Peer to peer lending: bond or alternative

[hotwired]

I am in the process of fine tuning my asset allocation and rebalancing. I have a good chunk in lending club and prosper (P2P lending) and it's generated a very steady 6.5-9% CAGR the past 3-4 years. Very steady, bond-like returns, very little volatility and it's incredibly well diversified (500 plus loans at 25-100 $ ea). I have been wondering if I should include that in my bond allocation or "alternative" allocation. I'm sticking with "bond" for now, following the "if it walks like a duck it probably is one' theory. It might be a new and unusual product, but it performs like a bond fund, in fact I'd say it most closely represents a mortgage backed security fund like AGNC ... except there's NO collateral! Anyway, any thoughts appreciated. Not a huge deal ... I'll probably retire the same day whether I call it an alternative investement or a bond holding!

Cheers, all.

 

[Onward]

I'm wondering the same thing. I'm guessing that the traditional asset class that p2p loans mimic most closely is junk bonds or mortgage bonds eek. But I can't say for sure.

I've been a p2p lender pretty much since the beginning. My return at Prosper, through 2010, was roughly -2% per year. This was the so-called "Prosper 1.0" days.

My return at Lending Club since 2010 has been significantly better.

 

[clifp]

I say alternative investment most similar to junk bonds. It is way too early to have even a 1/2 way decent model of P2P lending. My experience early on with Prosper was also -2% annual loss over almost 4 years. Which was probably better than the stock market during the same time period. I haven't tried The Lending Club, since have fooled around with Prosper the newness appeal isn't there.

My guess is that P2P are more sensitive to economic conditions than interest rates and as such behave more like junk bonds, than something like a mortgage bond. The fact you got decent returns during this economy is both surprising and heartening.

 

[ejw93]

I vote for 'other/alternative'.

P2P lending lacks the liquidity of a bond or mutual fund b/c the exit costs are steep.

Can't speak for Prosper, but on LC if you wanted to liquidate your position you'd have to sell your loans for a minimum 0.99 percent loss/sales commission.

Btw, my LC IRR over 2 years (Roth Acct) is 9.46 percent (not their hokey return figure, but my real cash-on-cash IRR as calculated by spreadsheet).

That being said, I'm still a fan of using LC to provide bouyancy/diversification in a tax-deferred account.

 

[photoguy]

So two posters are reporting 6-9% returns while the other two are reporting -2% on p2p lending. Any ideas what's causing the difference?

 

[Onward]

So two posters are reporting 6-9% returns while the other two are reporting -2% on p2p lending. Any ideas what's causing the difference?

The -2% returns for both of us were from the first version of Prosper, which got drastically reworked around 2009, as I recall.