In the fall of 2012 I decided to test a new investment: peer to peer lending. At the point, I had read a number of personal finance blog posts about this new form of investing and even listened to a live presentation about its growth from an executive of one of the largest peer to peer lending companies.
Despite all of the positive things I had heard and seen, I was still uncertain.
Being the curious investor that I was and still am, I decided to give it a shot. There’s no better way to learn than from personal experience.
Researching and Starting to Invest at Lending Club
When I decided that I was going to invest a little bit of money at Lending Club, I did some research. I looked at what others were using for filters and criteria for selecting a loan. Because of where I was living, I was restricted to purchase loans second-hand. Despite this restriction, there were still thousands of loans available to me.
I quickly learned some basic things to look for, like whether someone had a mortgage or was renting, debt to income ratio, and so forth. I had it mastered…or so I thought. While I could go into more detail, the fact that I am giving it up tells me not to waste my time telling you how to do it.
Investing in Peer to Peer Loans for over 1 Year
When I first started investing, I was seeing solid returns each and every month. I invested about $1,000 over the course of 3 months and I was seeing 13-15% returns. That came out to about $12 each and every month. That’s not bad considering how much I invested. Who can’t use an extra $12 per month?
But that wasn’t enough. One day I want to earn enough passive income to pay for my expenses and in order to accomplish that, I needed to keep investing. So, I kept investing regularly, but in small amounts.
This was going fine for a while.
Then I realized that there were a few minor problems with my investing plan.
First Problem – Over-saturated Market of Investors
The first problem is that finding the loans that met my requirements was getting harder and harder. More investors were using the same filters and so the competition was fierce. Loans would be gone within a day after being posted.
In order to keep investing, I was forced to go beyond my comfort zone occasionally. Take a small risk here, a slightly bigger risk here, just to keep my money invested. After all, I didn’t want it sitting around doing nothing!
That, unfortunately, led to the next big problem.
Second Problem – Defaulted Loans Hurt Your ROI
While I did not experience any loan defaults the first 6-8 months and my ROI was stead around 13-15%, slowly after that point, I began to see several loans go into the late and default classification. Slowly, these loans were charged off my account, dropping my return steadily. As a result, my return slowly dropped below 10%.
I could see where this was going. Before long, I might go negative on this investment and even though I embarked on this investment as a test, I decided to call it quits.
The Biggest Reason to Avoid P2P Lending as an Investment
While the first two problems that I mentioned above are pretty big issues (declining returns, difficulty investing), they don’t even compare to the last issue that I have with Peer to Peer lending.
It is one of the least liquid investments that exists.
I started selling off my loans MONTHS ago – and I still have a few loans left before I completely liquidate my portfolio. I am really familiar with the secondary market for loans because of my state restriction, but even with that, it has been a huge pain to get rid of these loans.
When you compare this to how easy it is for me to sell my stocks/ETFs in my brokerage account, this really hurts.
While I would not recommend P2P investing to anyone after my experience, I do recognize that other people have had better experiences. I still had a positive ROI, but nothing remarkable. I bet if I would have invested a larger amount, the number of defaults would fall more in line with the averages; but there’s no guarantee. The worst part is that if the economy falls, people are more likely to default on their loans.
Everyone should do their own homework before jumping into an investment, but for me, the declining ROI and the lack of liquidity was enough for me to get out and transfer it to a different investment.