Beating Broke

Personal Finance from the Broke Perspective

Peer-to-Peer Investing Update Mid-2016

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It’s been a little while since I last wrote one of these updates.  January of 2015 to be exact.  Needless to say, there have been a few changes in my peer-to-peer investing in the last year and a half.  One of the biggest changes, I’ll talk about below.  First, let’s see where my peer-to-peer investing was when we last looked at it.  (You can read the full post here, or just read the recap below.)

Peer-to-Peer at EOY 2014 (Recap)

The biggest change in my Lending Club account at the end of 2014 was the NAR (which is an adjusted rate of return) had dropped from a little over 13% in 2013 down to 9.61% at the end of 2014.  Despite the drop, I felt like that was a pretty good rate of return, and reason enough to continue to invest in peer-to-peer lending.

Two other factors that I looked at were default loans and interest received.  In 2014, there were 4 loans that had gone into default. There had been only one in 2013, but with an increase in investing on my part, the rise was somewhat expected.  The total principle written off in 2014 was $41.87.  Total interest minus fees for 2014 was $115.69.  Take out the written off principle and you still get income on 2014 of $73.82.  Again, not a bad little bit of semi-passive income.

Peer-to-Peer in 2015 and the first half of 2016

So, it’s been a year and a half since I last shared one of these updates.  First, let me do a bit of a quick overview of where the account sits now, and then I’ll share some changes that have had some effect.

Peer-to-Peer income

Beating Broke Lending Club Update
Is Peer-to-Peer Investing Worth Your Time?

I like talking about the income (and resulting rate) first.  Why?  Because that’s the meaty money part of it. 🙂  And I like money.  At the end of 2014, my NAR was 9.61%. Here we are in August of 2016, and my NAR is currently showing at 9.89%.  It’s gone up!  I love when that happens!  There’s a couple of factors that likely have helped with that.  The first is that there haven’t been any defaults since 2014.  Right now, there are 3 loans that are threatening.  1 that’s in that nasty 31-120 days past due category.  Typically, if they get that far, they’re as good as defaulted.  We’ll see, but I fully expect that loan to go into default in the coming months.  The other 2 are split between the Grace Period and 16-30 day categories.  More often than not, those loans tend to come back to the current status.  Having them default could eat into the income for 2016, but that’s one of the risks we take in investing for higher returns.

Peer-to-Peer Income 2015

2015 was a bit of an odd year.  I didn’t pay nearly as much attention to the Lending Club account as I should have, and so, often when I would log in, I would have quite a bit of my portfolio sitting around doing nothing in the cash account.  At one point, I had about 40% of the entire account sitting in cash because I hadn’t done anything with it in a while. That doesn’t equate to good income.  For 2015, the interest minus fees only totaled up to $103.07.  Down from 2014, but purely reflective of my inactivity in reinvesting the cash.  The upside to 2015 was the lack of defaults.  Because there weren’t any defaults, the income minus written off loans was still 103.07.  That’s better than 2014, so even though my inactivity caused a reduction in gross income, it also may have sheltered me from defaults and thus preserved more of the income.

I’ve been a bit more active in 2016, and my income reflects it so far.  As of the end of July, interest received minus fees was at $72.04.  If that trend continues, 2016 will be slightly better than 2014.  One of my goals when beginning this account was to achieve $10 per month in income.  At this point, I’ve done that.  I just have to remain active in reinvesting the funds in order to maintain that level.  Next goal, $20 per month!

Peer-to-Peer Changes

One of the things that I wrote about in my “How I Invest” article was how I wasn’t eligible to directly invest or borrow because of the state that I lived in.  Probably the most significant change since the end of 2014 is that my state is now eligible for both.  I haven’t toyed with the borrowing side, but I have touched the direct investment side.  My experience there is mixed. One of the things I like about it is that you aren’t paying any fees or premiums on the investments that you’re buying.  That means you make more money over the life of the loan.  That’s good.  The downside, to me, is the delay in investment.

Direct Investing vs. Trading Platform

If you’re unfamiliar with how the direct side works, you basically go in and choose which loans to invest in.  You’ve got some ability to filter, but not all the same ones that you have on the FolioFN site.  Once you select some loans, you press the invest button.  Here’s where the delay comes in.  The loan only gets investing if it gets fully funded.  So, if you invest in a loan early in the process, you could be waiting a while before there’s enough investor commitment to fully fund the loan.  Once the loan is fully funded, it goes through a vesting process.  The folks at Lending Club look it over, make sure everything is what it is supposed to be, and then the loan finally gets funded.  And then you wait until the next pay date.  All told, you’re money could be sitting in a committed status for a week or more waiting on all of those steps.  Or, you could pay a small premium (you can filter based on the premium) on the FolioFN trading site and have your investment in your portfolio the next day.

After playing with the direct side, I can see myself using it occasionally, but really keep going back to the FolioFN trading site to do my investing.  My thought is that the sooner my money is working for me, the sooner I’m making money with it.

Institutional Investors

I don’t know that this really qualifies as a change, but it’s something that’s been a topic of conversation a lot over the last year. And that’s the idea that there are institutions who are investing in peer-to-peer investments. One of the biggest issues that many seem to have with this is that it’s meant to be peer-to-peer (it’s right in the name!) not institution-to-individual.  That’s how the traditional loan process works, not peer-to-peer!

Ok.  I get that, but I think there’s also an argument that as the peer-to-peer movement grows, there’s going to be an increasing scale of demand for the loans.  And if the individual investing side doesn’t grow as quickly, there will be a lot of loans that won’t get funded.  It’ll look bad for business, plus it will drive away potential borrowers.  I think as investors, we need to recognize that if borrowers are being driven away because of a low funding rate, it means less opportunity to invest.  What we need to hope for at this point, is that the institutional investors are held at bay, and used for filling those funding gaps rather than let run amok and run the individual investors off.

My Peer-to-Peer Investing Going Forward

Much like many of my other updates, which you can read on my Lending Club page which has links to those and other related articles, I just don’t see any good reason to stop or even scale back my investment in peer-to-peer investing. The return remains excellent, and defaults remain low. As I’ve mentioned in other updates, I believe some of that is just plain luck, and some of it is due to scale. I’m only working with a little over $1000 in the account, so it’s pretty easy to be a bit picky when selecting loans to invest in. If I were working with a lot more money in my account, I couldn’t be as picky, and would likely see my rate drop some and my defaults rise.

The whole idea of this experiment (it’s really gone beyond an experiment now) was to let the account organically grow. Invest a bit of seed and reinvest the principle payments and interest so that it’s all working to make more money.  In short, I’m letting the miracle of compounding interest work for me. And so far, it’s working quite well.

What are your experiences with Peer-to-Peer investing?  Is it working for you?  Do you have questions before you dip your toes in?  Let me know in the comments!

How to Get Started with Lending Club

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Over the past couple of years, I’ve been talking about peer-to-peer lending.  I’ve shared my returns each quarter (see last quarters’), and shared how I go about selecting the loans that I invest in via FolioFN.  One thing I haven’t talked about in detail is how to get started with Lending Club.  So let’s do that.  Let’s talk about how the strategies that you can use to get started with Lending Club.

What is Lending Club

Before we talk about strategy for investing with Lending Club, we need to briefly discuss what Lending Club and other peer-to-peer lenders are.  They act as a service for both borrowers and lenders.  As an individual, you can apply to get a loan, or you can invest in a loan.  If you’re getting a loan, the peer-to- peer lender will vet the loan for risk, and then provide that information, anonymously, to the prospective investors.  As an individual, you can also invest in the loans that have been vetted.  The borrower then repays their loan just like they would if it were borrowed from a traditional lender (banks, credit unions, etc) and each payment (with interest included) is split out to each of the investors.  In short, they make you and the other investor/lenders into the bank.  There’s a lot more too it, but that’s the basic rundown. Now, lets talk about three strategies that you can use to get started with Lending Club.

Go Big or Go Home Strategy

Getting Started with Lending ClubThere are some people who refuse to do anything on a small scale.  You know who you are.  If this describes you, this is likely the strategy that you will use.  Decide on the percentage of your overall portfolio that peer-to-peer lending will be, then calculate how much of an investment that means you’ll be making.  Deposit that amount into your Lending Club account and start investing it into loans.  Depending on the size of your deposit, it might still take a little time to get it 100% invested into loans, but you’ve got the full amount in the account and ready to go.  As you progress, you’ll also want to make regular deposits that match the % of portfolio that you’ve set for your investment accounts.

Slow and Steady Strategy

Some people really like systems.  They like to decide on a path, set the system that will take them down that path and rarely deviate from that system.  In this strategy, you still decide what the percentage of your portfolio that your Lending Club account will occupy.  But, instead of making one large deposit to assign it, you make several smaller, timed deposits to bring it up to the % of portfolio that you’ve decided on.  Each deposit will be invested as you go.  Ongoing deposits will likely be larger than they would be with the above strategy because you’ll be increasing the account balance to match the % of portfolio as well as including your amount of new investments.

Get Your Feet Wet Strategy

Some of you are still a bit leery of peer-to-peer investing.  You’ve heard that it’s risky.  You aren’t sure if it has a future, or, more specifically, if it has a future in your portfolio.  Maybe you like investing in high-value stocks and bonds and playing it safe.  But, still, you’re tempted.  Tempted by the rate of return that I and others are claiming to receive.  This is the strategy for you.  Instead of selecting a percentage of portfolio like the above two strategies, you want to just get your feet wet a little and test the water.  Decide, instead, on an amount of money that you want to use to test the waters.  At a minimum, it should probably be something like $125-$250 minimum.  That amount will allow you to invest in $25 increments and reduce your risk by having at least 5-10 loans in your account.  Using this strategy lets you feel the system out with a minimal amount to lose.  Even if you lose it all, it’s not a large percentage of your investments.

Get Started with Lending Club

As investors and stewards of our money, it’s important to find the best way to handle our money.  For many of us, that means finding ways to eliminate our debt, earn more, and invest smartly.  I’m not a financial adviser.  I’m just some guy that likes learning things about money.  I share those things, and my thoughts on them here.   One of the things that I’ve been using to grow my investment portfolio is Lending Club.  I’ve been very happy with the service, and I recommend it.

Which strategy do I use?  At this point, I still have significant debt.  I happen to believe that investing while you are in debt is not all that smart.  So, I’m more focused on my debt than I am on investing.  I’m still firmly in the get your feet wet strategy with my investments.  In the time I’ve been testing the waters, my portfolio has grown to quite a bit more than the minimum investment I suggest above, but that’s where I started, and that’s the strategy that most closely resembles my usage of Lending Club today.

If you’re thinking about getting started with Lending Club, be smart, know that there are risks, but I don’t think they are as bad as some would claim.  Know that, just like stocks, there is a chance that you will lose your entire investment.  Just like investing in stocks, that chance is pretty small.  I’m not an adviser (that hasn’t changed in the last two paragraphs) so if you’ve still got questions, and want professional advice, I suggest you talk to your adviser first.

I’ve consistently been getting returns on my money of 13-14%.  Even in the boom times of online savings accounts, the interest rates weren’t that high.  Heck, even if you believe Dave Ramsey and his 12% returns on stock investments claim, it isn’t that high.  Getting you feet wet in Lending Club offers a potentially good rate and, I think, is worth a try.

Original Image Credit: Feet by lukasberg, on Flickr

Lending Club Returns Update 3Q13

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Another quarter has come and gone.  We’re bracing ourselves for the coming winter.  It’s also time for a check-up on my Lending Club account, and the returns I’ve gotten.  In my 2Q13 update , my account was showing a return of 14.08%.  Keep reading to find out if I’ve managed to maintain that rate.

No More Defaults

One of the other things that I wrote about in last quarters update was that my portfolio finally suffered it’s first defaulted loan.  In this quarter, I had a few loans that went into the late categories, but ended up coming back to normal.  I’m still a little surprised that I haven’t had more defaults.  I’m glad that I’ve been lucky enough to only have the one default since January, 2010.

Active Passive Income

Beating Broke Lending Club UpdateThe closer you get to true passive income, the less work you have to put into it.  Lending Club portfolios are not true passive income.  I’ve discussed it before, and it bears reiteration.  They are awful close though.  In all, I spend about 20 minutes a month to reinvest the payments and interest that have come in.  It’s not all at once, usually.  With the $9-$10 in interest that my portfolio is earning each month, that’s a pretty good wage.  Maybe it’s an active passive income stream.  Oxymoron for the win!

Lending Club Return Rate

Now, for what everyone has been waiting for.  (Or scrolled down really quickly for)  Without any further defaults, and staying on top of reinvesting the funds as they come in, I’ve been happy this quarter with my return.  As of 10/4/13, my current Lending Club returns rate displayed is 14.69%!  It’s bounced back nicely from the default.  I’ve been investing the funds a little more aggressively over this quarter which helps explain some of that.  At this point, my reasoning is that I’ve been investing with Lending Club since 2010 and have only had one default.  The risk is still there, I think, but I don’t think it’s quite as bad as some would like to make it sound.

Where will my rate be at the end of the year?  I’m hoping it will remain steady.  I’ll be maintaining the same Lending Club investing filter, and hope that doing so will maintain the low default rate I’ve been lucky enough to have.

How is your Lending Club portfolio doing?