Prosper P2P lending update late payments

Prosper P2P lending update - late payments?!

After logging into my Prosper account the other day, I notice that the status on one of my loans has a funny color next to it I haven’t seen before.  I investigate to see that one of my loans is now considered late in the 1-15 day range.  I don’t like this.  My stat model that I use at lendstats.com assumes that if a loan goes late even for 15 days, the odds of default at rise a lot.  For the return calculations I use a 90% write-off value when a loan goes late at all.  Thus I expect to loose 90% of my investment on average.  However, this is a D rated loan, which provides a pretty healthy yield.  Luckily the borrower paid the loan back up to current, but the question is do I want to keep the loan, or sell it?  I’m tending toward the sale option, even though there is significant effort.  More about this later.

Pending P2P investments - high yield notes

Pending P2P investments - high yield notes

So as you can see, the overall portfolio has gotten slightly more risky over the last month.  The A rated loans and the C through HR used to be about equal at around 25% of my portfolio.  Now the A rated loans only comprise around 17% of my portfolio, and the B rated loans have shrunk to about 45%, and the C through HR rated loans have expanded to about 30% of the portfolio.  I’m counting the pending bids on loans in this last category as well, as I added a few loans recently that have yet to close, but they are all rated C through HR.

Prosper loan terms - 3 year vs 5 year

Prosper loan terms - 3 year vs 5 year

The majority of my loans are still 3 year loans, but I’ve added a few 5 year loans as well.  In fact, I won’t take any A rated 3 year loans at this point, as the 8% yield doesn’t do much for me.  However, the 5 year A rated loans yield 12%, which is a bit more appealing.  In all the other cases, I’ll take 3 or 5 year loans for the B through HR rated loans.  This gives me an extra 14% points of return or so (after compounding) over the same time period of the 3 year loan.  On a percentage basis, this is a huge increase over the standard 3 year loan, for only slightly more risk.

Loan performance to date for P2p investment portfolio

Loan performance to date for P2p investment portfolio

To date, I’ve received $350, with $95 of that being interest payments.   I’d like to get that number up over $100 a month, and I should get there with my current search criteria once I have a full loan portfolio of 100 loans.

Getting back to the decision at hand, should I make the effort to register to trade notes via the security exchange in order to sell this loan because of the late payment, or should I hold onto the loan and hope that this is a one time exception?  Given the assumptions I had above, that I expect to lose 90% of my funds on average, it seems pretty clear what I should do huh?  Luckily, my status is back to where I lick to see it, Current, Pending, and Cash only.  So I have a bit of time to sell the loan, as it likely won’t default on the next payment.

 

Readers, what would you do?  Do I hold the loan or dump it while it’s still current?  What has your experience been?  Have you or someone you know loaned money to someone who was late paying it back?

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24 Responses to A late payment scare, P2P update

  1. I would love to someday be able to say “8% doesn’t do much for me.” WOW!!

    • Karl says:

      @ 1% and Elizabeth, Lol, I should clarify. When I say the 8% doesn’t excite me, I’m talking about given the risk of the A rated borrower. I think I’m not being compensated enough for that risk at 8%, but feel better at 12% even though the term is longer. If I could get 8% across all my money for reasonable risk, I’d jump at that. 🙂

  2. 8% returns seem pretty good. I just tried to open a Prosper account as a lender, but I am unable to because of my state of residence (NJ)…boooo

  3. WorkSaveLive says:

    @Iam1Percent – can you do lendingclub? You might want to check that out too.

    I would sell the loan. I’ve had some experience with Prosper a few years back and if somebody goes late then they’re extremely likely to go late again.

  4. jefferson says:

    I was reading about Prosper a few weeks ago.. and this is very interesting.

    Have you ever had someone go late before?

    • Karl says:

      Nope, this is the first loan that has had any problem at all. As mentioned above, it is current now, so maybe that is all that will happen. I played around a bit on lendstats today, and couldn’t really determine a difference between the returns on loans that had a single late payment (less than 30 days) and other loans, so maybe I’m actually fine either way.

  5. I haven’t thought of selling the loans. I’ll keep an eye out for the next late one. I imagine the lat payment would effect the selling price? Sell it and write a blog post. 🙂

    • Karl says:

      Yes, loans that are actively late only tend to get about .50 on the $1. So if I sell it, I will definitely decide in the next day or two and sell it while it’s current.

  6. Modest Money says:

    If it’s not too much work I’d probably try to sell it. I’ve never tried P2P lending though. So I don’t really know what’s involved with selling a loan. At point do you get to start breaking legs? 🙂

    • Karl says:

      I am going to investigate this. I basically need to create an need to create an account on the trading platform, sell the loan, then get the trading platform to send me the cash. If it links directly with my prosper account, that would make things quicker and easier…

  7. To me, it would really depend on the trouble it would take to sell the loan. If it’s not that much of a hassle and it gets you out of a risky situation, why not? On the other hand, if this was only a one time thing (whoops, forgot to make a payment!) and it’s a hassle to sell, it might not be worth it.

  8. Nick says:

    I’ve never gotten into P2P. It’s not that I’m “against” it or anything but the returns are subject to ordinary income taxes, right, not capital gains? So even a 12% return is really only 8% or less after taxes… So holding onto an index fund for more than 3 years, even if it returns 9% on average gets me pretty much the same place, but betting on big companies instead of individuals with outstanding notes… Just keeping it simple, really, more than anything.

    • Karl says:

      That may be true, but I read research that said the personal loans and credit card loans are not correlated with stock market returns. Something like the average credit card rate is 10% and that there has never been a down quarter for a portfolio of credit cards. This isn’t exactly the same thing, but I think it’s close enough. And you know that holding uncorrelated assets is the way to go to improve returns.

  9. SB @ FPR says:

    I have all A’s and I am happy about earning 8% no complaints. Be careful with your distribution.

    • Karl says:

      I think that the A rating is really in a spot that isn’t so great. The AA loans if I remember, return 6%, and the B ratings return 13-15% for 3 years. I’d rather go AA or B, as I think the small extra return of the A doesn’t compensate me quite well enough. For higher yields, I would rather hold a portfolio of AA and B.

  10. Brady says:

    I’d look for a pattern. If I see that a borrower consistently pays 1-15 days late, but its always on the same day, then I don’t really mind. But, if you that date staggering, or worse…slipping later and later towards the late period, this may be a sign the borrower is starting to struggle. From my understanding of your post, this is a first time event, so you really don’t know what you are getting into.

    To the borrower, there is no payment penalty nor ding on their credit for paying a few days late, so they may not see it as a big deal. Just as an example, I know a lot of people get hit with day care and a mortgage during the first week of the month, so if I see someone paying the second week instead of first, I can sort of infer what’s going on.

    All this said, if this spooks you and makes you anxious, sell the note. Just know that as your portfolio gets larger this type of “micromanaging” will become harder to scale. Good luck!

  11. I’m with Elizabeth, 8% sounds fantastic! I don’t know if I would be willing to take the risk. Glad this is not my decision.

  12. AverageJoe says:

    How much is the overall loan? Whether you sell or not would depend on commission vs. time and amount outstanding.

  13. I’d sell. I’m not 100% sold on the whole idea of P2P lending yet. Your returns have been great so far, but the aspect of default scares me. I know – silly to hear that coming from someone who invests in the stock market, right??

  14. Carl says:

    I do Lending Club. 8% is fine with me if I believe the borrower to be sound. I think too many people look at these notes only as an investment to be bought, and lose sight of the fact that there are real live people with real live issues behind them. I review every note before I buy it to see if it demonstrates certain financial habits that I think make the borrower more likely to repay the loan. Thus I’ll gain a few points in the end due to lower than projected defaults.

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