To encourage more people to start investing, each quarter I post the current state of my personal peer to peer lending accounts.
Because of my age and life-situation, I am an investor who feels comfortable taking on more risk than most investors. While this means my returns are probably higher than average, the risk also means my portfolio is more susceptible to macro economic factors like a rise in national unemployment. Most investors might prefer staying in the safer graded loans.
Returns for Q4 of 2014 (Trailing 12 Months)
Some notes on these returns:
- Account values, defaults, and interest are pulled from each platform’s monthly statements (See your Lending Club Statements // Prosper Statements).
- The important figure of Net Interest (highlighted in yellow) is calculated by taking the sum interest earned for the past twelve months and subtracting that period’s total value of defaulted loans.
- Annual Return, also highlighted in yellow, is done via XIRR (see: XIRR calculator), the best way to independently calculate your peer to peer returns. Most investors will probably not need to go to such lengths, and can trust the onsite return at Lending Club or Prosper.
- With an average age of 11 and 17 months, the notes in these accounts are not yet seasoned. Read: The P2P Return Curve
- All returns are pre-tax.
Lending Club IRA: Earning 10.1% Interest
My Lending Club IRA remains an incredibly rewarding way to save for retirement. As this account continues to have a sizable number of unseasoned notes, its returns continue to drop slightly quarter by quarter, this one being 0.3% lower than the last. Interestingly, the account’s monthly interest and defaults moved in tandem over the past three months:
Here’s a further breakdown:
Probably the most obvious insight from the above graphic is how heavily tilted my account is into E-grade loans. While this lack of loan grade diversification might increase the overall volatility of this account, I still feel comfortable taking on this risk considering the return it offers.
E-grade loans give the highest ROI at Lending Club. Leaning into them while utilizing a few extra filters seems to me to be a great strategy moving forward.
Prosper Taxable: Earning 14.5% Interest
The $10,000 lump sum I deposited in mid Q3 came roaring out of the gate this quarter. In the month of December alone I experienced almost zero defaulting principal while earning over $400 interest.
Here’s a further breakdown:
This current 14% is unsustainable, but welcome while it lasts. You can bet the following quarters will see a rise in my default rate as many of these new loans fail to get paid back. Loans almost always default sooner rather than later. Read more: The Three Seasons of the Return Curve
Overall, I continue to be really happy with my Prosper account. Similar to Lending Club, E-grades remain my most rewarding grade. They seem to be the sweet spot for my goal to hit the highest yield possible, but your experience may differ from mine. Also know that you’ll probably need to invest via API if you want to lean into them as much as I’ve done since so few are casually available. And, as always, you should be aware of the risks of low-grade loans.
Curious what filters I use for this Prosper account? Here they are.
My Future Returns: Probably Around 9%
Readers may notice how my Lending Club return dropped slightly from last quarter while my Prosper account increased dramatically (see 2014Q3). The main reason for this difference is the Lending Club account being better seasoned (average note age is 17 months). In contrast, half of the loans on my Prosper account are new investments, meaning many will default in the coming months, bringing my Prosper ROI closer to my Lending Club ROI.
I do plan to continue to shoot for 10% returns on both accounts, but actually feel 9% is a more realistic return for the coming year. As seen in the chart above (hat tip to NSR), lower rates are where the industry is headed. Since December 2013, Lending Club has substantially decreased the rates they offer borrowers, with D-E grade rates falling by almost 2%. This is a big change for investors, and something to watch closely in the coming year.
In my opinion, the cause of this adjustment is peer to peer lending’s investor demand. Many many people want to invest in these loans, so it only makes sense for platforms like Lending Club to keep lowering interest rates to attract more borrowers. Even so, a 5-9% return is a remarkable investment year over year.