Returns in peer to peer lending

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
international001
Posts: 2095
Joined: Thu Feb 15, 2018 7:31 pm

Returns in peer to peer lending

Post by international001 »

I have had been using LendingClub by buying notes in Folio as an experiment.
My annual return is right now ~4%. Mostly I bought notes with C/D credit. I looked at the maximum yield to maturity I could find.
I seems to me low returns with what was promised.
Did I do it right, or did I missed something?
User avatar
willthrill81
Posts: 26126
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Returns in peer to peer lending

Post by willthrill81 »

Below is a post I wrote about LC last year.
willthrill81 wrote: Fri Oct 09, 2020 10:54 pm I opened a small account with Lending Club in 2013. I used Nickel Steamroller, which was free at the time, to find a good set of selection criteria for high reward notes, and earned 9.5% returns, which I was very happy with. I then opened a larger Roth IRA account with them in the fall of 2016, and my returns using the exact same selection criteria as before were much lower, just above 4%. It was certainly not worth the platform risk alone for those kinds of returns, never mind the illiquidity. This is the same kind of experience that I've heard from many. The P2P companies lowered their standards for borrowers, and institutional investors greatly eroded the returns. I finished winding down both my taxable account and Roth IRA with LC in 2019 and haven't looked back for a second.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
hnd
Posts: 696
Joined: Mon Jun 22, 2020 11:43 am

Re: Returns in peer to peer lending

Post by hnd »

a guy int he office did some peer to peer lending and basically said after a few years, he hardly made 3-4%. for as much work as it was to pursue this opportunity or that, it wasn't worth it.
senex
Posts: 825
Joined: Wed Dec 13, 2017 4:38 pm

Re: Returns in peer to peer lending

Post by senex »

When I tried it, the returns were terrible, and the little income it did produce was taxed at higher than ordinary income tax rates (which I had previously believed was impossible [1]). I closed my account and would not do it again.


[1] See my prior post, where I explain how tax rate on lending club net income can reach 70% or more: viewtopic.php?p=3896494#p3896494
FinancialSnowboarder
Posts: 15
Joined: Fri Apr 11, 2014 3:56 pm

Re: Returns in peer to peer lending

Post by FinancialSnowboarder »

I did P2P lending with Prosper from 2012-2014. I found it to be too much work for the returns and risk.

I've switched over to private equity and real estate syndications. I'm happy to be out of P2P lending.
hoofaman
Posts: 219
Joined: Tue Jul 14, 2020 3:39 pm

Re: Returns in peer to peer lending

Post by hoofaman »

Returns?

I thought people were just happy to get some of their principal back, eventually
User avatar
willthrill81
Posts: 26126
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Returns in peer to peer lending

Post by willthrill81 »

hoofaman wrote: Wed Oct 06, 2021 5:12 pm Returns?

I thought people were just happy to get some of their principal back, eventually
I've only heard of a handful of people who didn't have positive returns from LC and Prosper at least. But the effort and platform risk alone weren't worth it for most, including me.

LC ruined their P2P lending when they brought in corporate investors, who were making comparatively short-term investments with surplus cash for good returns. But they effectively pushed down the yields so that it wasn't worth individual investors' time or risk.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
mary1492
Posts: 144
Joined: Thu Oct 17, 2019 3:02 am

Re: Returns in peer to peer lending

Post by mary1492 »

international001 wrote: Wed Oct 06, 2021 4:29 pm I seems to me low returns with what was promised.
I am 100% certain that you were not promised anything, other than being advised that your investment is not guaranteed and that you can lose money.
secondopinion
Posts: 1348
Joined: Wed Dec 02, 2020 1:18 pm

Re: Returns in peer to peer lending

Post by secondopinion »

willthrill81 wrote: Wed Oct 06, 2021 5:16 pm
hoofaman wrote: Wed Oct 06, 2021 5:12 pm Returns?

I thought people were just happy to get some of their principal back, eventually
I've only heard of a handful of people who didn't have positive returns from LC and Prosper at least. But the effort and platform risk alone weren't worth it for most, including me.

LC ruined their P2P lending when they brought in corporate investors, who were making comparatively short-term investments with surplus cash for good returns. But they effectively pushed down the yields so that it wasn't worth individual investors' time or risk.
Noticed the big money came in. I stayed out because of that since returns were not going to be reasonable (they would pick up the deals as well).

I stay with low-quality bonds instead.

How P2P lending is now being backed by "banks" (not exactly, but hardly the original concept)...
DaufuskieNate
Posts: 449
Joined: Wed May 28, 2014 11:53 am

Re: Returns in peer to peer lending

Post by DaufuskieNate »

LC merged with Radius Bank and is no longer in the retail P2P business. I have always had modest positive returns on my LC portfolio which is limited to higher quality/lower return A & B notes. Even as my portfolio is winding down, it is returning over 7%. I have no complaints.
Maverick3320
Posts: 793
Joined: Tue May 12, 2015 2:59 pm

Re: Returns in peer to peer lending

Post by Maverick3320 »

I had almost exactly the same experience as others above (on Lending Club).

Started off with 9-10% returns, institutional investors were let in, magically all the good opportunities "dried up", and many of my highly rated notes defaulted. Ended up in the 3% range. After taxes and effort it's not worth it.

I liked the idea early on, but it was too good to be true.
Topic Author
international001
Posts: 2095
Joined: Thu Feb 15, 2018 7:31 pm

Re: Returns in peer to peer lending

Post by international001 »

mary1492 wrote: Wed Oct 06, 2021 5:18 pm I am 100% certain that you were not promised anything, other than being advised that your investment is not guaranteed and that you can lose money.
By promise I meant what they advertised as their past returns ;-).
I expected to do about the same.
Topic Author
international001
Posts: 2095
Joined: Thu Feb 15, 2018 7:31 pm

Re: Returns in peer to peer lending

Post by international001 »

willthrill81 wrote: Wed Oct 06, 2021 5:16 pm LC ruined their P2P lending when they brought in corporate investors, who were making comparatively short-term investments with surplus cash for good returns. But they effectively pushed down the yields so that it wasn't worth individual investors' time or risk.
Well.. that seems market efficiency at work, no? In the back of my mind I was expecting it
At the end, they only premium should have been cutting the overhead of the bank

My curiosity Q:
- So would a bank make that same return (before overhead) of 4%?
- Would the returns be of the order of a high yield bond fund like VWEAX (I guess if you consider rating-C bonds only)?
- Why there are no funds that pool all this personal bonds?
Topic Author
international001
Posts: 2095
Joined: Thu Feb 15, 2018 7:31 pm

Re: Returns in peer to peer lending

Post by international001 »

senex wrote: Wed Oct 06, 2021 4:55 pm When I tried it, the returns were terrible, and the little income it did produce was taxed at higher than ordinary income tax rates (which I had previously believed was impossible [1]). I closed my account and would not do it again.


[1] See my prior post, where I explain how tax rate on lending club net income can reach 70% or more: viewtopic.php?p=3896494#p3896494
Thanks for your example. This seems business as usual, no? Capital loss may benefit you or not. You just have to be aware of your situation. And perhaps go for rated-A bonds.

Isn't the same with individual bonds (e.g. if you hold a bond of corporation X and it defaults, it's a capital loss)?

And a little off-topic, why do bond funds don't have capital loss distributions?
minimalistmarc
Posts: 1348
Joined: Fri Jul 24, 2015 4:38 pm

Re: Returns in peer to peer lending

Post by minimalistmarc »

hoofaman wrote: Wed Oct 06, 2021 5:12 pm Returns?

I thought people were just happy to get some of their principal back, eventually
I’d bite at the chance to get a fraction of my principal back at this stage (U.K.). Most of my remaining P2P (a 6 figure amount) has been tied up in administration process for 1 - 3 years. A painfully expensive lesson for me and I advise not to touch p2p with a 10 foot barge poll!
User avatar
willthrill81
Posts: 26126
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Returns in peer to peer lending

Post by willthrill81 »

international001 wrote: Fri Oct 08, 2021 6:39 am
willthrill81 wrote: Wed Oct 06, 2021 5:16 pm LC ruined their P2P lending when they brought in corporate investors, who were making comparatively short-term investments with surplus cash for good returns. But they effectively pushed down the yields so that it wasn't worth individual investors' time or risk.
Well.. that seems market efficiency at work, no? In the back of my mind I was expecting it
At the end, they only premium should have been cutting the overhead of the bank

My curiosity Q:
- So would a bank make that same return (before overhead) of 4%?
- Would the returns be of the order of a high yield bond fund like VWEAX (I guess if you consider rating-C bonds only)?
- Why there are no funds that pool all this personal bonds?
LC already had many thousands of investors on the site, so I doubt that bringing in a much smaller number of corporate investors resulted in increased 'incorporation of known information into prices' (e.g., efficiency). It was just a simple supply and demand effect. The corporate investors had far more dollars to invest and were willing to accept much lower returns than were individual investors.

Market efficiency says nothing about the risk/return and, I would add, effort factors of individual market participants. For instance, you might be willing to take on a lot more risk and put in more effort to get a higher expected return than me, and that difference in our willingness will result in different prices that we're willing to pay for the same thing. Us having access to different information has nothing to do with it.

Unsecured credit such as P2P loans has been likened explicitly by some at least to credit cards, which banks have been utilizing as profit centers for decades. Banks' effective returns on credit cards is likely well above 4%, not the least of which is because they can utilize leverage in doing so at a significantly lower cost than the typical retail investor can. Being able to borrow short-term money at 1% and then earn 7% on that money (just guesses on my part) is a recipe for fantastic profit, which is why the banks all compete so hard over credit cards and are willing to offer lucrative sign-up bonuses and rewards.

Some have suggested that P2P loans are similar to high-yield (aka 'junk') bonds, and that might be true. I don't know enough about such bonds to know if the comparison is apt, nor do I really see the point in comparing them.

LENDX is a fund that invests directly in P2P notes, but I believe that you must have an advisor to access the fund. You can search for discussion about this fund on the forum; there has been quite a bit in the past.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
User avatar
nisiprius
Advisory Board
Posts: 44728
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Returns in peer to peer lending

Post by nisiprius »

willthrill81 wrote: Fri Oct 08, 2021 10:12 am...LENDX is a fund that invests directly in P2P notes, but I believe that you must have an advisor to access the fund. You can search for discussion about this fund on the forum; there has been quite a bit in the past...
The expense ratio is 3.86% (Annual report, Feb. 28, 2021, footnote on p. 3219.)
As a fundamental policy, the Fund will only sell shares to or through fiduciaries (such as RIAs or retirement plans) or institutional investors, or to employees, directors and affiliates of the Fund or the Adviser. The minimum initial investment is $15 million, subject to certain exceptions.
...the Fund is not required to repurchase more than 5% of its outstanding Shares each quarter, so investors should consider Shares of the Fund to be an illiquid investment.
There is currently no secondary market for its Shares and the Fund does not expect a secondary market in its Shares to develop.
It is possible that a repurchase offer may be oversubscribed, with the result that shareholders may only be able to have a portion of their Shares repurchased.
(That actually happened to shareholders in one of the firm's other interval funds, it's not a technicality).
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
willthrill81
Posts: 26126
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Returns in peer to peer lending

Post by willthrill81 »

nisiprius wrote: Fri Oct 08, 2021 11:27 am
willthrill81 wrote: Fri Oct 08, 2021 10:12 am...LENDX is a fund that invests directly in P2P notes, but I believe that you must have an advisor to access the fund. You can search for discussion about this fund on the forum; there has been quite a bit in the past...
The expense ratio is 3.86% (Annual report, Feb. 28, 2021, footnote on p. 3219.)
As a fundamental policy, the Fund will only sell shares to or through fiduciaries (such as RIAs or retirement plans) or institutional investors, or to employees, directors and affiliates of the Fund or the Adviser. The minimum initial investment is $15 million, subject to certain exceptions.
...the Fund is not required to repurchase more than 5% of its outstanding Shares each quarter, so investors should consider Shares of the Fund to be an illiquid investment.
There is currently no secondary market for its Shares and the Fund does not expect a secondary market in its Shares to develop.
It is possible that a repurchase offer may be oversubscribed, with the result that shareholders may only be able to have a portion of their Shares repurchased.
(That actually happened to shareholders in one of the firm's other interval funds, it's not a technicality).
Yes, the fund certainly has more than its share of 'warts'. But, TMK, it's the only fund in the P2P lending space, which is why I mentioned it when international001 asked.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
secondopinion
Posts: 1348
Joined: Wed Dec 02, 2020 1:18 pm

Re: Returns in peer to peer lending

Post by secondopinion »

willthrill81 wrote: Fri Oct 08, 2021 10:12 am Some have suggested that P2P loans are similar to high-yield (aka 'junk') bonds, and that might be true. I don't know enough about such bonds to know if the comparison is apt, nor do I really see the point in comparing them.
I remember seeing that default rates are between 2-7% for P2P loans per issue. Assuming terms of 3 to 5 years, this means an annual default rate of 0.4%-2.4% (depending on issue length and credit). If I remember reading right, BBB is somewhere around 0.3% and BB is around 2%. The high quality loans are BBB or BBB-; the rest are more like BB+ to BB-. If the default recovery is bad for P2P loans (which I hear it is), then this can shove some loans down to the B level because recovery normally saves some of the high-yield bonds at this level (and even the highest quality P2P loans call to question their BBB status).

Aside from the market dynamics, I see not much of any difference. Granted, I doubt you will get much of CCC+ or lower borrowers; but nor do most junk bond funds hold much of such bonds.
manuvns
Posts: 1054
Joined: Wed Jan 02, 2008 2:30 pm

Re: Returns in peer to peer lending

Post by manuvns »

i invested 27k on lending club and got 31k back . 4k return in few years not great by any standard .
Thanks!
User avatar
willthrill81
Posts: 26126
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Returns in peer to peer lending

Post by willthrill81 »

secondopinion wrote: Fri Oct 08, 2021 12:31 pm
willthrill81 wrote: Fri Oct 08, 2021 10:12 am Some have suggested that P2P loans are similar to high-yield (aka 'junk') bonds, and that might be true. I don't know enough about such bonds to know if the comparison is apt, nor do I really see the point in comparing them.
I remember seeing that default rates are between 2-7% for P2P loans per issue. Assuming terms of 3 to 5 years, this means an annual default rate of 0.4%-2.4% (depending on issue length and credit). If I remember reading right, BBB is somewhere around 0.3% and BB is around 2%. The high quality loans are BBB or BBB-; the rest are more like BB+ to BB-. If the default recovery is bad for P2P loans (which I hear it is), then this can shove some loans down to the B level because recovery normally saves some of the high-yield bonds at this level (and even the highest quality P2P loans call to question their BBB status).

Aside from the market dynamics, I see not much of any difference. Granted, I doubt you will get much of CCC+ or lower borrowers; but nor do most junk bond funds hold much of such bonds.
In the P2P lending space, at least with LC, retail investors could be extremely selective in the notes they funded. As I noted above, I developed a set of criteria for which notes I would fund. This screened out 98-99% of all LC notes. And for years, not just initially, my net returns were about 9.5%, which I was thrilled with. But then, quite suddenly, returns fell to around 4% and never recovered, and I've heard from many others that returns fell quite suddenly for them around the same time as well.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
mary1492
Posts: 144
Joined: Thu Oct 17, 2019 3:02 am

Re: Returns in peer to peer lending

Post by mary1492 »

willthrill81 wrote: Fri Oct 08, 2021 1:01 pm
secondopinion wrote: Fri Oct 08, 2021 12:31 pm
willthrill81 wrote: Fri Oct 08, 2021 10:12 am Some have suggested that P2P loans are similar to high-yield (aka 'junk') bonds, and that might be true. I don't know enough about such bonds to know if the comparison is apt, nor do I really see the point in comparing them.
I remember seeing that default rates are between 2-7% for P2P loans per issue. Assuming terms of 3 to 5 years, this means an annual default rate of 0.4%-2.4% (depending on issue length and credit). If I remember reading right, BBB is somewhere around 0.3% and BB is around 2%. The high quality loans are BBB or BBB-; the rest are more like BB+ to BB-. If the default recovery is bad for P2P loans (which I hear it is), then this can shove some loans down to the B level because recovery normally saves some of the high-yield bonds at this level (and even the highest quality P2P loans call to question their BBB status).

Aside from the market dynamics, I see not much of any difference. Granted, I doubt you will get much of CCC+ or lower borrowers; but nor do most junk bond funds hold much of such bonds.
In the P2P lending space, at least with LC, retail investors could be extremely selective in the notes they funded. As I noted above, I developed a set of criteria for which notes I would fund. This screened out 98-99% of all LC notes. And for years, not just initially, my net returns were about 9.5%, which I was thrilled with. But then, quite suddenly, returns fell to around 4% and never recovered, and I've heard from many others that returns fell quite suddenly for them around the same time as well.
Did the drop in returns come about as a result of increased defaults, or just that the notes were being issued at lower yields for the same quality as previously?
senex
Posts: 825
Joined: Wed Dec 13, 2017 4:38 pm

Re: Returns in peer to peer lending

Post by senex »

international001 wrote: Fri Oct 08, 2021 6:49 am Isn't the same with individual bonds (e.g. if you hold a bond of corporation X and it defaults, it's a capital loss)?

And a little off-topic, why do bond funds don't have capital loss distributions?
I think you're correct about any bond being similar. The unique thing about Lending Club was the sheer number of notes, directly owned, made it such that my net return included a decent amount of capital loss, subtracting from what was otherwise respectable interest income.

I think that Mutual funds (& etfs) are prevented by law from distributing capital losses. I don't know any details, except that I vaguely recall a reliable user (maybe nisiprius?) saying so on a recent thread.
Last edited by senex on Fri Oct 08, 2021 1:12 pm, edited 1 time in total.
User avatar
willthrill81
Posts: 26126
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Returns in peer to peer lending

Post by willthrill81 »

mary1492 wrote: Fri Oct 08, 2021 1:08 pm
willthrill81 wrote: Fri Oct 08, 2021 1:01 pm
secondopinion wrote: Fri Oct 08, 2021 12:31 pm
willthrill81 wrote: Fri Oct 08, 2021 10:12 am Some have suggested that P2P loans are similar to high-yield (aka 'junk') bonds, and that might be true. I don't know enough about such bonds to know if the comparison is apt, nor do I really see the point in comparing them.
I remember seeing that default rates are between 2-7% for P2P loans per issue. Assuming terms of 3 to 5 years, this means an annual default rate of 0.4%-2.4% (depending on issue length and credit). If I remember reading right, BBB is somewhere around 0.3% and BB is around 2%. The high quality loans are BBB or BBB-; the rest are more like BB+ to BB-. If the default recovery is bad for P2P loans (which I hear it is), then this can shove some loans down to the B level because recovery normally saves some of the high-yield bonds at this level (and even the highest quality P2P loans call to question their BBB status).

Aside from the market dynamics, I see not much of any difference. Granted, I doubt you will get much of CCC+ or lower borrowers; but nor do most junk bond funds hold much of such bonds.
In the P2P lending space, at least with LC, retail investors could be extremely selective in the notes they funded. As I noted above, I developed a set of criteria for which notes I would fund. This screened out 98-99% of all LC notes. And for years, not just initially, my net returns were about 9.5%, which I was thrilled with. But then, quite suddenly, returns fell to around 4% and never recovered, and I've heard from many others that returns fell quite suddenly for them around the same time as well.
Did the drop in returns come about as a result of increased defaults, or just that the notes were being issued at lower yields for the same quality as previously?
Both. LC reduced their standards for borrowers, and the rates on all notes dropped.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
secondopinion
Posts: 1348
Joined: Wed Dec 02, 2020 1:18 pm

Re: Returns in peer to peer lending

Post by secondopinion »

willthrill81 wrote: Fri Oct 08, 2021 1:01 pm
secondopinion wrote: Fri Oct 08, 2021 12:31 pm
willthrill81 wrote: Fri Oct 08, 2021 10:12 am Some have suggested that P2P loans are similar to high-yield (aka 'junk') bonds, and that might be true. I don't know enough about such bonds to know if the comparison is apt, nor do I really see the point in comparing them.
I remember seeing that default rates are between 2-7% for P2P loans per issue. Assuming terms of 3 to 5 years, this means an annual default rate of 0.4%-2.4% (depending on issue length and credit). If I remember reading right, BBB is somewhere around 0.3% and BB is around 2%. The high quality loans are BBB or BBB-; the rest are more like BB+ to BB-. If the default recovery is bad for P2P loans (which I hear it is), then this can shove some loans down to the B level because recovery normally saves some of the high-yield bonds at this level (and even the highest quality P2P loans call to question their BBB status).

Aside from the market dynamics, I see not much of any difference. Granted, I doubt you will get much of CCC+ or lower borrowers; but nor do most junk bond funds hold much of such bonds.
In the P2P lending space, at least with LC, retail investors could be extremely selective in the notes they funded. As I noted above, I developed a set of criteria for which notes I would fund. This screened out 98-99% of all LC notes. And for years, not just initially, my net returns were about 9.5%, which I was thrilled with. But then, quite suddenly, returns fell to around 4% and never recovered, and I've heard from many others that returns fell quite suddenly for them around the same time as well.
I imagine that one can get BBB loans, but the general whole is not that. It is active management, but I think it is entirely reasonable in this context. It sounds like you are getting only somewhat decent returns now when you used to make a lot of money.

I am more comparing the general environment as it stands right now. There are some differences due to liquidity and market dynamics, but high-yield bonds are the nearest marketable comparable that I am aware of.
User avatar
willthrill81
Posts: 26126
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Returns in peer to peer lending

Post by willthrill81 »

secondopinion wrote: Fri Oct 08, 2021 1:18 pm
willthrill81 wrote: Fri Oct 08, 2021 1:01 pm
secondopinion wrote: Fri Oct 08, 2021 12:31 pm
willthrill81 wrote: Fri Oct 08, 2021 10:12 am Some have suggested that P2P loans are similar to high-yield (aka 'junk') bonds, and that might be true. I don't know enough about such bonds to know if the comparison is apt, nor do I really see the point in comparing them.
I remember seeing that default rates are between 2-7% for P2P loans per issue. Assuming terms of 3 to 5 years, this means an annual default rate of 0.4%-2.4% (depending on issue length and credit). If I remember reading right, BBB is somewhere around 0.3% and BB is around 2%. The high quality loans are BBB or BBB-; the rest are more like BB+ to BB-. If the default recovery is bad for P2P loans (which I hear it is), then this can shove some loans down to the B level because recovery normally saves some of the high-yield bonds at this level (and even the highest quality P2P loans call to question their BBB status).

Aside from the market dynamics, I see not much of any difference. Granted, I doubt you will get much of CCC+ or lower borrowers; but nor do most junk bond funds hold much of such bonds.
In the P2P lending space, at least with LC, retail investors could be extremely selective in the notes they funded. As I noted above, I developed a set of criteria for which notes I would fund. This screened out 98-99% of all LC notes. And for years, not just initially, my net returns were about 9.5%, which I was thrilled with. But then, quite suddenly, returns fell to around 4% and never recovered, and I've heard from many others that returns fell quite suddenly for them around the same time as well.
I imagine that one can get BBB loans, but the general whole is not that. It is active management, but I think it is entirely reasonable in this context. It sounds like you are getting only somewhat decent returns now when you used to make a lot of money.

I am more comparing the general environment as it stands right now. There are some differences due to liquidity and market dynamics, but high-yield bonds are the nearest marketable comparable that I am aware of.
I completely eliminated by P2P positions nearly two years ago and haven't looked back for a second.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
secondopinion
Posts: 1348
Joined: Wed Dec 02, 2020 1:18 pm

Re: Returns in peer to peer lending

Post by secondopinion »

willthrill81 wrote: Fri Oct 08, 2021 1:31 pm
secondopinion wrote: Fri Oct 08, 2021 1:18 pm
willthrill81 wrote: Fri Oct 08, 2021 1:01 pm
secondopinion wrote: Fri Oct 08, 2021 12:31 pm
willthrill81 wrote: Fri Oct 08, 2021 10:12 am Some have suggested that P2P loans are similar to high-yield (aka 'junk') bonds, and that might be true. I don't know enough about such bonds to know if the comparison is apt, nor do I really see the point in comparing them.
I remember seeing that default rates are between 2-7% for P2P loans per issue. Assuming terms of 3 to 5 years, this means an annual default rate of 0.4%-2.4% (depending on issue length and credit). If I remember reading right, BBB is somewhere around 0.3% and BB is around 2%. The high quality loans are BBB or BBB-; the rest are more like BB+ to BB-. If the default recovery is bad for P2P loans (which I hear it is), then this can shove some loans down to the B level because recovery normally saves some of the high-yield bonds at this level (and even the highest quality P2P loans call to question their BBB status).

Aside from the market dynamics, I see not much of any difference. Granted, I doubt you will get much of CCC+ or lower borrowers; but nor do most junk bond funds hold much of such bonds.
In the P2P lending space, at least with LC, retail investors could be extremely selective in the notes they funded. As I noted above, I developed a set of criteria for which notes I would fund. This screened out 98-99% of all LC notes. And for years, not just initially, my net returns were about 9.5%, which I was thrilled with. But then, quite suddenly, returns fell to around 4% and never recovered, and I've heard from many others that returns fell quite suddenly for them around the same time as well.
I imagine that one can get BBB loans, but the general whole is not that. It is active management, but I think it is entirely reasonable in this context. It sounds like you are getting only somewhat decent returns now when you used to make a lot of money.

I am more comparing the general environment as it stands right now. There are some differences due to liquidity and market dynamics, but high-yield bonds are the nearest marketable comparable that I am aware of.
I completely eliminated by P2P positions nearly two years ago and haven't looked back for a second.
When I do the numbers and consider the terms and the possible headache, I much rather not do P2P; buying SPHY or some other high-yield bond ETF is much easier to manage.
User avatar
willthrill81
Posts: 26126
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Returns in peer to peer lending

Post by willthrill81 »

secondopinion wrote: Fri Oct 08, 2021 1:42 pm
willthrill81 wrote: Fri Oct 08, 2021 1:31 pm
secondopinion wrote: Fri Oct 08, 2021 1:18 pm
willthrill81 wrote: Fri Oct 08, 2021 1:01 pm
secondopinion wrote: Fri Oct 08, 2021 12:31 pm

I remember seeing that default rates are between 2-7% for P2P loans per issue. Assuming terms of 3 to 5 years, this means an annual default rate of 0.4%-2.4% (depending on issue length and credit). If I remember reading right, BBB is somewhere around 0.3% and BB is around 2%. The high quality loans are BBB or BBB-; the rest are more like BB+ to BB-. If the default recovery is bad for P2P loans (which I hear it is), then this can shove some loans down to the B level because recovery normally saves some of the high-yield bonds at this level (and even the highest quality P2P loans call to question their BBB status).

Aside from the market dynamics, I see not much of any difference. Granted, I doubt you will get much of CCC+ or lower borrowers; but nor do most junk bond funds hold much of such bonds.
In the P2P lending space, at least with LC, retail investors could be extremely selective in the notes they funded. As I noted above, I developed a set of criteria for which notes I would fund. This screened out 98-99% of all LC notes. And for years, not just initially, my net returns were about 9.5%, which I was thrilled with. But then, quite suddenly, returns fell to around 4% and never recovered, and I've heard from many others that returns fell quite suddenly for them around the same time as well.
I imagine that one can get BBB loans, but the general whole is not that. It is active management, but I think it is entirely reasonable in this context. It sounds like you are getting only somewhat decent returns now when you used to make a lot of money.

I am more comparing the general environment as it stands right now. There are some differences due to liquidity and market dynamics, but high-yield bonds are the nearest marketable comparable that I am aware of.
I completely eliminated by P2P positions nearly two years ago and haven't looked back for a second.
When I do the numbers and consider the terms and the possible headache, I much rather not do P2P; buying SPHY or some other high-yield bond ETF is much easier to manage.
The taxes in the small taxable account that I initially started with were absolutely terrible, both in quantity and on tax returns.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
secondopinion
Posts: 1348
Joined: Wed Dec 02, 2020 1:18 pm

Re: Returns in peer to peer lending

Post by secondopinion »

willthrill81 wrote: Fri Oct 08, 2021 1:53 pm
secondopinion wrote: Fri Oct 08, 2021 1:42 pm
willthrill81 wrote: Fri Oct 08, 2021 1:31 pm
secondopinion wrote: Fri Oct 08, 2021 1:18 pm
willthrill81 wrote: Fri Oct 08, 2021 1:01 pm

In the P2P lending space, at least with LC, retail investors could be extremely selective in the notes they funded. As I noted above, I developed a set of criteria for which notes I would fund. This screened out 98-99% of all LC notes. And for years, not just initially, my net returns were about 9.5%, which I was thrilled with. But then, quite suddenly, returns fell to around 4% and never recovered, and I've heard from many others that returns fell quite suddenly for them around the same time as well.
I imagine that one can get BBB loans, but the general whole is not that. It is active management, but I think it is entirely reasonable in this context. It sounds like you are getting only somewhat decent returns now when you used to make a lot of money.

I am more comparing the general environment as it stands right now. There are some differences due to liquidity and market dynamics, but high-yield bonds are the nearest marketable comparable that I am aware of.
I completely eliminated by P2P positions nearly two years ago and haven't looked back for a second.
When I do the numbers and consider the terms and the possible headache, I much rather not do P2P; buying SPHY or some other high-yield bond ETF is much easier to manage.
The taxes in the small taxable account that I initially started with were absolutely terrible, both in quantity and on tax returns.
Taxes are a pain, that is for sure. My taxes personally are complex despite my income, but I guess I will get used to it.
bberris
Posts: 1785
Joined: Sun Feb 20, 2011 9:44 am

Re: Returns in peer to peer lending

Post by bberris »

I noticed the same thing with the online poker craze. When I first started playing, it was fairly easy to make money. Later not so much. I figure the cheaters entered and the people who thought they knew how to play quickly learned that they did not.
JCH10400
Posts: 23
Joined: Tue Dec 22, 2020 3:27 pm

Re: Returns in peer to peer lending

Post by JCH10400 »

During 2015 and 2016 I invested $35K in Prosper and $42K in Lending Club. It was going OK until the first month that the $ amount of loans written off exceeded the interest earned (some time in 2017 for LC, 2018 for Prosper). As soon as I saw that, I stopped reinvesting and started withdrawing funds as they became available. So far both have paid back about $5,000 more than I invested. I still have some loans with Prosper maturing in 2022, and I log in to LC every couple of months to withdraw the small amounts they recover from bad loans.
Topic Author
international001
Posts: 2095
Joined: Thu Feb 15, 2018 7:31 pm

Re: Returns in peer to peer lending

Post by international001 »

willthrill81 wrote: Fri Oct 08, 2021 10:12 am
Market efficiency says nothing about the risk/return and, I would add, effort factors of individual market participants. For instance, you might be willing to take on a lot more risk and put in more effort to get a higher expected return than me, and that difference in our willingness will result in different prices that we're willing to pay for the same thing. Us having access to different information has nothing to do with it.

Unsecured credit such as P2P loans has been likened explicitly by some at least to credit cards, which banks have been utilizing as profit centers for decades. Banks' effective returns on credit cards is likely well above 4%, not the least of which is because they can utilize leverage in doing so at a significantly lower cost than the typical retail investor can. Being able to borrow short-term money at 1% and then earn 7% on that money (just guesses on my part) is a recipe for fantastic profit, which is why the banks all compete so hard over credit cards and are willing to offer lucrative sign-up bonuses and rewards.

Well, as I see it if Ie can get a 9% return for a given risk for X and banks are getting return of 7% for for the same risk, eventually they'll figure out and invest enough in X so prices go down and the return equalizes.

But you are saying that corporate investment is minimum then I don't understand anything.

And why I can't get that 7% return? (minus overhead)
User avatar
willthrill81
Posts: 26126
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Returns in peer to peer lending

Post by willthrill81 »

international001 wrote: Sun Oct 10, 2021 6:58 pm
willthrill81 wrote: Fri Oct 08, 2021 10:12 am
Market efficiency says nothing about the risk/return and, I would add, effort factors of individual market participants. For instance, you might be willing to take on a lot more risk and put in more effort to get a higher expected return than me, and that difference in our willingness will result in different prices that we're willing to pay for the same thing. Us having access to different information has nothing to do with it.

Unsecured credit such as P2P loans has been likened explicitly by some at least to credit cards, which banks have been utilizing as profit centers for decades. Banks' effective returns on credit cards is likely well above 4%, not the least of which is because they can utilize leverage in doing so at a significantly lower cost than the typical retail investor can. Being able to borrow short-term money at 1% and then earn 7% on that money (just guesses on my part) is a recipe for fantastic profit, which is why the banks all compete so hard over credit cards and are willing to offer lucrative sign-up bonuses and rewards.
Well, as I see it if Ie can get a 9% return for a given risk for X and banks are getting return of 7% for for the same risk, eventually they'll figure out and invest enough in X so prices go down and the return equalizes.

But you are saying that corporate investment is minimum then I don't understand anything.

And why I can't get that 7% return? (minus overhead)
I don't fully understand your comment/question. Once corporate investors entered LC's platform and also got first pick of the notes, returns slid downward quickly. In my estimation and many others as well, 4% returns weren't worth the platform risk alone (i.e., what will happen to your investment if LC went bankrupt?). LC is leaving the P2P space anyway. TMK, Prosper is about the only P2P platform of meaningful size left in the U.S. P2P lending is much more common in China though.

Banks have been participating in the consumer credit market for decades via credit cards.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
Topic Author
international001
Posts: 2095
Joined: Thu Feb 15, 2018 7:31 pm

Re: Returns in peer to peer lending

Post by international001 »

If you are saying that somehow corporate can get the first picks and manage to do better decision, I guess this would break market efficiency and
they would be able to get better returns than myself.

I guess I was expecting a general algorithm where you could just pick all A notes and select maximum yield to maturity, and you would not be able to do better than tat
User avatar
willthrill81
Posts: 26126
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Returns in peer to peer lending

Post by willthrill81 »

international001 wrote: Tue Oct 12, 2021 5:18 pm If you are saying that somehow corporate can get the first picks and manage to do better decision, I guess this would break market efficiency and
they would be able to get better returns than myself.

I guess I was expecting a general algorithm where you could just pick all A notes and select maximum yield to maturity, and you would not be able to do better than tat
But that's the thing: the P2P market was clearly not efficient to begin with. People like me could mine the data to find which notes from which borrowers with which underlying factors historically produced the best returns, selected only those notes, and enjoyed subsequently higher than average net returns. For years, my returns on LC were far above average, well into the top 5% of all investors on the platform. But then LC changed things up, and virtually everyone's returns dropped, some significantly. And now LC is exiting the P2P space altogether.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
User avatar
White Coat Investor
Posts: 15423
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Returns in peer to peer lending

Post by White Coat Investor »

international001 wrote: Wed Oct 06, 2021 4:29 pm I have had been using LendingClub by buying notes in Folio as an experiment.
My annual return is right now ~4%. Mostly I bought notes with C/D credit. I looked at the maximum yield to maturity I could find.
I seems to me low returns with what was promised.
Did I do it right, or did I missed something?
I did it for years and got out a few years ago. My returns started out around 13% and were declining to about 8% at which point I figured I could make that with real estate loans in first lien position and got out.

Took forever to get out while the loans gradually trickled in too. If I ever wanted to do that asset class again I'd go through a fund rather than directly.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
User avatar
willthrill81
Posts: 26126
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Returns in peer to peer lending

Post by willthrill81 »

White Coat Investor wrote: Tue Oct 12, 2021 5:22 pm
international001 wrote: Wed Oct 06, 2021 4:29 pm I have had been using LendingClub by buying notes in Folio as an experiment.
My annual return is right now ~4%. Mostly I bought notes with C/D credit. I looked at the maximum yield to maturity I could find.
I seems to me low returns with what was promised.
Did I do it right, or did I missed something?
I did it for years and got out a few years ago. My returns started out around 13% and were declining to about 8% at which point I figured I could make that with real estate loans in first lien position and got out.

Took forever to get out while the loans gradually trickled in too. If I ever wanted to do that asset class again I'd go through a fund rather than directly.
When I decided to exit my P2P position, I just sold all of my notes on the secondary platform. This resulted in me probably getting somewhat less than I would have by waiting, but I was willing to pay that price in order to invest the funds elsewhere and to divest myself of platform risk. And the amount of money involved was not enough to justify waiting.

Incidentally, the secondary platform was actually a decent place for investors with both a good knowledge of which notes were the most profitable and with time on their hands to find some good deals. A good number of investors would clearly get sick of all their notes and sell them at a significant discount on the secondary platform, and those notes could be (and usually were) grabbed quickly by those who recognized the value in them. But the dollar value of most of the notes was too low for this to be attractive to those with large amounts to invest.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
abcdefg
Posts: 4
Joined: Fri Apr 27, 2018 8:00 pm

Re: Returns in peer to peer lending

Post by abcdefg »

I invested in P2P with Prosper for 5 yrs between 2012 - 2017 and with Lending Club for about 9 months in 2017.
Equated to about 2,000 total notes with Prosper and 220 notes with Lending Club with total funds invested around 35k.

To this day there is still a handful of loans left on both platforms but the overall returns of 4.07% Prosper and 2.59% LC, while better than HYSA (esp. during those yrs) and a majority of bond yields, isn't worth it due to the no/smaller risk and capital appreciation potential in those asset classes.

I never compared it to stocks or real estate from my personal point of view, but to me it had to more significantly outperform bonds to be worth it, given the higher risk.

Plus with both Prosper and LC as tech platforms and businesses, there were were a lot of other red flags along the way.
YRT70
Posts: 1151
Joined: Sat Apr 27, 2019 8:51 am

Re: Returns in peer to peer lending

Post by YRT70 »

I've been making 9% for the last 2 years on Mintos. I'm only investing in the 'safest' loans (still risky of course). I think they're mostly focused on Europeans but would expect they accept anyone.
Topic Author
international001
Posts: 2095
Joined: Thu Feb 15, 2018 7:31 pm

Re: Returns in peer to peer lending

Post by international001 »

YRT70 wrote: Wed Oct 13, 2021 1:39 am I've been making 9% for the last 2 years on Mintos. I'm only investing in the 'safest' loans (still risky of course). I think they're mostly focused on Europeans but would expect they accept anyone.
Interesting.. It seems you only need an European banking account to invest there. But US tax reporting would be probably complicated.
I wonder if the corporate investors will show up.
YRT70
Posts: 1151
Joined: Sat Apr 27, 2019 8:51 am

Re: Returns in peer to peer lending

Post by YRT70 »

international001 wrote: Wed Oct 13, 2021 6:22 pm
YRT70 wrote: Wed Oct 13, 2021 1:39 am I've been making 9% for the last 2 years on Mintos. I'm only investing in the 'safest' loans (still risky of course). I think they're mostly focused on Europeans but would expect they accept anyone.
Interesting.. It seems you only need an European banking account to invest there. But US tax reporting would be probably complicated.
I wonder if the corporate investors will show up.
Are you sure you need a European bank account? I would expect that as long as you can transfer money to their bank account you'd be fine. This would be cheap using a service like Wise.

Edit: I guess for getting the money back a European bank account may be necessary. Couldn't find the info on the site.
Last edited by YRT70 on Thu Oct 14, 2021 3:40 am, edited 1 time in total.
bagle
Posts: 160
Joined: Tue Feb 22, 2011 5:59 am

Re: Returns in peer to peer lending

Post by bagle »

I experimented with LendingClub when they were new. At the time, the market was less efficient. After extensive backtesting, I concluded that the higher risk E notes were relatively good value. And for a while, they delivered good risk-adjusted returns, around 6-8%.

Then several things changed: More sophisticated institutional investors arrived, using advanced credit models. Corporate investors invested excess cash. Borrowers may have gotten wiser. And the platform may have lowered it's standards.

In the end, default rates have been much higher than what historical data predicted. I still have a 3.73% return, but 32% of my notes have been charged off. I haven't bought a new note in many years, and don't intend to.
Topic Author
international001
Posts: 2095
Joined: Thu Feb 15, 2018 7:31 pm

Re: Returns in peer to peer lending

Post by international001 »

YRT70 wrote: Thu Oct 14, 2021 2:07 am
international001 wrote: Wed Oct 13, 2021 6:22 pm
YRT70 wrote: Wed Oct 13, 2021 1:39 am I've been making 9% for the last 2 years on Mintos. I'm only investing in the 'safest' loans (still risky of course). I think they're mostly focused on Europeans but would expect they accept anyone.
Interesting.. It seems you only need an European banking account to invest there. But US tax reporting would be probably complicated.
I wonder if the corporate investors will show up.
Are you sure you need a European bank account? I would expect that as long as you can transfer money to their bank account you'd be fine. This would be cheap using a service like Wise.

Edit: I guess for getting the money back a European bank account may be necessary. Couldn't find the info on the site.
Don't know.. it's just why I read from the website

https://help.mintos.com/hc/en-us/articl ... an-invest-

Another issue will be taxes. I wonder in which country will the income be sourced.
Topic Author
international001
Posts: 2095
Joined: Thu Feb 15, 2018 7:31 pm

Re: Returns in peer to peer lending

Post by international001 »

bagle wrote: Thu Oct 14, 2021 2:54 am I experimented with LendingClub when they were new. At the time, the market was less efficient. After extensive backtesting, I concluded that the higher risk E notes were relatively good value. And for a while, they delivered good risk-adjusted returns, around 6-8%.

Then several things changed: More sophisticated institutional investors arrived, using advanced credit models. Corporate investors invested excess cash. Borrowers may have gotten wiser. And the platform may have lowered it's standards.

In the end, default rates have been much higher than what historical data predicted. I still have a 3.73% return, but 32% of my notes have been charged off. I haven't bought a new note in many years, and don't intend to.
My thought was that you would not be able to know for sure unless you had long term for testing. Same thing than a high yield bond fund. During recessions you were susceptible to defaults for low credit notes.
You should be able to evaluate if risk/reward is better than stocks and how well they uncorrelated with stocks. But once you have all this information at a scale, I would assume market efficiency would kick in and it would be priced right.
Post Reply