Written By: Mr. Horizon
About three years ago I was trying to find an alternative investment that would provide consistent returns and help me create a monthly paycheck I could rely on. I wanted to look outside traditional stocks and bonds. At the time I had heard about peer to peer lending and had not put much thought into it so I decided to do some reading. Lending Club, a peer to peer lending service, boasted a 5-7% rate of return with a solid consistent monthly paycheck on 36-month or 60-month notes. In March 2016, after much research, I decided to give it a try. If it could consistently produce a 6% rate of return, I would consider it a success and work to maintain it much like my other investment portfolios.
GETTING MY FEET WET
In the first year I started with exactly as Lending Club suggested, no loan greater than 2.5% of portfolio. I made a purchase of 100 notes up front values at $2500. Notes are individual increments ($25) of an entire loan. Enough notes must be sold to individual investors to be consolidated into the loan of the borrower. In my initial portfolio I invested heavily into B notes and focused primarily on A, B, and C grade notes not putting much thought into lower quality notes. My initial 100 note portfolio is shown below:
As you can see, I have had 8 charge offs over the 36-months I have owned this portfolio. A charge off occurs after an account becomes delinquent for a period longer than 120 days and Lending Club has exhausted their means to get the loan back in good standing. They are basically telling you, the lender, the rest of the loan is more than likely not recoverable.
These notes have just about paid me back all of the principle. At this time, the total unpaid principle is about $250 and the monthly payments received has dwindled to $26. This means over the next two years the account will be all profit and I will make about $450 in interest on the initial $2500 investment. I know that does not sound terrible but if you look at the annual rate of return it is around 3.5%, well below the anticipated 5-7% claimed by Lending Club. This was just the start of my investing at Lending Club from here I set out to grow my account to $10,000.
By the end of my first year, I had purchased a total of 256 individual notes and I was not happy with the results so I adjusted my investment strategy to be more aggressive. I invested primarily in C and D quality notes which have a higher charge off percentage but better potential return. I chose a custom mix that had a historical return of 5.9%, very close to the 6% I was looking for. I was hoping to turn my investments around in 2017.
As 2017 continued, interest rates on individual notes were about where I needed it to be. By the end of the year, I accumulated another 341 notes with an effective interest rate of 15.3%. If I could limit the charge offs, I had a real opportunity to reach my goals of 6%.
I expected increased charge offs, late, and delayed payments that would cut into profit, but that is not really what happened. By the end of 2017, I was feeling pretty good about my investment. My unadjusted annual rate of return was up to nearly 9.3% and after charge offs, I was still sitting at 6.7%, a full 0.7% above what I had hoped to achieve for a rate of return. I thought I was going to turn good profit in early 2018. By this time the account value had ballooned to just under the $10,000 that I wanted to invest, as seen below. 2018 was going to be the year to prove out my Lending Club experiment.
Although I had high hopes for the new year, my investments began to take a turn. I hit my $10,000 in deposits and stopped investing more as the charge offs began stacking up.
This uptick in charge offs was not unexpected as I was investing more aggressively to get the 5.9% rate of return. I had hoped the higher rates on each individual loan would make up for the uptick. By the time I stopped reinvesting I had purchased 938 notes at $25 per note meaning my $10,000 deposit had purchased me just under $23,500 in notes. As the end of 2018 rolled around, my charge offs had taken up any additional interest I was getting and the number climbed from the 12 charge offs at the end of 2017 to 72 at the end of 2018. My rate of return prior to charge offs was an amazing 11.9% which was phenomenal, but the charge offs reduced my adjusted rate of return to a measly 2.9%. My profits made in 2018 were not worth the investment risk. For me this was all I could handle. I didn’t see any reason to take on all the additional risk for this terrible rate of return on investment. I could get safe, high quality bonds that pay the same rate of return.
As you can see below, I now have 4 portfolios in Lending Club and they are paying just under $500 per month and I will continue to own them as they pay me back for the notes over the next 3-5 years.
I have stopped continuing to invest and will be slowly pulling my money out. I am currently receiving and adjusted rate of return of 4.14% and to me this value is below my expectations.
As I withdraw this money, I will be reinvesting it into low cost index funds. I am also looking into some environmentally conscious investments. I want to get behind ideas that will invest in our future and be socially responsible for leaving the earth better than we received it. I will write about that in a future article but for now here are my parting thoughts on Lending Club.
Peer to peer lending has its place, but big banks have already infiltrated all of the lending sites available and make it nearly impossible to get high quality notes at reasonable interest rates. Lending Club’s rating system is not accurate; self-reported income, work history, and other information creates unqualified candidates who have no chance of paying back the loan. I did not lose any money with Lending Club and will likely end up making a couple thousand when it is all said and done, but the risk is just not worth it to me. I would rather take on the risk of a well-diversified stock and bond portfolio invested in low cost funds. It will have lower fees, less monkeying around, and is entirely liquid. Lending Club is only partially liquid with the 3-5 year payback period. I believe some people could do very well in Lending Club hand picking notes and investing large sums into these individual loans, however this is not something I am comfortable with. For this reason and all the others, I have pointed out, I will be removing all money from peer to peer lending and not reinvesting into this alternative investment in the foreseeable future.
Although this alternative investment did not work for us, I am not an investing expert and encourage you to research all of your investing options to see what works for you! We are all on different investing journeys so remember HOYH!