P2P Lending experiences?

[secretwealth]

I've been using Microplace for about a year now more as charity than as a real investment, but I've made a pretty good and reliable ROI on a small amount of money, so I'm wondering how much further one could take this.
I just looked over Prosper.com, which makes some big promises. Any experiences? I wonder if this would be a good way to bolster investment income.

[Dragline]

I've used both Prosper and Lending Club for about 4 years now. I like LC better, although Prosper has been recently adopting many of the same approaches as LC. I have let my Prosper account wind down and only have a few loans left there.
It took me awhile to get the hang of it, but I am making about 9.5% at LC right now on about $40K. I am slowly ramping it up and also using some leverage. If you are going to do it, make sure you make lots of small loans and take advantage of the 1-2% kick-backs they offer on various modes of deposit if you can.

[jacob]

Far too much tax filing (every single loan that goes bad needs its own paperwork) for my taste. I've written about my experiences with propser on the blog. I prefer high yield bond ETFs.

[ElysianFields]

Why do you say that every bad loan needs its own paperwork, Jacob? Can't you just list them as a short-term loss on Schedule D and attach a spreadsheet list of explanation (most of which is "more than 120 days old, recovery efforts exhausted, recovery unlikely")?

[jacob]

@ElysianFields - Yep, that's exactly what one has to do adding the loan paperwork as well---a tax return becomes half an inch thick. Now do that for 15+ loans (figuring 150 loans for diversification and a 10%+ default rate) using the online listing tools which aren't exactly helpful, to say the least, when it comes to finding out default dates and lost principal.

[Dragline]

It's not that bad really -- but it is an extra incentive to minimize defaults!
If you have a 10% default rate, you would have a big problem and probably not make any money. I learned that the hard way, believe you me! You really want to keep defaults down to the 1-2% range if you can. And I would aim for having at least 400 loans, each one representing no more than 0.25% of your investment at the time of purchase.

[tac]

I have an account with Lending Club. I invested a relatively small ($1k) amount and told myself I had to wait it out for 2 years before reinvesting or putting new money in. I'm now at that 2-year point, and I'm somewhat on the fence about reinvesting--think I'm going to wait a bit longer. Everything was rosy for the first year, then in the second year I've had a few defaults/loans charged off (and now I have to figure out how much of a tax headache that will be--given that each loan was for $25 total and I'm out less than $40 at the moment, I'm wondering if I even have to bother....). I'm still quite confident I'll get all my capital back and that my overall interest rate will be better than a CD or savings account, which was my minimum expectation. I do still recommend that people who are thinking of getting into P2P lending try it out, investing a small amount of money that they will be okay with losing. Right now, with interest rates low, stocks in the tank, etc. etc., your P2P loans do not have to do amazingly well to still do better than many alternatives. I think also that many people go in with this idea that they are going to get gazillions out of it, and frankly, losing some of their OWN money is the only way they are going to really figure out that, oh, yeah, there is risk involved.
I also think it's somewhat safer than another scheme I hear people talking about, which is loaning money to others without the screen of a Lending Club or Prosper. At least with LC/Prosper you can spread your risk out, bit harder if you are operating solo.

[Phayen]

I also have a LC account with a small amount ($530) or so. I started with $500 maybe a year and a half ago. It was working fine, getting about 10% or so for that first year, but then I had a loan default and now am only getting I think it said 5.6%. If I had another loan default I'd be darn close to not earning anything. The more high grade loans you have the better off you are. I think they have a graph on their website saying something to the effect that their members with 800 loans all have positive returns. I'm at something like 32 loans spread across my $530 as I've been reinvesting the proceeds and capital. Still not a bad return in my eyes.

[sshawnn]

I have had an unfortunate situation with my initial foray into P2P lending. As an Indiana resident, I can only participate in Lending Club's secondary market buying and selling notes. Indiana residents are restricted from participating in the issuance of notes on the primary platform by state securities authorities.

I am VERY disappointed! The secondary market simply adds another layer to the process that I am not willing to deal with.

The representative was very kind and is expediting the rapid return of my initial investment.

[Dragline]

Well, that's pretty lousy of Indiana. The secondary market is difficult to navigate -- I have not found any easy way of sorting through the loans there.

[m741]

I am also limited to the secondary market. Sort by Markup/Discount, and then find the loans listed within 1% of their 'book' value to eliminate loans with a bad price or something extra-fishy. Also, figure out what loan size makes the most sense for your account. I have $1700 invested and will not consider buying a loan of more than $100, in order to diversify.

[sshawnn]

m741

Your 1% filter seems like sound logic. I can't get over the (seemingly) obvious hurdle. If a note is a producing asset, why would the seller offer it? I realize most of the loan related data is present and realize one obvious reply is that the note holder may have change of plans etc. The primary market seemed like a solid idea but the secondary market seems more fishy overall. I just can't see how a buyer can get a comparable overall product from the secondary market as compared to the primary when planning a series of high volume low value transactions. My limit would have been $50.

[m741]

I'm not sure why people sell. I assume they want to raise cash. I haven't had problems with it: you can see whether someone's credit rating has been downgraded, or if they've missed payments, before you buy. So you have the same information available as the seller, which is very important.

[chilly]

I noticed that Lending Club (at least) allows you to go in via an IRA. I assume this would eliminate any tax concerns as with most things under the IRA umbrella. I will have to read up a bit more but wondered if anyone was doing it this way already.

[dot_com_vet]

P2P lending sounds very good, and I'm tempted to put this years IRA contribution at Lending Club.
But, this article says you can duplicate nearly the same investment with a bond ETF. (Lending to companies vs. individuals)
http://www.obliviousinvestor.com/lendin ... and-costs/

[JohnnyH]

This is a HUGE benefit to P2P that is rarely mentioned... However not being able to write off capital loses is a huge downside... Still I did >6% in LC last year, apparently tax free.
"JohnnyH,
If you have not received a 1099-OID yet, then you did not generate one in 2011. The reason being that you did not hold any individual notes that exceeded $10 in interest last year. For reporting purposes, please see the total interest earned on your year end statement.
Regards,
Investor Associate | Investor Services"

[Dragline]

Unfortunately, it's not tax-free. Just because they are not required to report it does not mean you can avoid reporting it as income yourself! They are just telling you that your total income is what's on the year-end statement and they are not going to issue a 1099.
But if you borrow money to invest in LC or a pool of investments that includes it, you can write off that interest against the profits you have made in LC.
I've begun using LC as part of the "cash" portion of a Permanent Portfolio, because it behaves essentially a short-term bond held to maturity with a much higher rate than a short-term bond fund. It takes a while to ramp it up, though, if you want to be sufficiently diversified.

[JohnnyH]

P2P is really blowing up in my face in 2012: capital losses and negative returns.

[henrik]

Any update on your experiences?

Also, how do you account for P2P loans in your net worth calculations? The site that I'm using reports a "conservative", "moderate" and "optimistic" nominal value of my portfolio (only good loans, +overdue loans, and all loans, respectively). But that's just the sum of free funds + all expected future inflows regardless of the terms of the loans or any time value of the funds.

I was thinking a better indicator net-worth-wise at any given time would be something like this:
My total deposits
- any withdrawals
+ actual interest and late fees received at the time
- written off principal.

This should give a conservative estimate plus have the psychological benefit of actually rising over time as the payments come in even if you don't make new deposits:) Does anyone have a better and/or more sophisticated idea?

[Dragline]

I just tend to look at it as a snapshot of what is there right now regardless of any deposits or withdrawals or interest to be received in the future.

LC also has a new calculator feature on its site that allows you to "downgrade" your late loans for the purpose of valuation and customize the calculation. I do a 25% downgrade for anything 0-15 days late, 50% for anything 16-30 and 100% for anything over 30 days late. This is more conservative than actual performances for those groupings.