I first dipped my toes in to the Peer to Peer lending market back in 2010. Back then I was just dabbling and transferred $2,000 into my investment account over a 6 month period. Looking back at the history it looks like this initial investment was made up of 5 separate deposits.
I don’t really remember what put P2P lending on my radar, but I do remember finding it intriguing…obviously it was interesting enough for me to divert some capital over to a P2P platform. Prosper was the first platform I found that facilitated such P2P lending activity. I am pretty sure Lending Club was around at the time as well, but I chose to invest my capital using the Prosper lending platform.
My Initial $2,000 Investment Was Short Lived
You can see from the above screen capture that I made my first deposit in February of 2010. I was interested, but much of my free capital at the time was going to invest in the stock market, as we were still less than a year off the March 2009 lows. Therefore, I was not willing to divert much capital this way.
After depositing a total of $2,000 with my last deposit in 2010 I set my Prosper account on auto-pilot. I didn’t even check in on it that often. Then Prosper introduced a trading platform that created a secondary market when you could actually liquidate the loans you were invested in before maturity, which I believe back then were 1-3 years in duration.
So, of course in April of 2011 I had to test this new platform out to see how easy it would be to liquidate my loans. I was curious what kind of haircut I was going to have to take to liquidate early. By July 11 of 2011 I had completely liquidated my loans. To my surprise I took a haircut on some, but was some how able to get a premium on others. In the end I think I ended up taking about a 1% haircut on average.
After completely liquidating my loan portfolio, I transferred my original investment of $2,000 plus the accumulated interest of about $100 out of my Prosper account and into my checking account. In 18 months my P2P lending career was over. In that time I did have 3 loans get sent to collections and eventually they were charged off.
I honestly can’t remember what my thinking was at the time, but P2P lending would not cross my mind again until sometime in 2015, when I decided this was an asset class that deserved a permanent allocation.
What Is Peer to Peer Lending?
As we approach about 500 words into this post I am realizing that some of you reading this may not even know what P2P lending is. I won’t spend too much time here, but lets review this briefly.
Peer to Peer lending is just like it sounds, as an investor, you are loaning money to borrowers. P2P platforms like Prosper and Lending Club make this rather easy. They have built an auction process where borrowers apply for loans and investors bid on those loans. As an investor you can invest (bid) in as small as $25 increments, so you can build up a pretty diversified portfolio quickly.
Whether you invest with Prosper or with Lending Club, they both offer a rating system that buckets each loan based on the risk level (the same way a bank would classify risk). The riskier the borrower the higher the interest rate, but also the higher probability of default.
And lastly with both platforms you can invest manually, handpicking the loans you invest in, or you can automate your investing. I am a big fan of the automation route.
What Does My P2P Portfolio Look Like Today?
In 2015 I jumped back into the P2P lending space and currently have an account with both Prosper and Lending Club. Although currently I have the majority of my P2P allocated capital at Prosper.
Last year when I put together my blueprint to $10M in net worth, I decided that P2P lending should play a role and should account for 5% of total net worth. Currently I have only invested $6,000 to date. In order to reach a 5% allocation based on my current net worth I am going to need to continue to build this to around $22,000.
At this point I don’t really know how fast I will allocate capital here in order to achieve the 5% allocation goal.
With that said, lets take a look at my current summaries for both accounts.
Prosper Account Details
Lending Club Details
You can see from the above screenshots of my P2P accounts that in 2016 Prosper is earning about a 5% return and Lending Club is earning about 7.6%. I think the disparity is really a function of how seasoned the investments are. I fully expect my Lending Club returns to fall closer to 5% over time. There will eventually be charge offs at some point.
I only have about $6,000 invested and based on my $10M blueprint I should be increasing this to about $22,000. I have the money, but why don’t I increase this to $22,000 immediately? Well, the thing I didn’t contemplate when I was formulating my plan, was taxes. The returns from my P2P portfolios are taxed at ordinary income rates.
If you read my recent post on how I plan to increase my income to $600K/year, then you will remember that one of the things I am trying to do is divert more capital into more tax efficient vehicles. We are approaching a marginal tax rate of ~54% and I would like to invest in assets that are going to help dilute that. All this to say that we are going to focus on a more tax efficient investment next, and it will require a significant portion of our capital.
I am also contemplating whether I really need to spread my P2P capital across multiple platforms or not. The good news is that with apps like Personal Capital, it makes it easy to keep on all your accounts in one place.
– Gen Y Finance Guy