Peer-to-Peer Lending 5-Year Performance Update

peer to peer investing updateMy experiment with peer-to-peer lending at Prosper.com continues, and it’s turned into a consistent cash flow month after month.

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 used Lending Robot to automatically deploy idle cash for all of 2015, which has worked out pretty well so far. (More on that automation below.)

(Your first $10k is managed for free!)

Summary

My loans are earning 12.41% (“seasoned” — up 0.64% from last year) and 12.23% (overall — up 0.61% from last year), better than the rates currently advertised on the homepage. The “seasoned” number contains only notes that are at least 10 months old.

prosper overall returns

(Most defaults happen early in the repayment cycle, so sharing a seasoned number only is a more accurate view of the potential long-term returns.

In an effort to deploy some of the idle cash last year, I opened up investments to some select B and C grade notes, which historically haven’t done as well for me, but with the mentality that ANY positive return would be better than having the cash sit around in the account collecting dust.

The loan performance for 2015 was slightly lower than the last couple years:

prosper annualized returns by year 2016

It also could be that Prosper themselves are lowering their borrowing rates in effort to attract more clients on that side of the business.

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):

prosper returns by loan rating

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

prosper 2016 advertised returns

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.

One reason I think the overall returns are up since last year is this shift in asset allocation. The account has become MUCH riskier, with now 80% of my loans rated D, E, or HR. (Which is right where I want it!)

prosper asset allocation

With the help of Lending Robot, my cash balance has gone to zero several times throughout the year, and when it does, I throw in another $500 or so and let that invest. Relative to last year, I now have very little idle cash in the account, which is a good thing.

(Get your first $10,000 managed free when you join through my Lending Robot referral link. I’ll also earn an extra $5k in free managed funds.)

One weird thing about Lending Robot is their “projected return” figures are MUCH lower than my historical (and therefore future-projected) returns.

lending robot expected returns

I’m not sure why that is. Notes issued in the past with similar “stats” have performed much higher — according to Prosper at least. Still, the automation is a huge time-saver and you can turn it up, down, or off at any time.

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.)

At this point, I’m also reinvesting all the monthly cash flow earned on these investments.

Chargeoffs

In total, 12.5% of my loans have defaulted, and another 5.2% of the active notes are currently delinquent.

If those numbers seem high, keep in mind I’m primarily investing in high risk, high return notes.

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. Of course the challenge is you won’t know your chargeoff total until the year is over and you get your tax forms from Prosper.

Cash Flow by Month

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

  • January  $164.08
  • February  $286.64
  • March  $186.72
  • April  $277.32
  • May  $270.79
  • June  $313.62
  • July  $348.35
  • August  $240.89
  • September $92.79
  • October  $316.41
  • November  $81.19 <– yikes lots of chargeoffs!
  • December  $203.04
  • AVERAGE  $232/mo

The monthly cash flow is up about $24 per month on average compared with last year. I’d still love to get this channel to $500/mo but I’m afraid I won’t be able to do that and stay under the $3000 chargeoff limit for taxes.

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!

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11 thoughts on “Peer-to-Peer Lending 5-Year Performance Update

  1. Hey man, this is great timing as I’ve been looking into the various Peer-to-Peer Lending platforms to get started with investing.

    Looks like a nice way to generate an additional revenue source. I’m in the UK so will have to look into the tax laws to see if I can come in under the maximum allowable.

    I’ve just grabbed your filters too, thanks again Nick.

    – Lewis

  2. Nick, this is incredible detail!!! This is the sort of thing that I’d expect to see over at Get Rich Slowly.

    I don’t know how familiar you are with them, but this piece has potential beyond your blog, me thinks :)

    I especially love the monthly breakdown — super helpful, and honest. Good man!

  3. Nick, THANKS! especially for the actual breakdown by month!
    I’ve had this on my list of future passive income streams.
    What this shows me is that like any other side hustle, you need to invest some time to understand it, then monitor & tweak it as you go along.
    Your info has help put me ahead of starting from scratch!
    thanks man.

    Don

    • I’ve got $31,400 in there right now. $22k of which is mine — though have ramped up slowly from an initial $5k deposit — and the rest is now “house money.”

  4. Hi Nick, thanks again for providing this step by step guide, it’s awesome! I downloaded your Lending Robot filters, and it appears Lending Robot deprecated the top 25% popularity filter. That filter was part of Rule #3. Just a heads up!

  5. Hi Nick,
    I was soooo inspired by your success at Prosper, that I decided to give it a go.
    Unfortunately, as a resident of the great state of Ohio, I cannot. :(
    A heads up for anyone that might be considering Prosper and also reside in Ohio (or Maryland, apparently).
    Thanks!!
    Pete

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