This post is inspired by Brave New Life, who posted about his strategy for lending in a peer to peer network in Lending Club Investment Strategy
Back in March 2007, we had some extra cash from yearly bonuses and decided we wanted to try peer to peer lending. I’ll be honest, I do not remember exactly how this came up. One of us probably read an article about it and thought it looked interesting. Then we looked at the different sites and decided to give it a try.
We went with Prosper. Again, I don’t remember the exact reasons why, but it might have been that Lending Club wasn’t accepting new lenders or borrowers at the time because they were going through an accreditation process. Prosper would later go through this process (taking around 18 months or so) but at the time was free and easy, so to speak.
What I do remember is that looking through the loan applications was addicting. Addicting.
We did not have strict money making criteria like Brave New Life. A lot of our decisions were emotional. I seem to remember I was more likely to invest if there was a picture, especially a picture of an animal. We did a lot of investing in animal emergencies- a horse that needed a surgery, a dog hit by a car, etc. We also invested in people trying to get out of the pay day loan cycle. We did a lot of investing in people who had very poor or no credit what so ever.
We did try to balance that out with investing in the occasional small business loan for people with great credit. And then there were some loans that were made just to be the one to fully fund a person.
Like I said, these weren’t sound investing strategies, but they worked okay for us.
In fact, in the early days, we were making a better return on our Prosper loans than we were on the money we’d put in CDs at the same time. And since this was 2007, the CD rates weren’t ridiculously low like they are now.
When payments came in, we reinvested while we could.
We originally invested $3,000. In November 2008, we pulled over $1,200 out to pay to move my mother in law in with us. This was money she eventually paid us back, but by then my husband had been laid off, so instead of reinvesting, it went toward debt payoff.
We continued to pull money out here and there to help get our debt paid off so that we could afford to live on my salary. We last pulled money out in July 2010, for a grand total of $2,545, leaving us with only $455 invested.
Prosper underwent some big changes during this time, too- getting federal accreditation and all. For a period of about 18 months, people were unable to apply for new loans and we were unable to invest (hence having $1,200 sitting around in Nov 2008.) We did not place a new bid from March 2008 to October 2010.
Over the 4.5 years we’ve been invested, we received interest payments of about $850, but had principal charge offs over $1,170, so we’re down about $320, or 10% of our original $3,000. Currently, we only have $135 in the account- $120 invested and $15 in payments sitting there.
We’ve had 26 notes charged off and 28 paid in full. Of those, the best investment, risk wise, were those with AA and B credit ratings- we made 6 loans in each of those categories, with 5 paid in full. On the AA loans, the interest rate yields varied from 8.15-10.7%. The B loans had yields from 13.5-17.26%.
The next best investment risk wise? Those with Prosper credit ratings of HR- or not enough information. We made 9 such loans and were paid back on 6 of them, with interest rate yields from 18-29%.
The worst rate of return came from those with D & E credit ratings, where we were paid in full only 25% of the time. People with A credit ratings paid in full 57% of the time, and those with C ratings paid 40% of the time.
Looking at reward, we made by far the most money on the HR loans- getting a profit of almost $125, once all the paid in fulls and charge offs have been figured in. The only other two categories where we made money were the B and AA, but so little ($7.80 & $13.38 respectively) given their percentage pay off rate that is just seems silly.
I also want to point out that though we had 26 defaults, of those, 14 honestly made what I consider good faith efforts to pay off their loans (we received over 50% of what we loaned back), and in fact, one of them had already paid back 124% of what he’d borrowed; he’d just happened to borrow at a rate of 27%.
Loans to those with a D credit rating continue to look like the worst investment. We lost the most money on that category- over $300 -and half of those we invested in did not even make it to 50% paid off.
Yes, it was disappointing to get the note from Prosper that a loan had been charged off. At the same time, getting the notes that others had been paid in full was a great feeling. When we got the note that said the 17 year old (now 20) who had borrowed for her horse’s surgery had paid her note off in full, we celebrated her victory, and were very glad that we could have been there for her.
Obviously, no one is looking for a 10% loss on their investments. But given the economy over this time frame, and the fact that we pulled money out instead of reinvesting it, I feel pretty ok about where we are. In fact, we’re at a point where I’m ready to consider depositing more money in to the account- get us back up to our $3,000 and see where it takes us. I may decide to stick with loaning money only to the HR folks, though.