Peer-to-Peer Lending 6-Year Performance Update

My experiment with peer-to-peer lending at Prosper.com continues, though I’m not quite as bullish on it as I was a year ago.

The platform has seen some impressive growth, both in terms of the number and volume of “originations,” and the number of lenders competing for the most attractive loans to lend on.

I’m still using Lending Robot to automatically deploy idle cash in my account, but I actually started to withdraw some earnings in 2016, where up to this point I’d pretty much reinvested everything.

Summary

My loans are earning 13.9% (up 1.5% from last year), far better than the rates currently advertised on the homepage.

Most defaults happen early in the repayment cycle, so the seasoned number only is a more accurate view of the potential long-term returns. In my case, since the account has been open for such a long time and the lending strategy has been similar over many years, the seasoned and “all notes” returns are almost identical.

The loan performance for 2016 was pretty comparable to the last few years:

I used the NickelSteamroller historical performance data to try and dial in the risk factors that had the biggest impact and the highest returns.

BONUS: Click here to download the actual loan filters I use for my Prosper investments.

download my prosper investing filters

Returns by Loan Grade

Take a look at my returns by loan grade (the lower the grade, the riskier the loan):

And here’s what Prosper says are the average returns by loan grade.

Gotta feel good about “beating the index,” right?

My Investment Strategy

Because of the markedly higher returns among the lower-grade notes, I’ve tried to skew my portfolio toward those. If E and HR notes have the best returns, why not just invest in them exclusively?

Because there aren’t that many available. Or rather, there aren’t that many available that also meet my Nickel Steamroller filters.

As I’ve pretty much stopped buying A, B, and C-grade notes, over 85% of my loans are now rated D, E, or HR. (This is a high-risk, high return strategy, but it’s intentional.)

I invest $25-50 per loan to make sure I’m diversified on the platform and am not out too much if any one note defaults. (More on chargeoffs below.)

Chargeoffs

In total, 10.9% of my loans have defaulted, and another 9% of the active notes are currently delinquent.

One drawback to peer-to-peer investing is that you are limited in the amount of loan chargeoffs you can deduct from your investing income each year on your taxes. As it stands now, my understanding is that you can only claim up to $3000 worth of chargeoffs per year.

After that, you’re probably better off investing in other assets, or switching to a peer-to-peer portfolio with less risky notes. You can track your chargeoff total by monitoring your monthly statements from Prosper.

Cash Flow by Month

But here’s where things get interesting / confusing to me. While the percentage returns look great, my monthly cash flow tells a different story.

I started tracking cash flow a couple years ago as part of my passive income goal. This figure includes payments received less chargeoffs.

  • January $174.28
  • February $233.3
  • March $244.85
  • April $328.19
  • May $292.59
  • June $130.82
  • July $309.6
  • August $191.44
  • September $208.76
  • October $27.85
  • November $-42.49
  • December $116.67
  • January ’17 $-61.44
  • AVERAGE  $166/mo

The monthly cash flow is down about $65 per month on average compared with last year.

I’m really not sure the cause of this. I saw a sizeable spike in chargeoffs in the second half of 2016 that continued into January of this year.

This long-term view of the account is actually helpful for me to look at. Even with the recent dip, this investment vehicle still is a great dividend engine that earned over $2000 last year.

One possible explanation for the recent decline is I have fewer new notes at the top of the repayment cycle (because I invested less in 2016 than in 2015), and as the portfolio ages I’m seeing a marked increase in the percentage of delinquencies.

For that reason, I’ve begun withdrawing some of the cash my Prosper account spins off, which will probably make the problem worse in the near-term. Do I have a fistful of toxic loans in my portfolio? It’s possible. My hope and theory is the loans will stabilize this year and get back to a more consistent positive cash flow.

I’m tracking the performance a little more closely now, and also evaluating some new alternative investment platforms to play around with.

For me, this is about buying cash flow. If you look at it that way, you can begin to evaluate the different investment opportunities on a level playing field. How expensive is each dollar of return in terms of the cash you need to “buy” it and the risks involved?

download my prosper investing filters

Your Turn

My initial investment was allocated automatically across a diverse portfolio of loans of all grades. No other filtering criteria was used.

Turns out, that’s not the smartest way to do peer-to-peer investing. Since then, I’ve started to use some of the filters available to hand-select the ones I think will perform well based on my default study and some historical data made available on sites like Nickel Steamroller.

Even if you went after lower risk loans, you could still earn a healthy 5-10%. Not a bad way to put some excess cash to use if you’re looking for an alternative investment.

I haven’t yet opened an account at Lending Club, Prosper’s primary competition.

Still a pretty fun and exciting way to invest. If you want to get started with an account of your own, be sure to hit up my affiliate link so I get some credit!

7 thoughts on “Peer-to-Peer Lending 6-Year Performance Update

  1. Prosper is doing much better for me than LC is.

    I’m actually pulling money out of LC until I get my balance down to $50k. It’s just not returning what I want it to and I prefer to have the cash in hand.

  2. I currently invest with Lending Club. I started out about a year ago with a really small investment of $350 spread across 14 notes. My current return rate sits at 14.67%. I’ve decided to let this grow organically so I haven’t put any more money in. I just reinvest the returns back into more notes. Currently, I have 18 notes and have only had one bad actor that may get charged off in a month or two. I have hand picked all of my notes based on my own criteria and it seems to be working out ok so far. Like you say, I think it’s a fun way to invest if you have some extra cash laying around.

  3. Thanks for the clarification. I assumed so but just wanted to make sure. Also, as an FYI there are savings accounts that give 1% monthly interest. I know Barclays does this with a limit on how much you can put in a month (I think 1k). That’s a pretty good annual return as well for a more conservative investment.

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