Peer-to-peer lending as an investment?

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radnor
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Peer-to-peer lending as an investment?

Post by radnor » Wed Feb 22, 2017 5:10 pm

I don't hear a lot about P2P lending. Is that because it's not all that it's cracked up to be? What are your thoughts on this?

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Re: Peer-to-peer lending as an investment?

Post by Whakamole » Wed Feb 22, 2017 5:39 pm


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Re: Peer-to-peer lending as an investment?

Post by Jack FFR1846 » Wed Feb 22, 2017 5:46 pm

Lending Club has had their problems and the "good" loans supposedly are snapped up by institutions. I've got a very small investment there in A, B, C loans and have consistently received about 11% annually. I'm sure all the bad press has scared people away. MrMoneyMustache has an ongoing sheet documenting how his investments have been doing. He invests opposite of how I do with D, E, F loans and has had a ton of defaults lately. I keep track of my return vs his and they're close to equal although it looks like his might start falling apart.
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Re: Peer-to-peer lending as an investment?

Post by Valuethinker » Thu Feb 23, 2017 5:14 am

radnor wrote:I don't hear a lot about P2P lending. Is that because it's not all that it's cracked up to be? What are your thoughts on this?
Check threads.

The short answer is the easy money has been made, and default rates are rising/ loan quality falling. Borrowers who need to keep borrowing to stay solvent have discovered these platforms, and that is hurting investors. I you think of Minsky's stages of finance leading to a crisis, it seems we are in to the Ponzi stage.

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Re: Peer-to-peer lending as an investment?

Post by chw » Thu Feb 23, 2017 6:08 am

I was a long term LC investor (5-6 years). I picked my own loans, and generally had ok performance (8% return after losses). I noticed a drop off in the quality of the available loans that were being filtered based my screening criteria about 4 years ago, and noticed the default rates on the loan vintages after that time frame were higher. It seems the institutional investors were getting first crack at the better loans...

I decided LC wasn't for me- not due to the default risk of the loans, but due to the possibility of getting wiped out if LC failed or went bankrupt. Many investors falsely think they have direct ownership investments in the notes- they don't, and basically rely on the health of LC to be able to fully recoup their investment in the notes. I've been letting my portfolio pay down over the past 3-4 years, and am mostly out of my investment, which at one time reached over 2,000 notes.

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Re: Peer-to-peer lending as an investment?

Post by queso » Thu Feb 23, 2017 8:25 am

chw wrote:I was a long term LC investor (5-6 years). I picked my own loans, and generally had ok performance (8% return after losses). I noticed a drop off in the quality of the available loans that were being filtered based my screening criteria about 4 years ago, and noticed the default rates on the loan vintages after that time frame were higher. It seems the institutional investors were getting first crack at the better loans...

I decided LC wasn't for me- not due to the default risk of the loans, but due to the possibility of getting wiped out if LC failed or went bankrupt. Many investors falsely think they have direct ownership investments in the notes- they don't, and basically rely on the health of LC to be able to fully recoup their investment in the notes. I've been letting my portfolio pay down over the past 3-4 years, and am mostly out of my investment, which at one time reached over 2,000 notes.
This. I did the same with Prosper and have been letting my cash balance build up and withdrawing it several times a year. It was fun for a while, but more work and the risk vs. reward isn't there compared to VTSAX.

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Re: Peer-to-peer lending as an investment?

Post by larryswedroe » Thu Feb 23, 2017 9:31 am

There are now funds available which is a far superior approach due to obvious diversification benefits, though of course have to pay for that.
We use LENDX via Stone Ridge but there are other vehicles like River North and Colchis
Note I have a very significant investment in this fund.
We expect returns long term in the 6-7% range with about SD of 5, note as rates move up the yields will rise quickly as duration only about 1.5
Larry

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Re: Peer-to-peer lending as an investment?

Post by smackboy1 » Thu Feb 23, 2017 11:59 am

I'm not familiar with P2P lending as an asset class either. What are it's characteristics and how does it fit into a portfolio?

It sounds like the personal debt version of junk bonds: higher expected returns along with higher default risk. What is the correlation compared to high quality fixed income and equity? I assume that for most investors returns would be taxed as ordinary income so not that great in a taxable space.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

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Re: Peer-to-peer lending as an investment?

Post by chw » Thu Feb 23, 2017 3:44 pm

larryswedroe wrote:There are now funds available which is a far superior approach due to obvious diversification benefits, though of course have to pay for that.
We use LENDX via Stone Ridge but there are other vehicles like River North and Colchis
Note I have a very significant investment in this fund.
We expect returns long term in the 6-7% range with about SD of 5, note as rates move up the yields will rise quickly as duration only about 1.5
Larry
Larry, are these funds investing in notes on the LC or Prosper platforms, or are they issuing debt directly to the consumer?

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Re: Peer-to-peer lending as an investment?

Post by larryswedroe » Thu Feb 23, 2017 5:07 pm

chw
They buy loans funded by the platforms that meet their credit criteria, the originator SERVICES the loans

As to the question about is it version of junk.
Depends on the type of loans originated and bought. Stone Ridge for example buys only what are considered prime loans from consumers and small businesses and student loans. So credit scores above a certain level, and look for a certain quality of the overall book, so a certain percentage of loans that are A, B, C, D, not loaded with D.

Expected credit losses over full cycles about 4%, with about 2x that in serious recessions like 08. So plenty of spread to protect the lender as yields are on average in the 13-14 range for the book.

Benefits are equity like expected return with much less SD, about 1/4, and much less downside risk, and much less inflation risk due to short duration, about 1.5 years vs say intermediate bonds. Give up liquidity as the trade.

Larry

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Re: Peer-to-peer lending as an investment?

Post by chw » Thu Feb 23, 2017 5:56 pm

larryswedroe wrote:chw
They buy loans funded by the platforms that meet their credit criteria, the originator SERVICES the loans

As to the question about is it version of junk.
Depends on the type of loans originated and bought. Stone Ridge for example buys only what are considered prime loans from consumers and small businesses and student loans. So credit scores above a certain level, and look for a certain quality of the overall book, so a certain percentage of loans that are A, B, C, D, not loaded with D.

Expected credit losses over full cycles about 4%, with about 2x that in serious recessions like 08. So plenty of spread to protect the lender as yields are on average in the 13-14 range for the book.

Benefits are equity like expected return with much less SD, about 1/4, and much less downside risk, and much less inflation risk due to short duration, about 1.5 years vs say intermediate bonds. Give up liquidity as the trade.

Larry
Larry, what is your take on the credit worthiness of the P2P lenders themselves? Like you, I'm ok with investments in selected notes of certain credit qualities. However, I'd hate to see my investment wiped out should one of these lenders fail, or go thru a bankruptcy reorganization and wipe the unsecured creditors (i.e. investors in the Notes). It's not like any if these lenders is wildly profitable for any length of time.
Last edited by chw on Sat Feb 25, 2017 10:50 am, edited 1 time in total.

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Re: Peer-to-peer lending as an investment?

Post by chw » Thu Feb 23, 2017 6:01 pm

Duplicate
Last edited by chw on Sat Feb 25, 2017 10:54 am, edited 1 time in total.

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Re: Peer-to-peer lending as an investment?

Post by larryswedroe » Thu Feb 23, 2017 9:34 pm

chw
I have no interest in the credit worthiness of the lenders. That's irrelevant to me as not making loans to them.
And if they fail the fund I invest in OWNS the loans and can then simply pull the servicing rights and hand them to another firm to perform that service for the same fee.
Larry

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Re: Peer-to-peer lending as an investment?

Post by aristotelian » Thu Feb 23, 2017 10:45 pm

Seems like loan sharking dressed up to make you feel good. I would feel dirty taking someone's money, and I would be upset if they defaulted. I will stick with VTI.

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Re: Peer-to-peer lending as an investment?

Post by chw » Fri Feb 24, 2017 6:09 am

larryswedroe wrote:chw
I have no interest in the credit worthiness of the lenders. That's irrelevant to me as not making loans to them.
And if they fail the fund I invest in OWNS the loans and can then simply pull the servicing rights and hand them to another firm to perform that service for the same fee.
Larry
Still sounds too risky for me. IMO, I would rather invest in the Vanguard Hi Yield Bond Fund. Similar asset class IMO. I know it's different types of debt (corporate vs. consumer), but I've worked in the consumer lending industry long enough to see many ways for these small/mid size lenders fail and wipe out investors in supposedly safe investments.

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Re: Peer-to-peer lending as an investment?

Post by minimalistmarc » Fri Feb 24, 2017 7:35 am

UK based investor here.

I love P2P, so far...

In the UK we have some very good sites offering crowdfunded P2P loans backed with assets, usually at 50 - 70% loan to value.

I have been investing for 2 years now and have had 12 - 17% returns, across a very diversified portfolio, with only 1 very small default to date.

Downsides for me:
1) Highly addictive
2) Requires a lot more effort than investing in my 1 fund ETF portfolio
3) Despite good monthly returns, underperformed my equity investments by a long shot last year, as they shot to the moon!

It is becoming more popular in the UK and loan rates are starting to drop, so I see myself exiting this wonderful asset class within the next 2 years as it becomes too popular and less competitive.

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Re: Peer-to-peer lending as an investment?

Post by desiderium » Fri Feb 24, 2017 8:48 am

aristotelian wrote:Seems like loan sharking dressed up to make you feel good. I would feel dirty taking someone's money, and I would be upset if they defaulted. I will stick with VTI.

P2P lending is to a large extent arbitrage, offering lower interest rates on unsecured consumer debt compared with banks. A big fraction of the loans are used to pay off credit card debt. With VTI, you are investing in the banks that own these credit card operations.

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Re: Peer-to-peer lending as an investment?

Post by larryswedroe » Fri Feb 24, 2017 8:50 am

chw
Before you draw that conclusion that LENDX or equivalent is too risky consider that in 2008 VWEHX lost about 22% while we estimate based on the historical data LENDX might have lost a few percent, The risks aren't even in the same ballpark.
Also High yield has much longer duration and thus much greater term risk as LENDX duration about 1.5 years.

To me there is no comparison as to which is the better investment as long as can accept the illiquidity of the fund.

Larry

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Re: Peer-to-peer lending as an investment?

Post by amarone » Fri Feb 24, 2017 1:25 pm

This is somewhat of a repeat of what I have posted in one of the other threads, but I also am getting out of Lending Club because of a much higher rate of charge-offs. In 2016 I had twice the amount of charge-offs, measured as a percentage of my investment. Despite LC claiming my return is about 6.4% (after allowing for late loans), it was actually 2.95% My 1099-B also indicated the problem - over 6 pages of charge-offs versus less than two and a half in 2015.

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Re: Peer-to-peer lending as an investment?

Post by Yankuba » Fri Feb 24, 2017 4:23 pm

I started investing in 2012. According to LC's math, my return is 6.80% (annual) but according to the summary page:

I deposited $27,000
I withdrew $28,500

and my account is currently worth $1,500

So it looks like I am up $3,000 on a $27,000 investment over ~4 years - which seems much smaller than 6.80%

I picked the loans myself and was very selective. I focused on small loans, made sure they were all for debt consolidation (i.e. not a wedding!) and only picked borrowers who had clean credit. I have mostly B notes, with a few C notes scattered. My default rate is 10%

It became harder to pick loans as time went on because of all the scripts sniping loans as soon as they became available. Additionally, LC sells off many of the loans before the public gets dibs on them.

The investment is extremely illiquid, it's a pain to build your portfolio and everything is taxed at income rates (i.e. not capital gains).

I technically didn't lose any money but I did much better with my Vanguard equity index funds and I have been emptying my LC account for a while now.

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Re: Peer-to-peer lending as an investment?

Post by renue74 » Fri Feb 24, 2017 4:40 pm

I added $2000 to Lending Robot....a robo system that sits on top of Lending Club and finds the "best" loans for me.

I did this about 2 years ago and have seen a number of defaults. I think I'm making about 8%, but to me it's not worth the risk. It's unsecured debt.

I also have two real estate properties that I have sold as "owner financing" and at any time if they stop paying, I can foreclose. Plus, these borrowers and properties are close to me.

I'm slowly getting out of P2P. Look at it this way...we're in a hay day of good economic conditions....when things start going south, I don't think P2P borrowers are going to be paying their loans off. (I had one P2P borrower who borrowed $32,000 and defaulted within 4 months.)

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Re: Peer-to-peer lending as an investment?

Post by bjames310 » Fri Feb 24, 2017 4:41 pm

I put in $10k in November, then I discovered Bogleheads in December, and immediately regretted it. It's frustrating to see how many borrowers quickly defaulted. And even more have paid off their entire balance, so there's even less of a return because of no more interest from those loans.

I tried selling all my notes on the secondary market and left it up for two days but only 8 were purchased. So it is not liquid, either, even with secondary market trading.

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Re: Peer-to-peer lending as an investment?

Post by willthrill81 » Fri Feb 24, 2017 4:43 pm

Valuethinker wrote:
radnor wrote:I don't hear a lot about P2P lending. Is that because it's not all that it's cracked up to be? What are your thoughts on this?
Check threads.

The short answer is the easy money has been made, and default rates are rising/ loan quality falling. Borrowers who need to keep borrowing to stay solvent have discovered these platforms, and that is hurting investors. I you think of Minsky's stages of finance leading to a crisis, it seems we are in to the Ponzi stage.
I've been investing with Lending Club for nearly 4 years now, and I can't say enough good things about it. I'm very picky about which loans I invest in, and my returns have been around 10% from then until now. However, I wouldn't recommend investing in it through a taxable account as the IRS treats P2P lending very poorly from a tax standpoint.

I've not seen any increase in default rates during this time frame among the loans I invest in.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Peer-to-peer lending as an investment?

Post by willthrill81 » Fri Feb 24, 2017 4:45 pm

bjames310 wrote:I put in $10k in November, then I discovered Bogleheads in December, and immediately regretted it. It's frustrating to see how many borrowers quickly defaulted. And even more have paid off their entire balance, so there's even less of a return because of no more interest from those loans.

I tried selling all my notes on the secondary market and left it up for two days but only 8 were purchased. So it is not liquid, either, even with secondary market trading.
When you say "how many borrowers quickly defaulted," how many percentage wise are you talking about?

Investing in loans blindly with no screening criteria is a big problem, and I would never recommend it to anyone. But actually, that's what's kept a lot of investors out of P2P lending or caused them to have a bad experience with it. That's more money for me to make. :D

And regarding the liquidity, you know going into it that's it not very liquid. It's a medium term investment, like buying an intermediate bond that you can't easily sell.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Peer-to-peer lending as an investment?

Post by larryswedroe » Fri Feb 24, 2017 5:27 pm

bjames
Your experience is EXACTLY why one should not IMO be buying individual bonds but only investing in a fund that diversifies those risks. It's like buying a single corporate bond instead of a fund. You need to diversify away the idiosyncratic risks
Larry

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Re: Peer-to-peer lending as an investment?

Post by willthrill81 » Fri Feb 24, 2017 5:28 pm

larryswedroe wrote:bjames
Your experience is EXACTLY why one should not IMO be buying individual bonds but only investing in a fund that diversifies those risks. It's like buying a single corporate bond instead of a fund. You need to diversify away the idiosyncratic risks
Larry
That's why Lending Club (and perhaps other P2P platforms as well) highly recommends diversifying your portfolio of notes by investing in at least 100 and preferably 400 notes.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Peer-to-peer lending as an investment?

Post by misterno » Fri Feb 24, 2017 5:54 pm

bjames310 wrote:I put in $10k in November, then I discovered Bogleheads in December, and immediately regretted it. It's frustrating to see how many borrowers quickly defaulted. And even more have paid off their entire balance, so there's even less of a return because of no more interest from those loans.

I tried selling all my notes on the secondary market and left it up for two days but only 8 were purchased. So it is not liquid, either, even with secondary market trading.
what is your overall return?

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Re: Peer-to-peer lending as an investment?

Post by willthrill81 » Fri Feb 24, 2017 5:59 pm

misterno wrote:
bjames310 wrote:I put in $10k in November, then I discovered Bogleheads in December, and immediately regretted it. It's frustrating to see how many borrowers quickly defaulted. And even more have paid off their entire balance, so there's even less of a return because of no more interest from those loans.

I tried selling all my notes on the secondary market and left it up for two days but only 8 were purchased. So it is not liquid, either, even with secondary market trading.
what is your overall return?
The problem is that his portfolio is not 'seasoned' if he only started three months ago. Not many borrowers are going to default in three months, though a few do. To get a good idea on your actual returns, you need to hold the portfolio around 18-24 months.

You can find the returns associated with different borrower types from the platforms themselves. My experience is that they're quite accurate (over all notes of course, your mileage may vary).

Nearly four years into it, my net returns are about 10%. I can't complain with that.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Peer-to-peer lending as an investment?

Post by chw » Fri Feb 24, 2017 6:02 pm

larryswedroe wrote:chw
Before you draw that conclusion that LENDX or equivalent is too risky consider that in 2008 VWEHX lost about 22% while we estimate based on the historical data LENDX might have lost a few percent, The risks aren't even in the same ballpark.
Also High yield has much longer duration and thus much greater term risk as LENDX duration about 1.5 years.

To me there is no comparison as to which is the better investment as long as can accept the illiquidity of the fund.

Larry
Larry, I respectfully disagree with your assumption that LENDX would have only lost a few percentage points during 2008-9. There really is no way to know this. I will liken the debt these companies originate to what sub-prime lenders were writing during the 2000s, and many of us know what happened to those lenders. LENDX may only be lending to "prime" borrowers, but my guess would be is that these borrowers are still impaired in some way (otherwise would borrow from traditional lenders) that will be exposed in the next credit cycle- that is if the originator or servicer survives to collect the debt. I agree these loans aren't directly correlated with Hi Yield Corporates, but I would still take my chances with the Corporatess for the portion of my AA I dedicate to Hi Yield debt.

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Re: Peer-to-peer lending as an investment?

Post by willthrill81 » Fri Feb 24, 2017 6:05 pm

chw wrote:
larryswedroe wrote:chw
Before you draw that conclusion that LENDX or equivalent is too risky consider that in 2008 VWEHX lost about 22% while we estimate based on the historical data LENDX might have lost a few percent, The risks aren't even in the same ballpark.
Also High yield has much longer duration and thus much greater term risk as LENDX duration about 1.5 years.

To me there is no comparison as to which is the better investment as long as can accept the illiquidity of the fund.

Larry
Larry, I respectfully disagree with your assumption that LENDX would have only lost a few percentage points during 2008-9. There really is no way to know this. I will liken the debt these companies originate to what sub-prime lenders were writing during the 2000s, and many of us know what happened to those lenders. LENDX may only be lending to "prime" borrowers, but my guess would be is that these borrowers are still impaired in some way (otherwise would borrow from traditional lenders) that will be exposed in the next credit cycle- that is if the originator or servicer survives to collect the debt. I agree these loans aren't directly correlated with Hi Yield Corporates, but I would still take my chances with the Corporatess for the portion of my AA I dedicate to Hi Yield debt.
Actually, the default rates in P2P lending are very similar to what they are with credit cards. And even in 2008-2009, banks were still in the black with credit cards.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Peer-to-peer lending as an investment?

Post by amarone » Fri Feb 24, 2017 6:09 pm

misterno wrote:what is your overall return?
I know you were not asking me, but I will answer anyway.

In my first (partial) year, I actually made a loss. I put in just $1,000 and two of my 40 notes defaulted (after borrowing the maximum) without making a single payment. I am convinced this was outright fraud. Over the next few years I kept putting in more up to a total of $15,000. My average return from April 2011 to now is 6% I was averaging more than that, and happy with it - in 2014 I made 8.65%. But in 2015 it was 5.47% and 2016 just 2.95%

I use automated investing because I am really not interested in spending much time on this. I have recently read of other people having poor experiences with automated investing. The institutions snap up the best notes; those prepared to spend time or use some other platform get the next ones, and we lazy types get the dregs.

As I am not prepared to work hard on this, 2.95% is unacceptable for an investment in junk bonds. That is why I am getting out.

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Re: Peer-to-peer lending as an investment?

Post by chw » Fri Feb 24, 2017 6:45 pm

The point many of you recent posters are missing when investing with LC/Prosper is- in spite of possible great returns (usually just after the initial investment), you still face possibly having your investment completely wiped out should LC/Prosper fail or go bankrupt/reorganize. LC is a public company, but hasn't been really around that long, and only been profitable for a handful of quarters (their most recent quarter I believe was a YOY decline in earnings on a decline in lending activity). I mentioned this earlier in the thread, but the point seems to have been lost as the thread evolved.

Some posters here have mentioned their returns have dropped as their loan pools have aged- this is because the better borrowers will prepay their loans (to get rid of the higher than market interest rate), thus leaving the higher risk borrowers with higher levels of default.

I've worked in various facets of lending over a 35 year career, and have seen different iterations of new ways to lend to impaired borrowers in some way that seems to be justified, but in the end usually blows up on the lender(s). P2P may indeed be a sustainable business model, but I wouldn't want to bet the bank on whether or not they can survive thru the next recession (which is when defaults typically rise).

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Re: Peer-to-peer lending as an investment?

Post by willthrill81 » Fri Feb 24, 2017 6:55 pm

chw wrote:The point many of you recent posters are missing when investing with LC/Prosper is- in spite of possible great returns (usually just after the initial investment), you still face possibly having your investment completely wiped out should LC/Prosper fail or go bankrupt/reorganize.
LC going bankrupt would not mean that all of the borrowers are just 'off the hook' any more than the bank holding your mortgage going bankrupt would mean that you now own your home outright for free.
chw wrote:Some posters here have mentioned their returns have dropped as their loan pools have aged- this is because the better borrowers will prepay their loans (to get rid of the higher than market interest rate), thus leaving the higher risk borrowers with higher levels of default.
That's not always the case. This is largely due to the fact that very few borrowers that will eventually default on a loan do so immediately after the loan is taken out. The eventual and inevitable defaults usually take time to occur, a process known as 'seasoning'.
chw wrote:I've worked in various facets of lending over a 35 year career, and have seen different iterations of new ways to lend to impaired borrowers in some way that seems to be justified, but in the end usually blows up on the lender(s). P2P may indeed be a sustainable business model, but I wouldn't want to bet the bank on whether or not they can survive thru the next recession (which is when defaults typically rise).
LC's borrowers are not necessarily "impaired borrowers" going to the lender-of-last-resort. Many of them have credit scores over 800, and you can limit your investing to such borrowers if you so desire. Personally, I only invest in notes being used to pay off credit cards or used for home improvement. Prior data mining I did before doing any investing showed these to have the highest net returns.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Peer-to-peer lending as an investment?

Post by chw » Fri Feb 24, 2017 9:55 pm

willthrill81 wrote:
chw wrote:The point many of you recent posters are missing when investing with LC/Prosper is- in spite of possible great returns (usually just after the initial investment), you still face possibly having your investment completely wiped out should LC/Prosper fail or go bankrupt/reorganize.
LC going bankrupt would not mean that all of the borrowers are just 'off the hook' any more than the bank holding your mortgage going bankrupt would mean that you now own your home outright for free.
I agree the borrowers aren't off the hook in a bankruptcy, but the note investors are simply unsecured creditors, and likely would get pennies on the dollar in bankruptcy. I would tell you to read the prospects closely to confirm this.
chw wrote:Some posters here have mentioned their returns have dropped as their loan pools have aged- this is because the better borrowers will prepay their loans (to get rid of the higher than market interest rate), thus leaving the higher risk borrowers with higher levels of default.
That's not always the case. This is largely due to the fact that very few borrowers that will eventually default on a loan do so immediately after the loan is taken out. The eventual and inevitable defaults usually take time to occur, a process known as 'seasoning'.
As you state, yes the fraudulent loans will default relatively quickly in the beginning of the loan cycle, then defaults will accelerate as the loans season. I was a LC investor for 7 years, and the best returns were in the early years of the loan cycle. As the loan pools aged (I tracked them by year), losses accelerated to the point where they were in excess of the interest collected as the pools were paying out.
chw wrote:I've worked in various facets of lending over a 35 year career, and have seen different iterations of new ways to lend to impaired borrowers in some way that seems to be justified, but in the end usually blows up on the lender(s). P2P may indeed be a sustainable business model, but I wouldn't want to bet the bank on whether or not they can survive thru the next recession (which is when defaults typically rise).
LC's borrowers are not necessarily "impaired borrowers" going to the lender-of-last-resort. Many of them have credit scores over 800, and you can limit your investing to such borrowers if you so desire. Personally, I only invest in notes being used to pay off credit cards or used for home improvement. Prior data mining I did before doing any investing showed these to have the highest net returns.

"Impaired" can mean several things, low credit score, good credit score with past delinquency (yes it does occur), insufficient income, poor job history etc.

Invest at your own risk obviously, but read the prospectus closely to know what you are investing in.

rj49
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Re: Peer-to-peer lending as an investment?

Post by rj49 » Sat Feb 25, 2017 12:09 am

smackboy1 wrote:I'm not familiar with P2P lending as an asset class either. What are it's characteristics and how does it fit into a portfolio?

It sounds like the personal debt version of junk bonds: higher expected returns along with higher default risk. What is the correlation compared to high quality fixed income and equity? I assume that for most investors returns would be taxed as ordinary income so not that great in a taxable space.
One difference is that a HY bond fund's NAV fluctuates, often dramatically, whereas with enough notes in a p2p portfolio, one is likely to have a positive return, historically been 5-10% after defaults, which is what I've received from Lending Club and Prosper. Both tightened lending requirements last year to try to cut down on defaults, and both allow automatic investing in higher-grade notes with fewer defaults but lower return.

As a retiree, I want positive returns and substantial interest income, which my p2p funds give me, and the growing number of banks, hedge funds, financial advisors, and others investing in these companies gives me assurance that they're a viable and sustainable sorce of retirement income, especially with bond and stock future returns uncertain.

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Re: Peer-to-peer lending as an investment?

Post by larryswedroe » Sat Feb 25, 2017 8:39 am

Willthrill
Yes they are similar and yes banks were positive there for the higher quality loans. But in this type of fund with the expenses of servicing and expense ratio, and a bit of leverage we estimate fund might have lost a few percent. So much better than with equities, about same as an intermediate muni fund like Vanguard but not as good as safe Treasuries/CDs
That's the price you pay for the diversification benefits and professional management. IMO clearly worth it, and I was the chief credit officer of the largest mortgage company in country and I would not buy loans directly because of first the time I would have to spend but more importantly the diversification benefits. I want thousands of loans just like I want thousands of stocks, and I want global diversification too. And diversification across jobs and regions.
Larry

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tarnation
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Re: Peer-to-peer lending as an investment?

Post by tarnation » Sun Apr 02, 2017 12:10 pm

Larry,
RMPLX and LENDX don't seem to be available to us retail folks and what I'm hearing you say is going directly to lending club is not enough diversification. So i guess bottom line is, effectively not available at all?
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Valuethinker
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Re: Peer-to-peer lending as an investment?

Post by Valuethinker » Sun Apr 02, 2017 1:12 pm

chw wrote:
willthrill81 wrote:
chw wrote:The point many of you recent posters are missing when investing with LC/Prosper is- in spite of possible great returns (usually just after the initial investment), you still face possibly having your investment completely wiped out should LC/Prosper fail or go bankrupt/reorganize.
LC going bankrupt would not mean that all of the borrowers are just 'off the hook' any more than the bank holding your mortgage going bankrupt would mean that you now own your home outright for free.
I agree the borrowers aren't off the hook in a bankruptcy, but the note investors are simply unsecured creditors, and likely would get pennies on the dollar in bankruptcy. I would tell you to read the prospects closely to confirm this.
chw wrote:Some posters here have mentioned their returns have dropped as their loan pools have aged- this is because the better borrowers will prepay their loans (to get rid of the higher than market interest rate), thus leaving the higher risk borrowers with higher levels of default.
That's not always the case. This is largely due to the fact that very few borrowers that will eventually default on a loan do so immediately after the loan is taken out. The eventual and inevitable defaults usually take time to occur, a process known as 'seasoning'.
As you state, yes the fraudulent loans will default relatively quickly in the beginning of the loan cycle, then defaults will accelerate as the loans season. I was a LC investor for 7 years, and the best returns were in the early years of the loan cycle. As the loan pools aged (I tracked them by year), losses accelerated to the point where they were in excess of the interest collected as the pools were paying out.
chw wrote:I've worked in various facets of lending over a 35 year career, and have seen different iterations of new ways to lend to impaired borrowers in some way that seems to be justified, but in the end usually blows up on the lender(s). P2P may indeed be a sustainable business model, but I wouldn't want to bet the bank on whether or not they can survive thru the next recession (which is when defaults typically rise).
LC's borrowers are not necessarily "impaired borrowers" going to the lender-of-last-resort. Many of them have credit scores over 800, and you can limit your investing to such borrowers if you so desire. Personally, I only invest in notes being used to pay off credit cards or used for home improvement. Prior data mining I did before doing any investing showed these to have the highest net returns.

"Impaired" can mean several things, low credit score, good credit score with past delinquency (yes it does occur), insufficient income, poor job history etc.

Invest at your own risk obviously, but read the prospectus closely to know what you are investing in.
At least with home loans, impairment rates were a poor forecaster, I believe, of the trouble to come. The peak *follows* a debt crisis, not proceeds it.

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Re: Peer-to-peer lending as an investment?

Post by willthrill81 » Sun Apr 02, 2017 1:13 pm

tarnation wrote:Larry,
RMPLX and LENDX don't seem to be available to us retail folks and what I'm hearing you say is going directly to lending club is not enough diversification. So i guess bottom line is, effectively not available at all?
I personally have experienced far more value with P2P lending as a direct investor with an 'active-passive' strategy. When I first started as an investor about 3.5 years ago, I spent some time on Nickel Steamroller (it was free back then) researching different combinations of lending criteria to find those that were associated with the best returns and have used those criteria for all of my note selections, the active part of my strategy (as an aside: I quickly found that there are certain categories of loans that you should never touch, such as business loans). I've now put all of my criteria into LendingClub's automated platform, so I no longer need to do anything, the passive part.

Considering that my current total returns are over 10%, I have no complaints there at all. My only complaint is the unfavorable tax treatment of the returns, which is why I will only make additional investments in P2P lending via tax advantaged accounts.

To Larry, I agree that diversification is a must, but the data I've seen suggests that beyond 400 notes there is very little benefit to owning more. With LendingClub, the bigger issue I've run in to is relatively few notes that meet my rather strict investment criteria. As such, I now place $50 in each note I invest in rather than the $25 minimum.

I agree that the diversification benefits of P2P lending are great, though I will not invest more than 10% of my portfolio into it at this point.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Peer-to-peer lending as an investment?

Post by frisco » Mon Apr 03, 2017 1:44 am

larryswedroe wrote: …in 2008…we estimate based on the historical data LENDX might have lost a few percent…

Larry
I’ve been trying to find historical return data. I’d like to see how this asset class performs in different market conditions and how correlation with equity/bonds changes over time. I understand that past performance does not guarantee future results.

Since LENDX and RMPLX are both fairly new funds, I decided to broaden my search. As I understand it, peer-to-peer lending is (at least partly) unsecured consumer loans. The Federal Reserve Bank makes historical data available on charge-offs rates on consumer loans (all banks; not seasonally adjusted) here.

Additionally, the Fed provides a downloadable CSV file (and a chart) with historical (February 1972–August 2016) finance rates on personal loans at commercial banks (24 month loan; not seasonally adjusted; series G19/TERMS/RIFLPBCIPLM24_N.M 3/7/2017) here.

Could I combine the data on rates and charge-offs (linked above) to determine the historical return on consumer loans? Are consumer loans from commercial banks similar enough to loans originated by peer-to-peer lending platforms, such that this exercise would help me understand peer-to-peer lending as an asset class?

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Re: Peer-to-peer lending as an investment?

Post by chipperd » Mon Apr 03, 2017 4:02 am

I really like Lending Club, but as an investment in my kids education, not to make money. I put in $500 and my kids each kicked in $50. I have them research the loans and decide where our money should be invested when they were about 13 and 12 respectively. Now 5 years on, they seem to really enjoy seeing the money grow and reading the stories behind the loan requests. I think mostly, they learn how much debt can put one over a barrel, so that to me is worth the low return rates alone. I know we are up, but don't really care how much. Cheap financial education!

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Re: Peer-to-peer lending as an investment?

Post by StevieG72 » Mon Apr 03, 2017 5:34 am

Meh...
Fools think their own way is right, but the wise listen to others.

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Re: Peer-to-peer lending as an investment?

Post by chw » Mon Apr 03, 2017 5:38 am

To the recent posters on this thread- I like you invested in LC starting about 7 years ago (for the reasons you state). My annual returns to date have been about 8%- though most of this return was earlier in the lending cycle. I've been winding down my investment over the past 3 years (down to under 1K, from over 70K invested). Agree with all your observations...

What you fail to observe is if Lending Club fails, you are an unsecured creditor, and will receive little to nothing on these "investments". The Prospectus for theses Notes clearly states this. If LC goes bankrupt down the road (they lose money regularly/stock is hovering around $5 share)- the future Note payments will go to the Secured creditors of LC, not the investors in the Notes.

I personally wouldn't invest a large sum in the platform (or other P2P platforms that allege to have no default risk) beyond what you could afford to lose.

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Re: Peer-to-peer lending as an investment?

Post by ahmadcpa » Mon Apr 03, 2017 5:58 am

Typical portfolio of peer to peer lending tax consequence on a $100,000 investment with a 20% interest rate and 10% default rate:

$100,000 X 20% interest rate = $20,000 Taxable 1099 Interest
$100,000 X 10% default rate = $10,000 Deductible CAPITAL LOSS subject to the $3,000 limit

That's why I pulled out!

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climber2020
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Re: Peer-to-peer lending as an investment?

Post by climber2020 » Mon Apr 03, 2017 6:10 am

radnor wrote:I don't hear a lot about P2P lending. Is that because it's not all that it's cracked up to be? What are your thoughts on this?
White Coat Investor wrote an article about this not too long ago. I know nothing about this topic, but here's the link:

http://whitecoatinvestor.com/why-i-deci ... ub-account

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Re: Peer-to-peer lending as an investment?

Post by larryswedroe » Mon Apr 03, 2017 7:49 am

Frisco
yes the loans made by these new platforms are being underwritten to virtually the same standards and process as are bank loans--credit cards.
And institutions are taking over from P2P to provide more readily available capital improving service to borrowers who don't have to wait to be funded any longer.
The key IMO is to avoid the subprime area
Larry

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Re: Peer-to-peer lending as an investment?

Post by highercall » Mon Apr 03, 2017 8:14 am

Anyone using the real estate crowd funding platforms? I have invested some money with Peerstreet and Patch of Land. So far returns are averaging approx. 10%. I have only been invested since 2015 so not a lot of history but so far so good. The loans I invest in are generally for a 12 Month term. Several have paid back and I reinvest in others.

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Re: Peer-to-peer lending as an investment?

Post by Valuethinker » Mon Apr 03, 2017 10:58 am

chw wrote:To the recent posters on this thread- I like you invested in LC starting about 7 years ago (for the reasons you state). My annual returns to date have been about 8%- though most of this return was earlier in the lending cycle. I've been winding down my investment over the past 3 years (down to under 1K, from over 70K invested). Agree with all your observations...

What you fail to observe is if Lending Club fails, you are an unsecured creditor, and will receive little to nothing on these "investments". The Prospectus for theses Notes clearly states this. If LC goes bankrupt down the road (they lose money regularly/stock is hovering around $5 share)- the future Note payments will go to the Secured creditors of LC, not the investors in the Notes.

I personally wouldn't invest a large sum in the platform (or other P2P platforms that allege to have no default risk) beyond what you could afford to lose.
Yup it appears not many people read the Lending Club prospectus- -I am not US based, but found the discussion here (from someone who did read it) quite illuminating.

An "investment" like this? I'd back away slowly, seeking not to make any sudden moves in case I set it off.

Valuethinker
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Re: Peer-to-peer lending as an investment?

Post by Valuethinker » Mon Apr 03, 2017 11:10 am

highercall wrote:Anyone using the real estate crowd funding platforms? I have invested some money with Peerstreet and Patch of Land. So far returns are averaging approx. 10%. I have only been invested since 2015 so not a lot of history but so far so good. The loans I invest in are generally for a 12 Month term. Several have paid back and I reinvest in others.
Because I am now on my 3rd (4th?) RE crash the whole topic of individual investment in RE loans terrifies me. Seems to me this rears its head and then again, the market crashes (US early 90s, Canada early 1990s UK early 1990s, UK-US 2008-9, Canada now). Did I mention Calgary in 1980? Took 20 years for the market to really recover.

Be sure you are in safe assets, at safe levels in the capital structure.

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Re: Peer-to-peer lending as an investment?

Post by willthrill81 » Mon Apr 03, 2017 11:14 am

chw wrote:To the recent posters on this thread- I like you invested in LC starting about 7 years ago (for the reasons you state). My annual returns to date have been about 8%- though most of this return was earlier in the lending cycle. I've been winding down my investment over the past 3 years (down to under 1K, from over 70K invested). Agree with all your observations...

What you fail to observe is if Lending Club fails, you are an unsecured creditor, and will receive little to nothing on these "investments". The Prospectus for theses Notes clearly states this. If LC goes bankrupt down the road (they lose money regularly/stock is hovering around $5 share)- the future Note payments will go to the Secured creditors of LC, not the investors in the Notes.

I personally wouldn't invest a large sum in the platform (or other P2P platforms that allege to have no default risk) beyond what you could afford to lose.
"When you invest in a Note, you are investing in an obligation of Lending Club. Borrowers make payments on their loans to Lending Club, and in turn, Lending Club distributes payments to investors in the Notes net of fees. If Lending Club were to go out of business, investors may not receive the full amount of payments due and to become due on the Note, or such payments may be delayed as bankruptcy or other proceedings make their way through the courts.

We have taken steps to ensure continuity to protect investors and borrowers if Lending Club were to go out of business. For example, we have executed a backup and successor servicing agreement with Portfolio Financial Servicing Company (“PFSC”). Under this agreement, PFSC stands ready to service borrower loans.

Following five business days’ prior written notice from us or from the indenture trustee for the Notes, PFSC will begin servicing the loans. If the underlying loans are determined to be part of Lending Club’s bankruptcy estate, PFSC may not be able to make payments on the Notes. If our agreement with PFSC were to be terminated, we would seek to replace PFSC with another backup servicer."
https://help.lendingclub.com/hc/en-us/a ... -business-

I very much doubt that LC going bankrupt would mean that note investors walk away with nothing or pennies on the dollar. But it hasn't happened yet, so it's just speculation on both sides I suppose.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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