Each quarter I post the current state of my peer to peer lending accounts. I am a lender who enjoys maximizing my return through fine-filtering available loans with the highest interest available.
Figuring Out ROI Can Be Tough
Calculating your peer to peer lending ROI (return on investment) is tricky business. If you want the easy route, both Lending Club and Prosper offer you their sometimes inflated number. Calculating your ROI with XIRR through Excel is probably the best, but this still does not take into account any notes that have gone late (and are, as such, no longer worth their full value). Michael’s Portfolio Analyzer at NSR includes a reduction from these late notes, but does not do well with loans bought or sold on the secondary market (which I have done many times). I have included on-site and XIRR ROIs for comparison’s sake (see my analysis of calculating XIRR return).
On average, my returns stayed the same this quarter as last quarter.
Prosper Taxable Account: 12.52% ROI
I added an extra $2,000 last quarter, and you can see it in the lowered average note age and the fact that my Prosper overall return rose by 6 basis points. For what it’s worth, I introduced C-grade loans into my Prosper account this quarter, and you can see it by the fact that the average interest rate on the loans I am investing in dropped from 26.89% to 25.28%.
I have earned almost $3,000 in interest on this account, but nearly half that amount (46%) has been lost in principal to defaulting borrowers. This large loss is a result of the higher-risk borrowers I am investing in. Considering my overall return remains above 12%, I am comfortable with this huge-up & huge-down approach. In my investing strategy (and at my age), I actually find this tumultuous toss a lot of fun.
I do not recommend this higher-risk higher-reward approach for most investors, especially for those starting out. That said, it continues to work well for me, and I plan on continuing this practice into the near future.
Lending Club Roth IRA: 13.10% ROI
This account has been enjoyable as well. For those not keeping track, I experienced my largest number of defaults ever this quarter – ten loans in all, and will probably accrue additional ones in the next quarter. That said, my overall return remains above 13%. I continue to push for returns on this account through smart note selections. My average weighted rate (the interest rate of loans I invest in) continues to inch upward, going from 21.28% to 21.36%.
It is worth mentioning again that I used to sell notes that had gone late by using my Sell Late Notes on Foliofn strategy.
Unfortunately, Lending Club has gently informed their lending community that this is now not allowed. There has not been an official announcement yet – just the top gray box on this page. However, you can read the continuing saga on this topic over at the Lend Academy forum (Thread: Folio and IRAs). (UPDATE: Trading through an IRA is now allowed again!)
Just 14% of my Lending Club notes have a 36-month term, and the average grade is E3. Similar to my Prosper account, I do not recommend such a higher-risk higher-return approach for most investors.
Riding the Return Curve
As outlined in my Riding the Return Curve post, my overall return continues to slightly drop as my account matures.
It is interesting to see how I continue to beat out the majority of Lending Club investors. I attribute this to the various strategies I employ, as well as patience and a bit of luck. I will be coming out with a post in the coming month regarding the filters I use on these accounts, though investors who have been in the game a while will not find any real surprises.
More than anything, I continue to be amazed by the reality of peer to peer lending. This thing works. This quarterly update, like those that came before it, prove this asset class to be both real and lucrative.
Tell you wives. Tell your friends. Things are changing. In fifty years from now when lending money to responsible people is the norm, we’ll all look back and shake our heads at the task most Americans faced in the late nineties when the mainstream way to save for retirement was corporation-based mutual funds.