Peer to peer lending

[brewer12345]

Quote:

Originally Posted by Nords Followup. Bamsphd brought up a few vulnerabilities with Lending Club: Apparently Prosper has raised concerns about that as well, which they're now attempting to lay at rest through an SEC filing for a subsidiary to hold their loans. The summary is here (with an organizational chart in one of the posts): Prosper Funding LLC Approved by the SEC The gory details of the SEC filing are here: EDGAR Search Results and the history is here: Prosper Announces the Creation of Bankruptcy Remote Entity If you're devoting time & effort to P2P lending then you should be following the LendAcademy.com blog to see more posts on this subject. The spotlight is now going to swing to Lending Club to see how they're protecting their loans from similar jeopardy.

But, but...CFB assured us this was a no-worries issue?

[Nords]

Quote:

Originally Posted by brewer12345 But, but...CFB assured us this was a no-worries issue?

Whether CFB is still reading this board is probably not relevant to the results... or the discussion.

[brewer12345]

Quote:

Originally Posted by Nords Whether CFB is still reading this board is probably not relevant to the results... or the discussion.

Sorry. I am back in the cube after a long vacation and bored/contemplating suicide.

[JDARNELL]

I have been playing in the p2p world the last 60 days. Doesn't seem worth the effort other than learning something new.

JDARNELL

[Nords]

Quote:

Originally Posted by JDARNELL I have been playing in the p2p world the last 60 days. Doesn't seem worth the effort other than learning something new.

I think of this as exploring opportunities while I'm at the peak of my cognition so that I'm no longer tempted by it in 30-40 years when I'm... not.

[Alex in Virginia]

I've just read a "my-experience-with" post on the blog below regarding peer-to-peer lending. The info is really, really intriguing. Even factoring in defaults, this one person's projected return is almost 14% per year.

Does anyone have actual first-hand experience with peer-to-peer lending that would be helpful?

As a high-risk-tolerance investor, I must admit this sounds like a promising prospect in which to place 10% or so of my risk principal.

Comments -- especially based on actual experience?

Thanks!

Alex in Virginia

The Lending Club Experiment … Four Months Later | Mr. Money Mustache

[brewer12345]

Quote:

Originally Posted by Alex in Virginia I've just read a "my-experience-with" post on the blog below regarding peer-to-peer lending. The info is really, really intriguing. Even factoring in defaults, this one person's projected return is almost 14% per year. Does anyone have actual first-hand experience with peer-to-peer lending that would be helpful? As a high-risk-tolerance investor, I must admit this sounds like a promising prospect in which to place 10% or so of my risk principal. Comments -- especially based on actual experience? Thanks! Alex in Virginia The Lending Club Experiment … Four Months Later | Mr. Money Mustache

Mr. MM tends to believe that sunshine radiates out of everyone's butt and has a tendency to ignore risk management. Take what you read there with a grain of salt.

[LIWIKI]

I average about 7%.
Default rates are very high.

[Nords]

It's been eight months since I started this thread, and I've learned a lot from the people who posted here. Thanks especially to EJW93, Brewer, and JDarnell. Let me know what else you learn about P2P lending!

If you're TL;DR and only going to read one post in this thread, it should be Khufu's:
http://www.early-retirement.org/foru...ml#post1240224

P2P lenders are not being adequately compensated for the risks they're taking. That's mainly because nobody-- not Lending Club or Prosper or anyone else-- seems to be capable of accurately predicting loan default rates from the short history available. Nobody appears to be able to remember what Wall Street did to CDOs and MBSs a few years ago, either.

I've finally finished digging through the prospectuses and 10Ks and media articles and blogs. There have been some interesting changes over this time, too:
- Prosper's near-death experience
- Lending Club's struggles to retain their core retail lenders while courting their new institutional lenders
- Google's buyout of some LC investors
- The struggles of both companies as they attempt to scale up on their current fee structures.

Most of you regulars have already seen the blog posts, but I'll link them here to tie it all together. They should be read in the order they're linked: a general overview of the P2P business, advice for prospective P2P borrowers, and then more advice for P2P lenders.
The problems with peer-to-peer lending
Peer-to-peer loan calculator
More problems with peer-to-peer lending

There's way too much money chasing too few borrowers. Posters have mentioned that their actual returns are lower than advertised, and I suspect that's only going to continue. Both companies disclose how they calculate their returns data, but it essentially consists of assuming that (1) all funds are immediately reinvested and (2) defaults are only recognized months after the borrowers have stopped paying. P2P lenders should run their own Excel XIRR spreadsheets for the actual returns data, and I'd recognize defaults if the loan goes past 30 days late.

Lenders have to be willing to lock up their money for 3-5 years or else harvest the principal & interest payments (which lowers their actual returns). 800 loans @ $25 ($20,000) appears to be the minimum number for guaranteeing that you'll break even, which is probably better than paying fees on a checking account. If you're trying to distinguish investing skill from luck then it will take at least $180K in loans @ $25 (7200 loans). That $180K should be less than 10% of an investor's asset allocation, and preferably 5%. The automated investing tools of the P2P companies are not yet up to this task, unless you're an institutional investor who's willing to pay extra for concierge service.

There is some liquidity in the secondary market but it can take a week or two to receive the full value of the loan, and this liquidity will dry up at the next hint of a recession.

If you're reading this board then you already know there are better ways for P2P borrowers to get out of debt.

The best I can say on the whole sector is that P2P borrowing actually seems like a better deal than P2P lending... and P2P borrowers already have better alternatives.

[clifp]

Great blogs Nords.

I managed to get back 90% of my money with Prosper which considering the time frame was better than having money in the market.

It is also 30x higher than I've got in Angel philanthropy Investing, (except for tax credits.)

I am looking forward to your blogs on Angel Investing, and if you need a guest blogger.....

[Nords]

Quote:

Originally Posted by clifp It is also 30x higher than I've got in Angel philanthropy Investing, (except for tax credits.) I am looking forward to your blogs on Angel Investing, and if you need a guest blogger.....

I'll need all the guest help I can get when I blog about angel investing. That'll be a very difficult post, because so much of it will be about issues other than the money. It's certainly another great example of a lack of liquidity.

I should probably wait to write that post until I'm basking in the warm glow of an exit from at least one of my angel investments. Five years and counting... no bad news so far but no exits either.

[REWahoo]

Quote:

Originally Posted by Nords I should probably wait to write that post until I'm basking in the warm glow of an exit from at least one of my angel investments. Five years and counting... no bad news so far but no exits either.

You left out clearly defining the info we all want to know: made any money?

[Nords]

Quote:

Originally Posted by REWahoo You left out clearly defining the info we all want to know: made any money?

Sorry, I didn't intend to be evasive.

The answer is "Heck no." Technically I haven't "lost" any either. I've just locked my money away in illiquid shares.

It turns out that there are many ways for a startup to exit. It's not just "IPO" or "bankruptcy". All of the other ways tend to be messy, and only a few of them are fully liquid. It may be another decade before all the data is in, the tax returns are filed, and the scorecard is finished.

The companies that I've invested in are still operating. One of them ("Clearfuels") has been taken over by a joint-venture partner in exchange for publicly-traded stock which may someday be worth what we paid for Clearfuels shares. Another one ("Adama Materials") seems stuck in the lab, where DOE and DoD grants are much more attractive to some startups than selling products and earning sales revenue.

The others are still perking along, selling stuff and earning money and growing (some more quickly than others) or else achieving their milestones and selling more shares to other investors. They attract attention from larger companies who may eventually acquire them, but nobody's buying yet. One of them may IPO, but they've been ominously quiet about that lately.

A couple of my investments were offset by state tax credits, a program which expired in 2010 and will probably never be renewed. (I now have enough tax credits to last at least 25 years, but that's a bad reason to be an angel investor.) I've paid five years of dues to the angel investing group, although about 40% of that goes toward a very nice buffet lunch. At least once a month I burn gas (and pay parking) to attend meetings. I'm tracking those expenses on my IRR spreadsheet to offset the future (hypothetical?) capital gains.

Today's startups typically go 5-8 years before a "liquidity event", although a few (especially software) can exit in 18-36 months. I'm no longer investing in new startups, although the environment is better than ever. ClifP and I have seen a couple of very sweet deals in the last year.

The main reason I started this angel-investing odyssey was to immunize myself against the temptation to get involved when I reach my 70s. That goal has succeeded beyond all expectations. When angel investing is done right, it can be a full-time job.

[Onward]

Boy, that's a long list of downsides to P2P lending. I've been an investor on Prosper and Lending Club for six years, and I have a very different (and more positive) take.

But I don't mind seeing negative reviews, for the same reason I like reading bearish calls on the stock market. They help reduce froth.

[clifp]

Quote:

Originally Posted by Onward Boy, that's a long list of downsides to P2P lending. I've been an investor on Prosper and Lending Club for six years, and I have a very different (and more positive) take. But I don't mind seeing negative reviews, for the same reason I like reading bearish calls on the stock market. They help reduce froth.

Lending Club I can believe but Prosper I am surprised. I started lending Aug 2006 and stopped in early 2007, so the last of my note matured in Feb 2010. When I stopped pretty much everyone was complaining and more importantly the outside statistic places were showing almost no one was making money.

From what I can tell, and Nords blogs things have improved. Still as Nords points ultimately Prosper and LendingClub have to make money and they are a long way from doing that.

[cute fuzzy bunny]

[mod edit]

I've passed one year with LC. The short version is I cleared almost 8K on a 60k investment, after defaults. The vast majority of defaults I got were loans I wouldn't buy today, knowing what I know. Basically using the same filter mentioned previously. My "NAR" is still over 13% while I expected it to drop to 11 by now and hang around there. It actually bottomed out around 12.5 and has started to climb again, as my later and more recent note buys were higher interest than my first large lump. I bought some A's and a LOT of B's, to start with and buy nothing over a C5 now. So I'm anticipating an increase in my rate of return. I'm still seeing almost the same default rate between B and D notes. Its worth it to dip a little lower on the credit chain, for almost double the interest.

I'm still spending ~5 minutes a day buying notes...1 to 10 or so per day. As mentioned before, deploying a lot of capital in a short time with the filters/quality level I'm looking for would be challenging, so many of the early notes I bought with a wider filter and 'in bulk' are where my bits of defaults are occurring.

Certainly in the event of another major recession, I may see my return drop to near zero, but the overall credit default rate in the worst of the recent recession would still have me making a lot more than CD's, bonds or money markets. Plus if we have a second dip thats worse than that one (about what it'd take for me to lose money), I don't think anyone would be particularly happy with any of their investments, or the quality of life they'd 'enjoy' thereafter. So losing a hunk of my piddly little 5% of my net worth wouldn't really concern me a whole lot. You folks that hold gold as a minority holding lost more in the last few months than I plausibly ever will.

I haven't needed to harvest income from this, so my returns are now compounding.

Cool part (and I'll tie this in to the health care thread post I'll make next) is that this is considered 'invested money' and not cash on hand, and since I'm getting by just fine on dividends and interest and bartering (which is a thread all to itself). That means that (because I have no high withdrawal to pay a mortgage or car payments) I get lots and lots of low income subsidies and the feds will be paying most of my health care premiums starting on 1/1.

I'm actually looking forward to rising inflation and interest rates, which will floor bond investors. I'll be able to invest in higher credit rated notes at a higher interest rate, and really clean up on the notes at the credit level I'm writing now.

The liquidity bugaboo is nothing more than smelly vaporous cloud with nothing in it. Since many states don't allow LC investors to buy new notes, they buy 'used' notes on the secondary market and frequently pay more than face value for curated quality notes with a good payment history. In fact, you can get the face value and 2-5 months interest up front on them. Well priced notes sell in hours or a day or so, not in weeks or whatever the people who aren't doing this and know little about it claim. Its hardly less liquid than a mutual fund.

Doing exactly what I wanted it to do...giving me some income on my cash buffer while barely taking any time from my couch potato-ing. Wish I could buy some 7% cd's or a 3% money market and forget about it, but that isn't how things are working right now.

[Running_Man]

With Lending Club IPO going so very great thought perhaps this old thread would be of interest.

[Chuckanut]

I've thought about peer to peer lending as a way of earning more interest. But, then I remember Uber, the problems they are having, and the fact that I can't earn it back.

Now, if PenFed would just offer those 3% CD's one more time!