Beating Broke

Personal Finance from the Broke Perspective

Peer-to-Peer Investing Update Mid-2016

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It’s been a little while since I last wrote one of these updates.  January of 2015 to be exact.  Needless to say, there have been a few changes in my peer-to-peer investing in the last year and a half.  One of the biggest changes, I’ll talk about below.  First, let’s see where my peer-to-peer investing was when we last looked at it.  (You can read the full post here, or just read the recap below.)

Peer-to-Peer at EOY 2014 (Recap)

The biggest change in my Lending Club account at the end of 2014 was the NAR (which is an adjusted rate of return) had dropped from a little over 13% in 2013 down to 9.61% at the end of 2014.  Despite the drop, I felt like that was a pretty good rate of return, and reason enough to continue to invest in peer-to-peer lending.

Two other factors that I looked at were default loans and interest received.  In 2014, there were 4 loans that had gone into default. There had been only one in 2013, but with an increase in investing on my part, the rise was somewhat expected.  The total principle written off in 2014 was $41.87.  Total interest minus fees for 2014 was $115.69.  Take out the written off principle and you still get income on 2014 of $73.82.  Again, not a bad little bit of semi-passive income.

Peer-to-Peer in 2015 and the first half of 2016

So, it’s been a year and a half since I last shared one of these updates.  First, let me do a bit of a quick overview of where the account sits now, and then I’ll share some changes that have had some effect.

Peer-to-Peer income

Beating Broke Lending Club Update
Is Peer-to-Peer Investing Worth Your Time?

I like talking about the income (and resulting rate) first.  Why?  Because that’s the meaty money part of it. 🙂  And I like money.  At the end of 2014, my NAR was 9.61%. Here we are in August of 2016, and my NAR is currently showing at 9.89%.  It’s gone up!  I love when that happens!  There’s a couple of factors that likely have helped with that.  The first is that there haven’t been any defaults since 2014.  Right now, there are 3 loans that are threatening.  1 that’s in that nasty 31-120 days past due category.  Typically, if they get that far, they’re as good as defaulted.  We’ll see, but I fully expect that loan to go into default in the coming months.  The other 2 are split between the Grace Period and 16-30 day categories.  More often than not, those loans tend to come back to the current status.  Having them default could eat into the income for 2016, but that’s one of the risks we take in investing for higher returns.

Peer-to-Peer Income 2015

2015 was a bit of an odd year.  I didn’t pay nearly as much attention to the Lending Club account as I should have, and so, often when I would log in, I would have quite a bit of my portfolio sitting around doing nothing in the cash account.  At one point, I had about 40% of the entire account sitting in cash because I hadn’t done anything with it in a while. That doesn’t equate to good income.  For 2015, the interest minus fees only totaled up to $103.07.  Down from 2014, but purely reflective of my inactivity in reinvesting the cash.  The upside to 2015 was the lack of defaults.  Because there weren’t any defaults, the income minus written off loans was still 103.07.  That’s better than 2014, so even though my inactivity caused a reduction in gross income, it also may have sheltered me from defaults and thus preserved more of the income.

I’ve been a bit more active in 2016, and my income reflects it so far.  As of the end of July, interest received minus fees was at $72.04.  If that trend continues, 2016 will be slightly better than 2014.  One of my goals when beginning this account was to achieve $10 per month in income.  At this point, I’ve done that.  I just have to remain active in reinvesting the funds in order to maintain that level.  Next goal, $20 per month!

Peer-to-Peer Changes

One of the things that I wrote about in my “How I Invest” article was how I wasn’t eligible to directly invest or borrow because of the state that I lived in.  Probably the most significant change since the end of 2014 is that my state is now eligible for both.  I haven’t toyed with the borrowing side, but I have touched the direct investment side.  My experience there is mixed. One of the things I like about it is that you aren’t paying any fees or premiums on the investments that you’re buying.  That means you make more money over the life of the loan.  That’s good.  The downside, to me, is the delay in investment.

Direct Investing vs. Trading Platform

If you’re unfamiliar with how the direct side works, you basically go in and choose which loans to invest in.  You’ve got some ability to filter, but not all the same ones that you have on the FolioFN site.  Once you select some loans, you press the invest button.  Here’s where the delay comes in.  The loan only gets investing if it gets fully funded.  So, if you invest in a loan early in the process, you could be waiting a while before there’s enough investor commitment to fully fund the loan.  Once the loan is fully funded, it goes through a vesting process.  The folks at Lending Club look it over, make sure everything is what it is supposed to be, and then the loan finally gets funded.  And then you wait until the next pay date.  All told, you’re money could be sitting in a committed status for a week or more waiting on all of those steps.  Or, you could pay a small premium (you can filter based on the premium) on the FolioFN trading site and have your investment in your portfolio the next day.

After playing with the direct side, I can see myself using it occasionally, but really keep going back to the FolioFN trading site to do my investing.  My thought is that the sooner my money is working for me, the sooner I’m making money with it.

Institutional Investors

I don’t know that this really qualifies as a change, but it’s something that’s been a topic of conversation a lot over the last year. And that’s the idea that there are institutions who are investing in peer-to-peer investments. One of the biggest issues that many seem to have with this is that it’s meant to be peer-to-peer (it’s right in the name!) not institution-to-individual.  That’s how the traditional loan process works, not peer-to-peer!

Ok.  I get that, but I think there’s also an argument that as the peer-to-peer movement grows, there’s going to be an increasing scale of demand for the loans.  And if the individual investing side doesn’t grow as quickly, there will be a lot of loans that won’t get funded.  It’ll look bad for business, plus it will drive away potential borrowers.  I think as investors, we need to recognize that if borrowers are being driven away because of a low funding rate, it means less opportunity to invest.  What we need to hope for at this point, is that the institutional investors are held at bay, and used for filling those funding gaps rather than let run amok and run the individual investors off.

My Peer-to-Peer Investing Going Forward

Much like many of my other updates, which you can read on my Lending Club page which has links to those and other related articles, I just don’t see any good reason to stop or even scale back my investment in peer-to-peer investing. The return remains excellent, and defaults remain low. As I’ve mentioned in other updates, I believe some of that is just plain luck, and some of it is due to scale. I’m only working with a little over $1000 in the account, so it’s pretty easy to be a bit picky when selecting loans to invest in. If I were working with a lot more money in my account, I couldn’t be as picky, and would likely see my rate drop some and my defaults rise.

The whole idea of this experiment (it’s really gone beyond an experiment now) was to let the account organically grow. Invest a bit of seed and reinvest the principle payments and interest so that it’s all working to make more money.  In short, I’m letting the miracle of compounding interest work for me. And so far, it’s working quite well.

What are your experiences with Peer-to-Peer investing?  Is it working for you?  Do you have questions before you dip your toes in?  Let me know in the comments!

Lending Club Return Update 1Q13

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If this is the first of my Lending Club return updates that you’ve read, let me catch you up a bit.  It all started with a little Lending Club / Sharebuilder experiment.  It’s moved on past that, to an ongoing series here at Beating Broke where I share, on a quarterly basis, how the account is doing, the things I’ve done with the account recently, and the things that I might be thinking about trying over the next quarter.

How I invest in Lending Club

Because of where I live (North Dakota), I’m not able to directly invest in fresh loans.  I’m forced to use the FolioFN trading platform to buy (and occasionally sell) the notes that I’m investing in.  But, based on my returns, I don’t think I’ll be complaining anytime soon.  If you’d like to read more about how I select my Lending Club notes, you can read my post on that subject here.

Beating Broke Lending Club UpdateLazy Lending Club Investing

While I consider investing in peer-to-peer investing to be a nearly passive income source, it isn’t a pure passive income source.  What I mean by that is that it does require some active management in order to keep the money invested in loans, and not just sitting fallow in your account.  Without meaning to, I put that to the test this last quarter.  In February, I don’t even know if I logged into the account.  I certainly didn’t buy any new notes.  What that means is that for the better part of February, the money that I had coming in just sat in the cash account not doing a darn thing.  By the end of February, the cash account was nearly 10% of my Lending Club portfolio.  I invested all of that back into notes in March, but it was a lesson in needing to log in and check the account once in a while.

Lending Club Loan Analysis

Analysis might be a bit too strong of a word.  At the end of the quarter, I had invested in a total of 62 notes.  Of those 62 notes, 19 had been paid off, and there have been no written off loans.  There is one that has slipped into the delinquent status column, however, and is showing signs of ending up in the written off column. The balance on principle of the loan is less than 1% of my total portfolio.  I might be able to sell it, but it’s far enough delinquent that I’d have to sell it at a significant discount.  Honestly, I haven’t decided if I’ll do that or not.  I’d rather it just came back around and was paid off, but I’m more of a realist than that.  Maybe we’ll be talking about the written off loan effect at the end of next quarter.

Lending Club Return

So this is the part that everyone’s been reading for, right?  If you look back at the 4Q12 update, you’ll see that my rate of return (displayed as NAR in the account dashboard) was 14.48%.  I screwed up a bit and didn’t record the NAR displayed at the end of March.  As of 4/24/2013, it’s being displayed as 14.63.  That still includes the one delinquent loan, so it’s likely to go down some if that loan is sold at a significant discount, or if it is written off.  The spreadsheet I use to keep track of the numbers shows a a return of 15.86% and 13.26% (adjusted with inflation, which may or may not be necessary).

The cash flow in the account remains pretty good.  I had several loans paid off in the last quarter that was reinvested.  All told, the portfolio of active (principle remaining) loans grew by 2 over the first quarter.  The average amount of money churning back into the account each month is averaging well over $30 a month now allowing me to invest in one new note (at $25/each) each month and then another when the balance grows beyond $25 again.  Monthly interest received is teetering around the $10 a month line.  I think my next goal might be to get the interest income up to $25 a month.  That would be pretty sweet.  I’d be investing in a new note each month on just the interest along.  If I want to do that anytime soon, however, it means I’ll have to start putting money into the account again.  I haven’t put anything into it since November of last year, and I haven’t yet decided when I’ll start putting money into it again, but it will likely be soon.

Embracing Risk, and Increasing Returns

I suppose that somewhere along the way, here, I should mention risk.  The notes that I’m investing in all carry a risk of potential default.  If they all were to default, I’d lose every penny in my account.  The odds of that happening are pretty small.  But, the odds of having one or two loans default out of a couple hundred is significantly higher.  If you’re going to invest in Lending Club notes, or any investment, you need to know and understand the risks.  That’s your warning, and my disclaimer.

Now, take a minute and go look to see what your bank or credit union of choice pays on their savings account.  How about their best rate on a CD?  Now, even if I were to invest my portfolio into loans with a better credit rating (and, supposedly lesser risk), I could easily be making 6-9% if there weren’t any defaults.  It beats the heck out of the rates at my credit union.

One last disclaimer.  Please don’t put your liquid (or, emergency) savings into risky investments.  You need those readily available, and relatively risk free.  Even at a paltry 0.25% in a savings account, it’s in the best place.  Every other drop of savings is fair game though.  Your money needs to be working for you, not the bank.

If you think Lending Club (or Prosper) is something you want to give a look (maybe you’ll want to try an experiment like I have?) you can sign up at the following links: (Lending Club | Prosper)

Quick and Easy Passive Income Ideas

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Building passive income streams can be hard work.  They usually take a significant amount of work and/or money to set up before they can really become a full-fledged passive income stream.  It’s part of the argument over whether they really are “passive” or not.  Obviously, as with anything, the more work or money you put into your passive income ideas the better the resulting passive income streams will be.  But, when you’re first getting started, there are several ways you can set up some small passive income streams that will provide with different forms of passive income.

Here’s a few passive income ideas.

  • deposit money with passive income ideasBlogging – As a blogger, myself, this one is one of the first ones I usually suggest.  To be sure, it’s not for everyone, but it can set up a rather nice passive income stream.  Blogging is work, but a well set up blog, with some content, could eventually be left alone to collect traffic, and Google adsense checks.  The initial work is a bit heavier, but the maintenance while setting it up can be as little as a few hours a week.
  • Cash Back Cards – Some might argue that this isn’t really a passive income stream, but I think that it can be.  Using a tax free cash back card to pay for bills/things that you would normally buy anyways makes the cash back an added bonus.  The only added work is to immediately pay the balance for the things that you’ve bought, and the cash back becomes an extra stream of income that you earned by buying things you would have anyways.  I have a coworker that does this and makes $500-$600 a year.
  • Peer-to-peer lending – I’ve written before about my portfolio on LendingClub, and how, with very minimal maintenance, I’m slowly building a passive income stream that earns me money.  As my portfolio grows, and I reinvest the interest, the interest income from the portfolio grows with it.  Eventually, if I keep with it, I could have a compound interest passive income machine, built with less than $20 and 20 minutes a month.

Those are just a few quick and easy passive income ideas to build passive income streams.  They don’t require a lot of work to get started and maintain, but they will provide for extra income that you can use to build them further, or to help beat broke.
photo credit: alancleaver_2000