Ending my Experiment of Investing in Peer to Peer Loans

July 21, 2017

Ending my Experiment of Investing in Peer to Peer Loans

I have decided to wind down my investment test with LendingClub. I should end up with a investment return of about 5% annually. So it beat just leaving the money in the bank. But returns are eroding more recently and the risk does not seem worth the returns.

Early on I was a bit worried by how often the loan defaulted with only 0, 1 or 2 payments made. Sure, there are going to be some defaults and sometimes in extremely unlucky situation it might happen right away. But the amount of them seems to me to indicate LendingClub fails to do an adequate job of screening loan candidates.

Over time the rates LendingClub quoted for returns declined. The charges to investors for collecting on late loans were very high. It was common to see charges 9 to 10 times higher as the investor than were charged to the person that took out the loan and made the late payment.

For the last 6 months my account balance has essentially stayed the same (bouncing within the same range of value). I stopped reinvesting the payments received from LendingClub loans several months ago and have begun withdrawing the funds back to my account. I will likely just leave the funds in cash to increase my reserves given the lack of appealing investment options (and also a desire to increase my cash position in given my personal finances now and looking forward for the next year). I may invest the funds in dividend stocks depending on what happens.

chart showing return for Lending Club portfolios

This chart shows lending club returns for portfolios similar to mine. As you can see a return of about 5% is common (which is about where I am). Quite a few more than before actually have negative returns. When I started, my recollection is that their results showed no losses for well diversified portfolios.

The two problems I see are poor underwriting quality and high costs that eat into returns. I do believe the peer to peer lending model has potential as a way to diversify investments. I think it can offer decent rates and provide some balance that would normally be in the bond portion of a portfolio allocation. I am just not sold on LendingClub’s execution for delivering on that potential good investment option. At this time I don’t see another peer to peer lending options worth exploring. I will be willing to reconsider these types of investments at a later time.

I plan to just withdraw money as payments on made on the loans I participated in through LendingClub.

Related: Peer to Peer Portfolio Returns and The Decline in Returns as Loans Age (2015)Investing in Peer to Peer LoansLooking for Yields in Stocks and Real Estate (2012)Where to Invest for Yield Today (2010)


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