About 2 months into the person-to-person lending experiment, I’ve now invested in a total of 48 loans. The number of available loans that have been returned in my search screens have been fairly light the last month, so I didn’t add nearly as many loans as I did in January. But, I have been remaining patient in order to build the best portfolio of loans that I can, with good returns and hopefully a very limited amount of defaults. I really am trying to squeeze as much of the risk out as possible, as a single default can wipe out the returns of dozens of loans. If you can wring a single extra percent of default out of your search, and still have a statistically significant number of loans to base a return on, you can add hundreds of dollars to your returns over the course of several years.
As you can see, my portfolio consists primarily of B rated loans, which return approximately 13.5% before defaults. About 20% of my portfolio is A rated loans, which return about 8%. The remainder, besides some cash, are loans rated C, D, and E, which return from 18% to 32%, again before any defaults. Additionally, you can see that the term of the loans I’ve invested in are mostly 3 year loans, about 65%, with the remainder being 5 year loans. There are several advantages I see in 5 year loans. First, the interest rate to me, the investor, is higher. Second, they likely pose less risk in the short and intermediate term for the borrowers, as the cash flow requirements to service a 5 year loan is less than a 3 year loan at the same principle. Currently, all my loans made are current, though the first due date of all my loans has not occurred, as I continue to add loans to my portfolio.
For background, peer-to-peer or person-to-person (P2P) lending is what borrows use instead of payday loans, pawn shops, credit unions, or banks that either offer poor terms and rates or won’t offer a loan at all. Additionally, the rates on P2P loans are usually less than credit cards rates, offering borrowers a clear path to saving money while repaying their debts. At the same time, investors can earn outsized returns compared to the high-yield bonds and especially compared to savings account, though at much higher risk.
It’s hard to say anything about my returns thus far, as I’ve only received a single payment from most of my loans, though one or two loans have given two payments. Prosper tells me my return to date is 10.15%, but again, this doesn’t mean much at this point. None of my loans are seasoned, which is defined as loans 10 months old or more.
What I’ve received so far is shown below. I’ve gotten a total of $75.68 in payments, of which $27.61 represent interest payments.
I’m happy with how things are going so far. I’ve invested almost half of what I’d like to start with in person-to-person lending. To begin with I’d like to get 100 loans, which would provide enough diversification so that any luck or lack thereof would be removed from the equation. At the current rate that loans are coming up in my search, I should have a full portfolio around June or July.
Readers, what are your experiences with P2P lending? What about P2P borrowing, have any of you paid off high interest credit cards from person-to-person loan proceeds?