lending club, my best investment of 2008

I have written about person-to-person (or P2P) lending several times. The big players in the US are Prosper (currently not accepting new lender registrations) and Lending Club. I invested a bit of money in both of them. I was checking up on both of my accounts and noticed a startling fact: my current rates of returns on these two accounts make them my best two investments of the past year – bar none.

Lending Club: 14.71%
Prosper: 12.41%

My 401(k) is down a ridiculous amount. My IRAs and brokerage accounts took a pounding, and the only positives out of those are my cash and bond fund positions. Even other areas which could loosely be called investments are sliding:

Home values in the New York area – after resisting the rest of the US real estate bust for a long time – finally started falling, and fast.
My contract consulting work dried up – the networking and recommendations don’t mean much when the corporations who usually would hire me are collapsing.
Even other side businesses – websites, freelance work, etc. – require a lot more effort for lower returns.

I am not bemoaning my financial situation (I’ve done enough of that in other posts, I think) and I’m not lauding P2P lending as an investing opportunity that you must jump into with reckless abandon, because my results might not be your results.

What I am noticing is that the mantra of “diversify, diversify, diversify” can’t be hammered home enough – even to myself. My index funds are way down – but less than my two individual stocks (mistake)! My portfolio is down, but not as much as if I hadn’t included bond funds. My income is down, but not by as much as it would have been had I not had side earnings. And P2P lending continues to give me great rates of return. Hindsight is 20/20, but I should have invested more in Lending Club when I had the chance. That small diversification of my investments at least gave me a few seconds to smile in an otherwise grim year-end assessment.

My other posts about < Lending Club:

photo credit: josef.stuefer

(and no, the photo has nothing to do with the post – I just figured we could all do with a picture of a Leffe)

lending club, my best investment of 2008

http://www.thewriterscoin.com Writer's Coin

Diversify is right, but I'm curious how comfortable you feel investing in P2P in the current environment. Do you still feel confident in the ratings and that people will pay you back?

With so many people losing jobs and things going haywire, it seems like we can't trust our banks. But can we trust ourselves?

http://www.bripblap.com Steve @ bripblap

@WC: Good question. As I said, I don't think I'd recommend anyone plow their life savings into P2P lending. I'm not going to. I'm going to make a ridiculous example here: if I was an investor in AIG or Citi or Merrill, would I feel more comfortable that I'm going to get the money I invested in them back (or the money they've invested in luxury jets, custom designer rugs, etc.), or to get my microloan of a few hundred bucks back from someone who's serious enough about paying down credit card debt that they went out on the internet and found LC or Prosper?

I'm cynical enough now to think that in terms of “safe” investments, P2P is at least as reasonable as most of the bailout banks. It's obvious to me that the ratings for LC/Prosper are at least as valid as the (in retrospect) fictitious ratings by Moody's and so on.

http://plonkee.com plonkee

I agree that diversification is key. I think I'm likely to be looking at having the same income as last year but greater expenses (and that's at best). But I feel better knowing that even if I lost one source of income, I'd still have another – I should probably work on further ideas though.

As for whether you'll continue to get amazing rates from P2P – I'd say not. I suspect that there will be as many defaults on P2P as there are on regular loans, maybe more, but you should be able to afford to have some defaulters and diversify within P2P as well as outside of it.
Ford

First rule of the club: don't talk about the club!

Sounds like an interesting alternative investment. You know what the typical default is?

http://www.bripblap.com Steve @ bripblap

@Ford: I know that Lending Club rates on a sliding scale and the very “worst” loan – a G5 – assumes a default rate of 5.53%. For May 2007-Oct 2008 the overall default rate (according to Lending Club) was 2%. That may not sound like much, but of course that's a 2% chance of losing your principal altogether, which is something to consider.

http://blog.budgetpulse.com/ Craig

I don't really understand the whole Lending Club thing and how it can bring you a return. Would it be possible to explain it in basic details more, maybe in a future post?

http://www.bripblap.com Steve @ bripblap

I certainly will cover it a bit more, although my earlier post “what is Lending Club” covers a lot of ground. In a nutshell, you're making 3-year loans at a set interest rate. That's massively oversimplified (maybe too much) but effectively that's what's happening.

http://www.personalfinanceology.com Personal Finance Ology

How much did you invest in these two? That can make all the difference. I invested 2k. While I am still positive. I have had 2 charge-offs already. If you have invested very little, their is a good chance you just wouldn't have gotten any defaults yet.

A would be a little wary of posting 12%+ returns like that. The three years isn't up yet, you have no idea how you will fare by the end of it. They could all default tomorrow and you would have gotten a -90% return or something.

Also default rate of 2% is a joke. It is way higher than that. Even if you invest in A's or higher. 2% may be the average default rate that credit cards get, but those stats don't apply hear. Usually the people who are on Prosper and lending club are desperate, their cards are already maxed out and they don't have any other options. Meaning their default rate is way higher than that. If it were just 2%, I'd plow all my money in!

By the way, if you did have a 2% default rate on money you got 10% on, that would be like subtracting 2.2% from your return. Meaning you would end up with 7.8% return (not bad). You mention you are losing the principle too, but you would only be losing 2% of your total principle (assuming you were well diversified). Idk if that made any sense but that was intended for the non math inclined.

There are actually a lot of good sites that track all the stats for these sites, you should check them out. Just google them.

http://www.bripblap.com Steve @ bripblap

@PFO: I didn't invest much – we're talking less than $1000 all told. I would have invested more recently but Prosper's not accepting new lender activity and Lending Club hasn't been “approved” or whatever the term is in New Jersey yet, although I am sure they will be shortly.

I don't think saying I've got a 12% return to date is any more or less accurate than talking about my unrealized stock gains/losses would be. That represents the rate on the loans, and I've realized SOME of the interest and SOME of the principal being returned. It's just the same as saying a mutual fund lost 30% this year… it did, but if I haven't sold it yet the return might be different next year.

Well, the 2% rate comes from Lending Club, and to be honest most of the loans I've made on LC and Prosper aren't for desperate people refinancing – it's people who are consolidating and taking a very measured approach to debt repayment, or trying to raise capital for a venture.

I've seen a few of the stats sites, and I'll probably cover that in a future post if I write more about LC or Prosper. And you're entirely correct that the default rate would represent a decrease in my overall return, but I've been lucky (or a good loan picker) and haven't seen defaults yet.

Jim @ InvestWithLessRisk.com

I haven't figured out my yearly return yet but my experience doesn't look to be quite as good as yours.

http://www.investwithlessrisk.com/the-death-of-…

Scott

Um….yeah. That's because you went with Prosper. There is actually a big difference between the two.
http://www.bripblap.com Steve @ bripblap

It's hard to say – maybe I've been lucky so far, but I've only got one late loan and so far no defaults. Certainly I'd be singing a different tune to a 53% default rate – but then again, one of my mutual funds is down 60%, so it's hardly unusual.

Elaine

hope you get your principal back, especially in this environment.

if you read closely at their prospectus – if the person you're lending to is insolvent, you lose your principal. if LENDING CLUB is insolvent, you lose your principal. you are technically lending at the unsecured tranche of debt to the company.

http://www.bripblap.com Steve @ bripblap

Sure, I think that's understood, Elaine. The fact that it's effectively an unsecured loan is what drives the higher rates of return. It's the same with credit cards and mortgages – the credit card rates are higher since they are unsecured.

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401k_ira

Thanks for information, I'll always keep updated here!
unsecured loans for bad credit

thats a nice article. …

http://www.bripblap.com Steve @ bripblap

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(and no, the photo has nothing to do with the post – I just figured we could all do with a picture of a Leffe)

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