Or how long you’ve been employed. It’s on the honor system.
I think Prosper does verify your income, although I’m not 100% sure if they verify the claimed profession. But according to their website, they do screen to ensure the applicant has the actual income they claim they have.
Rich people steal from others all the time.
Look up: Bernie Madoff.
Out of 549 $25 notes on LC I have 41 charged off, 2 in default, 17 late 16-120 days, 9 in grace period, and 158 fully paid off with 322 in good standing. Adjusted returns currently sit at 8.79%.
Not bad at all!
Any idea on when Prosper will allow investors from more states? I can’t invest in my current state, Ohio, and I don’t know if it’s because of Prosper or some government policy…
Depends on your state legislator. Probably after the next turnover.
I socked in ~$20k about two years ago, focusing on “C” rating and a normal bell curve into other risk categories. Seasoned (10 mths+) returns of 10.08%. I use the minimum $25, so I have 1000+ active notes right now on “quick invest.”
Sam you need to get more diversified!
-MrB
Yep, same here. I don’t know much about much. I’m just a lowly software engineer pulling six figures when you factor in some over time. However, I have about $10k+ in Prosper at the moment and after nearly two years, I’m still doing more than 11% (granted, it is still very early and this could fall drastically!). I aim for the meaty loans. Sure, higher default, but higher reward. Play the numbers by massively diversifying. I only invest the minimum amount and have done more than 550 loans, so far. 7 charged off with about 17 more currently over-due.
Considering I built my filters ages ago and have had it on quick-invest auto-pilot, it is a no-brainer, for me, at the moment. I don’t know that I’d invest a huge chunk of my money into it beyond the initial investment I made for fun, but after a couple weeks of researching and reading up before diving in, I have not done a drop of work since. I look at my email alerts every day or two from them and every month or two, I might log in for two minutes to see what my numbers are like. That’s it.
It feels really crappy when people default on their loans (often not paying a single payment), but as gross as that is, it’s also kind of gross that I’m making money by investing in loaning money to other people who have had such a poor time dealing with their money that they’ve had to take on more debt to consolidate their existing debt… so…
I do indeed. And this damn note is $200+! I’m going do $25-$50 from now on. 10% return is fantastico.
Thanks for sharing your findings with us! I would have been annoyed too if one of my borrowers stopped paying. Hopefully yours will get back on track since they didn’t skip payments on the other loan. That is pretty crazy they borrowed so much for a vacation on that other loan though. They should have at least consolidated debt first!
Sam, I thought you were going to go down the same path regarding debt deadbeats as well.
I have dealt with this situation working with tenants the last 30 years in middle class to lower income areas. They sign a contract, agree to the terms, look you in the eye, shake your hand, then often in the future, back out of their lease. There is very little benefit to pursuing these folks that will recoup the time and money invested in the effort.
What happened to their honor and commitment to their word? It is tough for me to handle. I keep telling myself that it is the cost of doing business.
The first few charge-offs on my prosper account solidified my wish to see us return to a debtor’s prison system.
So expensive though.
If someone shakes my hand, signs a contract, and looks me in the eye and the welchers, they will pay me back, I guarantee it!
Good to see more in this regard!
I’ve got a prosper account that’s a bit over 2 yrs old, and net returns are hovering ~8%, though I have a mix between AA and C. A bit over half are AA or A. Pretty solid return for zero work once I set filters and let things run.
I also felt the same annoying feelings when I had notes turn south, but it’s part of the game you have to accept in fixed income.
I’m winding down this account passively (stopped reinvesting payments received) as I opened an IRA at Lending Club and plan to let that one reinvest. Taxes are a killer! I may reopen in the future if the LC IRA becomes a small enough portion of my assets and I want to increase the p2p allocation and have some mix between pre-tax and taxable.
Overall, very solid platform. I’m glad to see the hype has died down, and reasonable borrower costs being pared with reasonable investor expectations. Hopefully underwriting stays consistent to prevent the bubble/bust cycle.
Hi FS,
I was sure you link for “we’re glorifying debt welchers” was going to refer to this article (https://www.businessinsider.com/greece-referendum-result-and-the-meaning-of-debt-2015-7) about Greece, and how they’re being hailed as showing those mean capitalists how debt markets work.
I did Prosper lending for a year way back when, but I suffered from some severe loss aversion, and decided not to continue on. I get pretty upset when somebody stops paying on a loan; i take it personally. Perhaps it’s just a maturity thing.
If rates tick up a bit, I’ll probably get back into the game.
Eric
A weekend read through Confessions of an Economic Hitman would probably give one some degree of sympathy for the situation Greece is in, though. Especially in dealing with Germany.
Funny though that rates are ticking down.
I firmly believe a 2% increase in the 10-year Treasury yield to 4.5% is the MAX, MAX we will see for another decade.
I went for quantity over quality, and have around 1,500 notes in the C-D range on LendingClub. I buy them in the secondary market, so they’re seasoned for 6-12 months and have a strong payment history. I’ve gotten a net return of around 7.5% and find that 4% of my notes by quantity and 3% by dollar amount default. Ironically, many of the notes that default only have a few monthly payments left. I’m not sure who decides to skimp on the final payment of a loan after paying on time for 3-5 years!
One commenter above said he sells notes at a discount as soon as they go late for the first time. I’m typically on the other side of that trade, picking up grace period notes at a 15% discount. According to LC’s own statistics, 75% resume payments, so I’ve found it to be fairly reliable.
I like LC even more because I was allocated 500 pre-IPO shares for being a customer. That was a really nice touch.
LC stock has really tanked into the mid teens.
What’s your view on the long term prospects of the company? How about the next 18 months? If not the stock price itself, then maybe fundamentals?
I think if the asset class survives (and I sure do hope it does!), then they should be fine. Maybe they just had an Apple problem… expectations so high they could not possibly be met.
So, I actually sold my LC IPO shares at $24 in the first week of trading. That said, I just bought back in yesterday in the mid-$14 range.
Fundamentally, valuation is still not at all attractive at 221x ’15 EPS, 72x ’16 EPS and 8x sales. It’s definitely a victim of the inflated tech IPO trend (but several have still worked phenomenally well). And while the lock-up has expired, I fully expect a bumpy ride over the next year and don’t have a target price.
Longer term, I like it more. I’m impressed that the board has well-regarded members like John Mack and Larry Summers. The opportunity to grow loans and origination fees is quite large, and the company takes no credit risk as an intermediary. Although nobody will know for sure until we go through another recession, it appears to be a sustainable businesses model at scale.
That’s a good point. I realize they are basically just an underwriter and a pass-through of sorts to match up borrowers and lenders. On the surface, it’s almost the same as what many small banks do… originate loans and then sell them or securitize them (of course there are spread nuances and guarantees and other complexities there, but overall similar).
Smart way to have gotten back in 30% lower than when you got out! I also think it will be bumpy, but so long as it’s a long term bet, I think they’ll survive. The key is that they eventually get to a cash flow positive state (i.e. enough scale to cover operating costs), and then they are golden. Hopefully they don’t get too greedy or experiment too much and burn up all their capital.
Very true–I completely agree!
Like you mentioned, write-offs are part of the p2p lending game. There’s simply no way to avoid them.
I’ve been investing through LendingClub since about 2012. Of the loans I’ve funded, 8-10% have been charged off. I invest primarily in C, D, and E loans which average about 16-18%. Therefore, I’m still pulling an adjusted net annualized return of a little over 8%.
The first few write-offs stung, but after awhile it just feels like the cost of doing business. I’ve been overall pleased with my returns on LC, though I haven’t held through a recession (nor has anyone else for that matter), so how my portfolio will hold up in a significant economic downturn is a giant question mark.
Wow that’s a great return considering you’ve had close to 10% charge offs! I’ll have to start taking more risks with Cs and Ds. I don’t have any Es because I’ve felt too intimidated of defaults.
8-10% seems like a lot. But yeah, just feels like business after a while. Although, I would like to know who this person is.
I was a very early prosper lender and went through the Great Recession with them… I luckily had been doing all A loans and in the end my net return for that period was about 2.5%… Considering everything it wasn’t to bad at all… Now there were a lot of people who went whole hog into the c, d, and e loans and got really hosed. What worries me right now is how long these companies will stay viable and what happens if they didn’t… If you read the docs we are unsecured borrowers of the company and don’t have recourse to the loans. LC at least is public so we can monitor their health… Prosper is backed by Sequia and I trust their judgement in general but I’m just scared to put a sizable chunk of investable assets into them… Any thoughts on that?
I have often wondered how useful credit scores are in predicting likelihood of repayment, especially in specific cases. I don’t have firm data (and am very open to seeing it), but part of me thinks that the scores are rather crude proxies for default (even if they’re still one of the best tools we have for the job). This person had a respectable score of 740-759 despite (1) showing little positive evidence of financial responsibility (just two years of positive clean credit) and (2) demonstrating flat out financial irresponsibility. A 25k vacation loan is practically a straw man of stupidity! But a credit score doesn’t capture that decision. It only sees that for two years he has been fine, and most people who have that characteristic wind up being responsible. It would be really interesting to look at a snapshot of, say 10 people, all with the same credit score, to see the different financial situations/ decisions/ histories behind the same number.
I would have filtered out that borrower for having such a short history. The FICO score is predicitive, but I need it paired with at least 5 years of borrowing history for me to fund a loan.
That’s a good point.
And also, does a good credit score really matter anymore?
My current (8) charge-offs:
740-759 == 1
720-739 == 1
680-699 == 4
660-679 == 2
Also — average credit history of the eight is 16.5 years.
Fascinating stats – thanks for sharing those! Goes to show that a really long credit history doesn’t equate to safety from default.
That is fascinating indeed.
Conclusion seems to be: Say no to sub 700 credit score borrowers!
Even for real estate, folks who have under 720-740 are put at the bottom of the stack. That’s the cutoff for “excellent” credit.
Sam how many total loans are you invested in currently? Just trying to get an idea of how diversified your loan pool is… Does Prosper sync with FolioFN?
What I was doing with Lending Club, is selling notes at a slight discount on the secondary network as soon as they went delinquent. There’s really no way for any of us to truly know how diligent the recovery team is, so after seeing several notes being charged off I had better performance dumping them and reinvesting any capital I could recapture… Even if at a loss.
I’m not sure if this is still a viable strategy to automate either, since Lending Club stopped allowing notes to be sold during their “payment in progress” period, or whatever they call it. I’ve since sold everything I could at a profit, and just syphoning off the remainder as it winds down to use the capital as down payment on another investment (only a couple grand left in the system at this point, so I don’t know how valid this is), but it might be worth looking into if you’re going to continue to invest consistently.
Hi Matt,
I’m not diversified enough. I have under 50 loans. I want to get up to 100 loans, and average at least $100 a loan.
Selling to the secondary market is a good outlet. I’ll look into it.
$25,000 for a vacation? Where were they going? And why wasn’t I invited?
In all seriousness, I can’t believe that anyone would loan them the original 25K for a vacation either.
Totally.
I *only* do debt consolidation loans. I’ve looked into it and all the other loan types (including business loan, buying an RV, buying a wedding ring, education, etc) have an incredibly high rate of failure. More importantly, I don’t trust the intention or ability to pay back a loan on a vacation or wedding. If you’re taking out loans for either one, you have already shown incredibly poor judgement and a bad sense of priorities. I mean, even if you’re not taking out a loan, paying some of these ridiculous amounts for a wedding or vacation *at all* is ridiculous.
YOLO? The most expensive vacation I’ve gone on for two is around $10,000 for 3.5 weeks. After that, it just feels way too expensive.
How much should a 72yr old healthy,married woman have in a savings account ?
Hard to say. But read:
How Much Should My Savings Be By Age?
i did a trial with lending club with $1k for 40 hand selected notes and ended up with 8 charged off loans (C and B ratings, 36 month terms).
net return ended around 5.34%
meh…
Jesse this isn’t nearly enough notes for a good assessment or a positive outcome. You actually did pretty well if you didn’t lose money on that small of a loan pool… You have to consider, two or three bad apples can really undermine total portfolio performance. There just aren’t enough positive performers to balance out the inevitable defaults.
Note selection is another huge factor in my opinion, if not the most important. I would recommend setting up two to five saved criteria/portfolios you pick notes with (hand selected if you don’t intimately know how the criteria affects/can reflect personality traits) and analyze the performance between them if you decide to give it another go.
They recommend shooting for at least 100 notes. That said, with so many charge-offs, and still a net of over 5%, that’s better than what the S&P 500 is doing in 2015 and 2.3X more than the 10-year Treasury yield!