Lending Club Update: Backing Out

In early 2012, I decided to jump on the most popular bandwagon in blogging (at the time) and get into some peer-to-peer lending. Initially I started off with $300, but quickly upped my stake to a total of $1,000 and then decided to let my experiment ride before I committed more money to it. Statistics showed that lending club investors were getting great returns, on average of 5% for “A” grade notes, all the way up to the much riskier “G” grade notes, returning 9.22%. The sweet spot seems to be mostly “E” grade notes, which return 10.22% on average (source). Things looked good to me, and it was sure better than the shitty ass <1% that H and I are getting for our savings accounts. Of course, I mentioned it to my dad and he looked at me like I had four heads, but also slightly curious.

Initially, my lending club experience was going quite well. After 6 months, I was convinced enough to up my stake in lending club from the initial 300. Everything was going good, and if I remember right my return was in the 8% range, which is more than adequate for what I was looking for (and I think a bit better than the S&P 500 at the time). Now that everything was going great, I figured this could become a pretty significant part of H and I’s portfolio going forward. We could use it to generate additional cash flow as well as get better returns than a regular savings account. Of course, in my initial excitement, I had forgotten that I was taking on quite a bit more risk than I was had I opened just a regular savings account.

After 9 months in, there was still no trouble in paradise. I had kicked my investment to the 1,000 range and was holding steady at an 11%+ return – not bad at all. I had even started taking on riskier notes. I started with A & B grade notes, with a few C grade in there for my first round, but the next round I was looking for higher returns and only was looking for B, C, D and E Grade notes.

I was making good returns in month 9, but still was looking forward to the awesome returns, though I did mention if I had a default or 2, I would still be much higher than I would in a regular savings account (you can see the increased risk had yet to sink in at this point), but I was totally happy with my return and probably would have put a bit more into it had I not decided to throw the last of the cash into the house so we could finally finish up some stuff upstairs. Since everything was going so well, I adopted the ron popiel strategy for this asset that I had built up:ron-popeil-rotisserie-oven

Unfortunately, this strategy was rather poor, and my 10%+ returns were not going to last much longer.

Why you shouldnt leave lending club on auto pilot

After executing my awesome strategy, I decided to check in 3 months later at the 1 year mark and see how it was working. Unfortunately, I was greeted with a nice slap in the face (and noticed I was $50 poorer). I had 1 loan past due at this point, but 2 had already been charged off, and I was currently looking at losing about $75 in principal! This was rather shocking to me, as I had about 50% of my investment in the most secure, lowest returning notes (A & B grade) and another 22% in the C grade – Over 70% of my exposure was in the top half of their rating structure!

My return had plummeted, but I figured that the defaults were mostly behind me, so I decided to keep the money there and figured that I could ride out the bad loans. My friend joe over at retireby40┬áhad a similar situation and saw his ROI drop after a few defaults, but then started to climb back up again after other loans kept paying back in full on time. I did know that this was a risk of the game, and had finally realized it, but only after it cost me $50. I was still ahead of where the banks were giving me, so I wasnt too worried quite yet. I’d just let the money sit, figure on no more defaults and then my ROI would climb back up around the 10% range and everything would be just fine. Unfortunately, these borrowers had other plans.

I noticed that one of my notes was late at this point, but instead of hopping on the trading platform to unload it at a partial loss, but I decided to do nothing and just blindly hope that the borrower would pay me back (not a good idea, FYI). It finally sunk in for me that I was probably taking on a bit more risk than I thought I was getting a return for, and even noted that had I simply tossed it into an S&P 500 index fund I would have been way better off. I was still fairly optimistic there though, and not really ready for what I would find a mere 6 months later.

How Low Can You Go?

During my 1.5 year check in, I realized that I really needed to pay more attention to this. I now had double the amount of defaults, and a few more notes that were late. This was not going well, and my return dropped below 2%. I had absolutely not heard of anyone with this poor of luck (friends were still earning 15%+ in some cases) but I still wasnt sure what I should do with it. Just over 1/2 of the term of most of my notes had passed, and I’d taken a bath! At this point, I had pretty well decided that I needed to back out of it, I just wasnt sure how to price my notes on the secondary market, so I basically sat on my hands for a while.

Eventually, my Return dipped below .75% and I got fed up. It was time for me to make a move before I got killed with this even more. Unlike losses in the stock market, these arent “paper losses” and are immediately realized when the borrower defaults. At least in the market there’s a chance that your holdings can increase in value after falling – not so at lending club.

Also at this point, I was saving up some cash for tax lien sales. Though I only got about $100 worth of tax liens this year, I’m hoping to increase that next year by going to sales in more counties. I’d also like to be able to sink a few hundred (or thousand) into a property that I feel like will be paid back, just for the sure 18% return.

Unloading

Finally, I ended up taking some action and put a block of notes up on foliofn for sale. Not all of them sold, but some of them did. I decided that I wanted to back out half of my portfolio (not sure why just half) and am selling them in blocks as they come up. I’ve gotten about 20% of my initial investment back at this point, with about another 50% of my investment on the trading block. I dont expect all of those notes to sell within the week time that is allotted, but some of them will and I’ll be able to move the cash out of lending club and back into my bank account, where it will be reinvested somewhere else. Right now, I dont have a plan for it and it will just sit in cash, but I’ll probably open a brokerage account and fund it with these proceeds. If things go well, I may just back everything out of my lending club account.

LC

I can say that I do like the lending club idea, and I honestly think that I just had a bit of bad luck and I didnt screen the borrowers that I was lending to close enough. I also think that I didnt have a large enough balance to swallow the defaults that were coming my way. Lending club recommends a balance about 20x the size of what I had, and I think that would be enough to swallow the defaults that I was experiencing and still come out with a very solid rate of return – somewhere in the 8-9.75% range if I followed the same allocation as I had before.

I may decide to build this portfolio back up in the future when I’ve got a bit more cash, but right now me and lending club are on the outs, as you can see from the picture above. I’ve sold off 35% of my holdings, and plan to sell off more.

The odd thing about this entire situation is that many of my friends also signed up for lending club, and have been absolutely killing it. They’ve enjoyed anywhere from 8% on the low end (Joe) to 11% in the mid range (eric), and a personal friend without a website juiced returns up to 19%, before falling back to around 16.5%.

Readers: Do you use lending club or its friend prosper? If so, how have you been doing so far? How long have you been investing, and how much total do you have invested?

 

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14 thoughts on “Lending Club Update: Backing Out”

  1. That’s some crazy (un)luck, but it sounds like you didn’t have that much money invested, so your losses (or lack of gains) were limited. I’m at around 9-10% after 2+ years, but I’m actually looking to take my money out too, though for a different reason. It’s hard to find good loans these days and it’s got to be way more active than I would like!

    • I was having trouble finding loans towards the end as well. Apparently big investors have been buying up boatloads of these notes for higher returns.

  2. Sorry to hear that. Thanks for sharing your experience though.
    I think when you have a small investment, the choice of loan and luck are huge. When you have more loans, it will average out more toward the median ROI.
    Our return is about about 9% now and that’s the average at Prosper.
    I’m also having a more difficult time finding loans.

  3. Jeff, Sorry to hear about your experience but I was gratified to see you realize what is needed to avoid this type of situation. I have found that for anyone with less than 50 notes you are relying on luck in order to produce a good return. Once you have a fully diversified portfolio, which I think can be achieved with 200 notes at $25 each, then you are less reliant on good luck.

    Sorry to see you go. Hope some time in the future you can dedicate more money to this to give it another go. Best of luck.

  4. I began my asset taper a few months ago too. I’m still showing a good return, but it has become too difficult. Like you, I like the idea a lot, but for us little guys, the pickings have become very slim.

  5. Boy sounds like you did everything wrong. I’ve been putting money into Prosper for 5 years now and my avg. return has been over 10% per year with not one month of a downturn. At this point I’ve got over 4000 loans. Almost every day I have a loan go bad. It’s the nature of the beast. It’s to be accepted and expected. I absolutely think your crazy if your not doing p2p lending!

    • That’s quite the stash of loans soctt, and I think you’re right – I did do everything wrong here, from the not paying attention to what was going on and the small balance, it worked against me quite a bit.

  6. Sorry to hear about your experience. You are spot on that it seems like you didn’t have enough invested. If you go to ‘understanding your returns’ within your account, you will see people with lower returns when you change the criteria to 100+ notes vs 250+ or even 500+. I made the mistake of investing in lower grade notes to begin with and have now moved on to higher grade notes as I’ve added to my account. I’ve seen my NAR increase and now start to drop off as loans go late, but I still remain positive about my investment in peer to peer lending. Best of luck in the new investment opportunities you mentioned.

    • Thanks ryan – when I’m reinvesting the profits, I’ve been going into more A & B notes than I was previously, but that still comes with a bit of risk (now heightened because of my small balance), so I’ll continue to watch the NAR and see what happens.

  7. Jeff,

    18 months is way too soon to pull the plug on an investment especially since loans in this platform are for 36 to 60 months. I would have diversified more and evaluated at the end of the term. I am have been investing in P2P since 2008 and there have many ups and downs.
    There are very vew investment vehicles where you just set and forget and P2P is not one of them.

    • I think you’re right jack – I wasnt treating this like there was actually money in there, I was kind of using it as a set it and forget type situation like I mentioned. Unfortunately that didnt work out, but had I had a larger balance I think that I could have rode this one out. A lot of people suggest that you start into P2P with 5k+, so maybe I’ll shoot for at least that next time I go in.

  8. Unfortunately, $1k just isn’t enough diversification to overcome those defaults. The largest number of loans default from month four to month 13 after that they trail off. I would not advise starting in with Lending Club unless you can commit at least $5k so you’ve got enough loans to to offset the defaults. With just 35 loans, the stats don’t work in your favor. For example, the difference between a 5% default rate and a 20% default rate is just five loans and that is completely within the realm of chance with so few loans. Statistical averages really only work over big numbers. Sorry you had such a bad experience.

    • Don
      Thanks for commenting – this is the conclusion that I came to as well. I should have kept putting about $50/mo in there after my initial investment, but I didnt and seems like I paid the price for it. I didnt have the cash at the time to really make a big commitment, but I’m not opposed to the service at all. I’m very aware of statistics in my life, and should have understood that I was going to fall on the wrong side of them for this, but I didnt. Oh well. Thankfully, I didnt lose any money (I just didnt gain any either).

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