My experiment with peer-to-peer lending at Prosper.com continues, and it’s been another busy year.
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.
In fact, there’s been a huge influx of institutional money buying up big chunks of peer-to-peer notes as part of their portfolio, making it harder and harder for individual investors to play.
Up until this year, I never really had any problem reinvesting the cash the account spun off. But now I’m dealing with some idle capital because I can’t find enough loans to lend on.
My loans are earning 11.44% (“seasoned”) and 12.12% (overall), better than the rates currently advertised on the homepage, and nearly 2 percentage points greater than last year. The “seasoned” number contains only notes that are at least 10 months old.
(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.)
So what changed to improve the performance of the account?
Last year I spent some time taking a deep analysis into the loans that had defaulted in my account so far, resulting in a bunch of charts and graphs and discoveries I’d never really thought of before.
Now that I have more than 100 defaults to study, I could update those reports to see if there have been any changes in the trends or new things to watch out for. But I’m not sure it’s worth the time to do that, because I can’t find any loans to buy anyway! (more on that below)
Also, as time has gone by, the number of hand-selected notes has increased as a percentage of my portfolio, and those have generated stronger returns than the initial batch of “easy-button-dummy-diversification” plan notes I bought.
Knowing what factors seemed to contribute to higher default rates, my picks performed significantly better in 2013 than in prior years:
Since last year, there are a few newsworthy items to take note of:
- In the past, Prosper advocated for fractional ownership of the loans, promoting a more peer-to-peer relationship and diversification on the lender side. In 2013, they introduced a Whole Loan program allowing buyers to buy up complete notes.
- Institutional investors fully embraced peer-to-peer lending, buying up as much as two-thirds of the available inventory before the notes were even made available to the general public.
- Serious peer-to-peer investors are moving to automated investments using software that taps into the company’s API. I tested one of these solutions but found it was missing several critical filters.
Returns by Loan Grade
Take a look at my returns by loan grade (the lower the grade, the riskier the loan):
These are for the seasoned loans:
And for all notes:
Because of the markedly higher returns among the lower-grade notes, I’ve tried to skew my portfolio toward those. But sometimes they’re increasingly hard to come by and 7-8% is still better than having the funds sit in cash and earn 0%.
Lately I’m having a really hard time finding anything riskier than a C grade.
In total, 9.4% of my loans have defaulted, and another 5.3% of the active notes are currently delinquent.
Cash Flow by Month
I started tracking cash flow last year as part of my passive income goal. This figure includes payments received less chargeoffs.
- January $169.19
- Februrary $163.66
- March $164.57
- April $252.71
- May $236.28
- June $198.09
- July $232.99
- August $373.97
- September $237.76
- October $273.36
- November $250.78
- December $301.98
- January ’14 $228.77
- February ’14 $120.82
- AVERAGE $229/mo
My intention has been to reinvest those cash flows in more Prosper loans, but until I find a good software solution to do so, I’m stuck with more idle cash than I’d like.
If I can get that kind of auto-investment going, I’d like to try to get to $500 a month here. If not, I might slowly start withdrawing and seeing where else I can put that cash to work.
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 Prosper-Stats.com.