Lending Club is a peer-to-peer lending service. People (like you and me) sign up for their site, and list a loan to be funded by investors (like you and me). I like to think of it as replacing the bank in a loan with me. (Except I’m not “too big to fail”.) Of course, with that comes the same risks that the bank assumes when it issues a loan. There’s a risk of late payments, missed payments, and default and it’s associated collection activities. Luckily, Lending Club and Prosper (another p2p lending site) take care of most of the paperwork for the lenders (and borrowers). This post is the second quarter update on my Lending Club account, and the return I’m getting on my money.
First Lending Club Default
I’ve been mentioning in the last several updates how lucky I’ve been that I haven’t had a loan go into default yet. Well, that streak ended recently. I knew it was only a matter of time before one of the notes defaulted, and one has. Luckily, the loan that defaulted was a small one, and my portfolio has grown enough that the value of the default didn’t really affect the account too much. The value of the defaulted loan is about 1% of my Lending Club portfolio.
There’s also a loan that is in the 31-120 days late category, that has the possibility of going to default, but at this point, the borrower is making attempts to pay the loan. The reason it’s still in the late category at all is because the most recent payment was only a partial payment. This loan is a larger loan than the defaulted one, so I may have to consider taking the loss on it and selling it at a discount to get it off my books.
One of the things that I like most about Lending Club, and p2p lending as a whole, is that you get a relatively high churn on your money. It’s not a buy-and-hold scenario, per se. Yes, you invest in a note with the expectation of holding that note until it is fully paid off, but, as the payments come in monthly, that money is available for reinvestment. In my 1Q13 update, I mentioned that I’d been a bit lazy in my reinvestment of those funds. I was slightly better with that in the second quarter, and was able to keep most of the money pretty actively invested.
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Passive Income from Lending Club
Many people (myself included) call p2p investing a form of passive income. While not strictly meeting the criteria in that it does still require some activity on the investors part, it’s pretty close. Maybe we need to start defining passive income in terms of it’s passivity? Something like levels. Each level is achieved by it’s decile of passivity. For instance, I think p2p investing could be somewhere around 90-95% passive. That would make it a Level 9 Passive Income source. With about 15 minutes of work a month, I’ve earned almost $60 in interest payments as of the end of June of 2013. Last year, with the same amount of work, I earned $75.37 in interest payments. If I had significantly more money, that amount would be larger, but I think that the time spent each month to earn it would be a bit larger as well. Still, a pretty close to passive means of making some money.
Lending Club Return Update
We’ve talked about most of the rest of the account, but the title did say that it was a return update, right? Yes. In my 1Q13 update, I mentioned that the rate of return then was being shown as 14.63%. As of 8/3/13, it’s being displayed as 14.08%. The combination of the defaulted loan, and the payoff of a couple of higher interest paying notes is bringing the rate down. I’ve been happy with the return I’ve been getting, but I truly think that a more reasonable expectation of return is somewhere in the 10-13% range. I’ll take the 14%+ returns I’ve been getting though.
Click here to learn more about how I select my Lending Club investments.
Overall, I’ve been really happy with my results at Lending Club. And, with the p2p lending industry as a whole issuing over 200 Million in loans in July, it would appear that there are plenty of other happy users too.
Have you gotten your feet wet in p2p lending? Why or why not?