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My Quarterly P2P Lending Results – Q1 2013

by Peter Renton on April 11, 2013

The main reason most investors have taken the plunge with peer to peer lending is for the excellent returns. For this reason every quarter I post the details of my own returns for all my accounts at Lending Club and Prosper. You can see my historical returns here.

There are a few points you need to keep in mind as you look at the table below.

  1. I do not rely on the return numbers that Lending Club and Prosper provide. Instead I work out my trailing twelve month (TTM) return using the XIRR method. This allows me to take into account cash drag as well as any deposits (and withdrawals if I had any) while providing an accurate return.
  2. The Net Interest number is total interest earned plus late fees less any charge-offs.
  3. The Average Age column shows the average age in months of the loans in my portfolios. I added this based on feedback from my last update and it is useful because as a loan portfolio ages the more impact defaults have on the overall returns.
  4. All the interest and total balance dollar amounts are obtained from the monthly statements, I do not use balances displayed on the websites of Prosper and Lending Club.
  5. The Return on Site number is from the platforms recorded on the last day on the quarter.

Below is the table showing the return breakdown from my six accounts.

AccountBalance 3/31/12AdditionsBalance 3/31/13Net InterestAverage AgeXIRR ROIReturn on Site
Totals $146,665.45 $18,000.00 $181,631.16 $16,965.71 10.79%
Lending Club Main$23,620.71 $3,000.00 $29,591.84 $2,971.13 19 mths9.17%10.65%
Lending Club Roth IRA$5,476.51 $-$6,149.93$673.4215 mths12.30%13.99%
Lending Club Trad IRA$61,689.09 $- $67,357.11 $5,668.02 20 mths9.19%8.96%
Lending Club Roth IRA - PRIME$15,719.98 $-$16,642.50$922.5220 mths5.87%7.60%
Prosper Main$37,765.00 $15,000.00 $59,122.15 $6,357.15 12 mths13.99%15.06%
Prosper - 2$2,394.16 $- $2,767.63 $373.4714 mths15.60%16.59%

This past quarter was a mixed bag for my investments. Some of my accounts were up and some were down. I provide some more detail below.

Lending Club Main

This was my first p2p lending account that I opened in June 2009. All the loans from my initial investment have now matured and this money has been completely reinvested in a new batch of loans. But this account was my biggest disappointment last quarter. I went from a 12.34% TTM return on December 31, 2012 to 9.17% on March 31, 2013. Why the big drop? One word: defaults. January was my worst month ever for this account with around $412 in defaults against $453 in interest earned. February and March were much better and more in line with my historical numbers but the hit in January caused the big drop in my TTM return.

Lending Club Roth IRA

My $5,000 Roth IRA that I opened in April 2011 is now nearly two years old and it too suffered quite a big TTM return drop in the 1st quarter. My ROI dropped from 14.35% to 12.30%. This is my most aggressive Lending Club account, only investing in loan grades D-G and it also suffered more defaults in the latest quarter than ever before. January was also a terrible month here with more defaults than interest, which is the first and only time this account has gone backwards in a month.

Lending Club Traditional IRA

This month marks the third anniversary since opening this account. It was started as a Lending Club PRIME account but I took it off PRIME in November 2011 as I felt I could do a better job cherry picking loans. This is my largest Lending Club account and it is continues to show improved performance. I have gone from a TTM low of 6.45% one year ago to 9.19% today, this is also up from 8.28% last quarter. I continue to focus on grades D-G in this account by investing in my Lending Club Filters 2 and 3 as described in my How I am Investing post.

Lending Club PRIME Roth IRA

My second Roth IRA account (this is my wife’s Roth) is a Lending Club PRIME account. This is my experimental account. While I know I could do better by managing this account myself I like to see what happens when I let Lending Club choose the loans for me. This account has been a PRIME account since I opened it in April 2010. After several quarters of declining return numbers we showed a nice jump from 4.91% to 5.87% in the last quarter.

Prosper Main

I opened my first Prosper account in September 2010 with just $1,000. I have continued to add regularly to this account and today it has almost $60,000. Like most of my older accounts my returns here continue to drop but I am still very pleased with the numbers. My TTM return on March 31st was 13.99% down from 15.34% three months before. This account has the youngest average age of all my accounts at just 12 months so I should expect these return numbers to continue to fall. But I am hopeful that I can maintain returns here in the 12-13% range.

Prosper – 2

My smallest account also happens to be my best performing account out of all six. It is also my most aggressive account. I have only ever invested in grades E and HR in this account and so far it has paid off. I opened this account in April 2011 during a promotion where Prosper gave away $104 for every investor who opened a new account. My TTM return number of 15.60% does not include this bonus. While that number sounds impressive, it is down from 17.09% the previous quarter.

My Overall P2P Lending Return

My overall TTM return remained steady at 10.79% up just 0.02% from the previous quarter. My goal this year was to get my overall real world return to 12% by the end of the year. If I don’t add to any accounts I think that would be difficult. Long term, I may have to settle for returns in the 10-11% range.

I have decided to stop adding new money to my taxable accounts at Lending Club and Prosper. The advantages of earning interest in tax-deferred accounts are simply too great. I am going to add no new money this quarter at all but in the third quarter I am rolling over a six-figure IRA and investing it into both Lending Club and Prosper. This will give an initial boost to my return numbers but the average age of these accounts will drop dramatically.

The Final Word

While studying return numbers is interesting the most important number in my table is total interest earned. This is the money you have earned and can withdraw at any time if needed. My total interest earned continues to steadily increase now just under $17,000.

{ 35 comments… read them below or add one }

Dan B April 11, 2013 at 5:58 pm

As always, thanks for sharing your results.
Regarding your LC Main Acct & LC Roth IRA…………..how far off would I be if I were to take a wild guess & say that these 2 accounts are invested heavily (50% or more) in 5 year loans?

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Peter Renton April 11, 2013 at 6:31 pm

You would be correct. My LC Main account is 57% invested in 60-month loans and my Roth IRA is 78% invested in 5-year loans.

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Dan B April 11, 2013 at 7:08 pm

As I suspected, thx.

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dontvote April 12, 2013 at 11:48 am

I suspected something similar but am curious what your reason was for thinking Peter bulked up on the long plays?

dontvote

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Peter Renton April 12, 2013 at 12:07 pm

There are a couple of reasons that I bulked up on 60-month loans. In the credit grades I invest in (D-G) there is much more choice when investing in 60-month loans. The extra interest has been an incentive as well.

Having said all that, in recent weeks I have been focusing exclusively on 36-month notes on my main LC account to try and get to an underweight position on 60-month loans. I may start doing that in my Roth IRA account as well because I have basically ignored loan term in that account and I certainly have an oversupply of 60-month loans there.

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Dan B April 13, 2013 at 6:24 pm

Dontvote…………..Peter & I have had various discussions on 3 yr. versus 5 yr. loans, stretching back all the way to their initial introduction, so that was actually not as brave of a guess as I may have previously suggested. I’ve always argued that the higher interest offered on 5 yr. loans did not sufficiently compensate for the risk & that defaults, (both in terms of actual numbers as well as when they’d occur) would not be consistent with the 3 yr. loan experience. Therefore I’ve always limited my exposure to 5 yr. loans to no more than 10-15% in all my accounts.

Peter, on the other hand, embraced 5 year loans & responded to my arguments with a more neutral or non-committal stance, suggesting in his almost trademarked manner, ( as he often does :) ) that no one knows what will happen & that it’ll be interesting to see how it all plays out. (or words to that effect) Well Peter, I think it’s starting to play out. Oh & of course……………I told you so. :)

All joking/ribbing aside, it is instructive to note the damage that can occur within a short period of time…………….even to highly diversified portfolios. Even though nothing in these results have surprised me, I wouldn’t have predicted that an account would ever show a loss like the Roth IRA apparently did, albeit thankfully for just that one month so far.

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Peter Renton April 15, 2013 at 9:48 am

Dan, I am always happy to admit when I was wrong and I think my bullish call on 60-month loans was incorrect. Now that we have almost three years of history with 60-month loans we can start to make some educated forecasts about their payment patterns. This will be a topic for a future blog post but I agree with Dan that on the whole I don’t think investors are being rewarded enough for the increased risk of these long duration loans.

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Dan B April 16, 2013 at 6:53 am

It’s quite easy to suggest that a house is unstable………….,,,,, after part of it has collapsed. It’s quite another matter to make that same suggestion when things “looked” ok. A few of us recognized the situation back then & made educated forecasts back then. Some of us may not require 3 years of payment history in order to “start to make some educated forecasts”. Perhaps our minds just work differently or perhaps at different speeds. :)

Jack April 11, 2013 at 6:00 pm

Awesome job….. both from an analysis and from a return perspective. Are you still averaging @ $60 per loan or have you changed your dollar amount based on the credit grade?

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Peter Renton April 11, 2013 at 6:33 pm

Depending on my criteria I invest $25, $50 or $75 and very occasionally $100 in each of my accounts. It averages out to just under $50 these days. If I was putting new money to work I would bump up the loan amounts but for reinvestments these amounts work for me.

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Fred April 12, 2013 at 7:42 am

“… in the third quarter I am rolling over a six-figure IRA and investing it into both Lending Club and Prosper.”

Hopefully you are not putting all you retirement eggs in this P2P loans basket. :)

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Peter Renton April 12, 2013 at 9:43 am

I am very bullish on p2p lending obviously and am comfortable putting a large chunk of my retirement account in Lending Club and Prosper. But no, it is not all my retirement money.

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dontvote April 12, 2013 at 12:00 pm

I’m not sure I understand your comment about being able to withdraw your interest at any time. I understand this number as your total investment return (in dollars) but if you have reinvested this amount you will only be able to withdraw (to another IRA for most of your accounts) the cash generated by these loans (probably about 25K/yr and immediately probably about $2500).

dontknowhatyoutalkinboutwillis

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Peter Renton April 12, 2013 at 12:16 pm

I guess I wasn’t very clear in that last paragraph. Obviously unless you are more than 59 1/2 you cannot withdraw money from an IRA account without paying a penalty unless you are rolling it over in to another IRA. And you also cannot withdraw all your interest at one time.

My point is that once I do hit retirement age, which is still a few years a way for me, I intend to in part live off the interest from my p2p investments. I will work out my approximate monthly interest and withdraw that amount every month and then reinvest the rest. My p2p lending investments will in effect become a kind of tax free annuity.

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Fred April 12, 2013 at 3:21 pm

” … once I do hit retirement age … I intend to in part live off the interest from my p2p investments.”

Nice. I think every serious P2P investor can aspire to do the same.

I have entertained an idea that by the time I am retired my P2P interest income is as much as my social security benefit.

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Sheldon April 12, 2013 at 1:45 pm

Peter are you at all worried that in the near future given this country’s 17 trillion dollar deficit and growing, that the government will seize retirement accounts?

I currently have a main account with Lending Club, but I’m very hesitant to open an IRA or Roth. I’m curious as to your thoughts to my question.

I got concerned after reading this…. How they intend to steal your retirement…..http://market-ticker.org/akcs-www?post=219536

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Peter Renton April 12, 2013 at 2:23 pm

No I am not worried in the slightest that the government is going to raid my IRA. I don’t want to get into a political discussion here – this is a politics free zone – so I will leave it at that.

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Matt April 12, 2013 at 8:54 pm

Peter,

I also hope to use my Propser and LC accounts as annuities upon retirement. How much interest do you currently generate on a monthly basis?

Additionally, what line of work are you in?

Congratulations on your lofty P2P returns.

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Peter Renton April 13, 2013 at 6:20 am

You can see my yearly interest in the above chart – it is $16,965.71 which is $1,413.81 per month.

I am a full time p2p lending industry analyst – this is what I do every day.

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Jim April 13, 2013 at 8:31 am

Peter – any thoughts on the 1st quarter defaults? I know you started to invest more aggressively on the risk side. Do you think that explains it all? I have a bubble of bad loans that started to hit my account in Q1 and will continue into Q2, but the default rate seems to have dropped back down for now.

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Peter Renton April 15, 2013 at 9:37 am

Yes, I have had a look at my defaults and five of the six defaults in January were for 60-month loans. This is one of the reasons I am only reinvesting in 36-month loans right now. Also, I went through a period about a year ago when I was putting new money to work whereI increase my average loan size to $100 – and four of my defaults in January were notes of that. I am back down to $25 or $50 in my main account now.

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Rob April 29, 2013 at 12:42 pm

One factor could have been the expiration of the payroll tax holiday the first of the year. That took a 2% bite out of take home pay starting in January and may have pushed some struggling borrowers over the edge. FWIW, I just discovered P2P lending a couple of days ago so I’m at the zero point on the learning curve and trying to move up. Thanks for a most interesting website.

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Peter Renton April 29, 2013 at 2:12 pm

Hi Rob, Welcome and glad you found us. I really don’t think the end of the payroll tax holiday has had a major impact. People don’t suddenly default on their loans because of a 2% reduction in take home pay, usually the problems are more dramatic such as a job loss or a major medical bill.

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White Coat Investor April 17, 2013 at 12:49 pm

Surprised it took you this long to quit screwing around with your taxable accounts. Not only are your returns highly taxed, but doing taxes with a taxable P2P account is a pain. It’s fine for a tiny account to check it out, but if you’re going to get serious about P2PL, you really need to do it inside a retirement account.

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Peter Renton April 18, 2013 at 10:45 pm

For several years now I have had the bulk of my p2p lending investments in retirement accounts. As you say doing taxes is a pain and more importantly it eats into your returns. I intend to only add new dollars from now on through retirement vehicles.

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SJM April 18, 2013 at 11:30 am

Peter – The decline in yields appears to be a long-term trend, albeit a slow one. My theory is that yields will continue to decline as P2P becomes more mainstream and lenders demand lower risk premiums. After all, the enormous delta between P2P and other investments (bonds, CDs, etc.) seems unsustainable and ought to decline as P2P becomes more predictable. What do you think?

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Peter Renton April 18, 2013 at 11:00 pm

The decline in yield is a long term but not in quite the way you are thinking. As individual accounts age they suffer a decline in yields and that is what has happened in most of my accounts. The decline you are talking about is different and it has not happened yet, nor does it look like happening in the near term. Average interest rates at Lending Club continue to rise, a trend they have shown for a couple of years now. And Prosper’s average rates have always been higher than Lending Club.

I think you are right that eventually as p2p becomes more mainstream yields will decline. But I think investors have several more good years to make hay while the sun shines.

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Bernd April 25, 2013 at 10:09 pm

While i agree with your prediction, i expect an increase in the general interest rate level (effectively near zero today) to go nowhere but up — which may more than compensate for the downward trend.

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Brian April 22, 2013 at 6:42 pm

Hello Peter, thank you for this article. I am new to P2P lending and would like to know how much did you add a month to your first Prosper account that you started with $1,000?

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Peter Renton April 23, 2013 at 12:19 am

I added to this account sporadically. I added $4,000 within six months then another $20,000 within a year. Then I added about $5,000 a quarter since then. The total I have invested in my main Prosper account is now $50,000. I am no longer adding to this account because I will be opening an IRA account with Prosper later this year and will only add new money to the IRA account.

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Harry @ PF Pro May 2, 2013 at 3:51 pm

Thanks for the info Peter. My Roth IRA with LC finally funded(5k). I really like your idea of breaking down into incremental investments: $100 for your strictest filters, $75 for your less strict and so on. Is this what you do or did I just see it mentioned somewhere on your site before?

But I’ve been having trouble in my small after-tax LC account finding loans that meet my criteria. I used to always be able to find loans even with my strictest filters. And am I reading this right? At this exact moment, when I log in to my account and browse notes, there are only 167 total loans in funding at all of LC? That seems way too small…

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Peter Renton May 3, 2013 at 2:04 pm

Harry, I use the different note amounts that way at Prosper. It is a way for me to simulate the Portfolios feature because they do not have that.

As for LC there is rarely more than 250 loans available these days. There is a glut of investor money right now and loans are disappearing from the platform very fast – in a matter of minutes in many cases. The best time to login is right after the loans hit the platform at 6am, 10am, 2pm and 6pm Pacific each day.

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Harry @ PF Pro May 3, 2013 at 3:22 pm

Wow, thanks for the time tip. I just went on and found a bunch of new loans right at 2 pm. Looks like it won’t be as hard as I thought it would be to fill up my 5k Roth IRA now.

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Carol May 6, 2013 at 3:55 pm

Great website Peter.
I signed up for both LC and Prosper last Friday and am trying to be patient waiting for the investment money to show up. I have been looking at the available notes all weekend and was getting very concerned at how few notes there are. Just did a refresh after reading this comment about the 6, 10, 2 and 6 loan updates and LC went from 81 to 180. Now I now why have an alarm clock on my cell phone ;-)

Question: I have some small basic IRAs just lying around out there collecting dust. From the comments here it sounds like I can roll them over into LC and just slowly fund it?!! Can you point me to somewhere I can get all the details.

I found myself retired about 2 weeks ago (I’m 58) and decided I should start doing something with my money. Thanks in advance!

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Peter Renton May 8, 2013 at 10:23 am

Thanks Carol. Opening an IRA is relatively easy at Lending Club. I wrote a post on this a couple of years ago along with a video. The process is still pretty much the same today.
http://www.lendacademy.com/how-to-open-a-lending-club-ira/

Basically with a rollover to Lending Club there are two options. You can liquidate your existing IRAs and have the checks sent to you. You then have 60 days to open a new IRA and invest the money there. Or you have the money sent directly to Lending Club by transferring an existing IRA. Good luck.

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