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My Quarterly P2P Lending Results – Q1 2012

by Peter Renton on April 10, 2012

Back in January I opened the kimono and gave you a complete rundown of my p2p returns from 2011. This was one of my most read posts ever so I have decided to make it a regular quarterly feature.

The table below shows my trailing twelve month (TTM) returns for all six of my p2p lending accounts for the year ending March 31st, 2012. You can see my opening and closing balances, additions I have made, total interest earned and my real world return calculated using the XIRR() method. I have also included the return numbers that are displayed on Lending Club and Prosper for each account on March 31.

AccountBalance 3/31/11AdditionsBalance 3/31/12Net InterestXIRR ROIReturn on Site
Totals $85,458.20 $52,000.00 $146,565.45 $9,107.25 8.58%
Lending Club Main $11,584.78 $11,000.00 $23,620.71 $1,035.93 8.04%9.18%
Lending Club Roth IRA$0.00 $5,000.00 $5,476.51 $476.5110.40%16.29%
Lending Club Trad IRA $57,953.84 $0.00 $61,689.09 $3,735.25 6.45%8.52%
Lending Club Roth IRA - 2 $14,827.03 $0.00$15,719.98$892.956.02%8.38%
Prosper Main $1,092.55 $34,000.00 $37,665.00 $2,572.45 18.46%18.66%
Prosper - 2$0.00 $2,000.00 $2,394.16 $394.1620.80%23.57%

Why I Use XIRR() to Calculate Real World Returns

Last year I wrote about the different ways to measure your p2p lending ROI and why I like to use the XIRR() method. I believe this method provides the investor with the most accurate return for any historical period. It takes into account idle cash as well as trading platform activity, something that the official numbers on Lending Club and Prosper don’t. I have used the XIRR method in calculating my returns in the above table.

Below is a brief discussion and analysis of all six of my p2p lending accounts.

Lending Club Main

My main Lending Club account was opened back in July 2009. I started out with a conservative strategy, focusing on A, B and C grade loans and continued with that strategy for two years or so but last year I changed to a more aggressive strategy targeting D, E, F and G grade loans. I made no additions to this account in 2011, but I have added $11,000 in the first quarter of 2012. My new strategy is already paying dividends (literally) because I have gone from 6.29% in the TTM through 12/31/11 to 8.04% for the TTM through the end of March 2012. I expect that ROI number will continue to increase as the year goes on.

Lending Club Roth IRA

opened this new Lending Club IRA in April 2011 and took around six months to fully invest the cash. From the start the goal with this account has been to earn the maximum ROI possible at Lending Club. I have only invested in D, E, F and G grade loans from the very beginning. I took so long to invest the money because I was very strict with my criteria and only invested in loans that passed all my filters. This account is doing very well. My annualized ROI since I opened the account has risen to 10.4% and my goal is to have a 14% return with this account by the end of the year.

Lending Club Traditional IRA

I rolled over several IRA and 401(k) accounts that my wife had accumulated from various jobs and consolidated them into one Lending Club traditional IRA in May 2010. I opened it up as a PRIME account with a medium risk focus which meant notes were mainly grades B, C and D. The total balance I started with was just over $52,000 – I wrote more about this account in my first review of Lending Club PRIME back in February last year. In October, I decided to take this account off PRIME and manage it myself because I believe I can do better with my note picking strategies. But it is going to take a while to turn this battleship around and my 6.45% ROI reflects that.

Lending Club Roth IRA – PRIME

My second Roth IRA account at Lending Club is another of my wife’s accounts where I rolled over a Roth 401(k). I opened this as a PRIME account and have kept it that way because I am interested to see how a PRIME account will fare over the long run. Having opened this account in May 2010 the average age of notes here is over 15 months now. I had 16 defaults this past quarter which sent my TTM real world ROI down from 7.96% to 6.02%. This is not as good as I hoped but I am leaving it on auto pilot to see what happens as the account ages.

Prosper Main

I opened my first Prosper account back in September 2010 with just $1,000. In 2011 I added to this account substantially. I am continuing to add new money into this account and you can see that I have added $34,000 in the last 12 months. I had a few defaults this past quarter but I am still maintaining an excellent ROI of over 18%. I expect this to come down to around 15% this coming quarter which is roughly what my account on Lendstats has been showing.

Prosper – 2

I opened my second Prosper account (under my wife’s name) when Prosper ran a special giveaway in April last year. They were giving new investors $104 to open an account and I couldn’t resist the free money on offer. I have only added $2,000 to this account and I have been focused primarily on new borrowers in grades E and HR (the highest risk borrowers on Prosper). My goal with this account is to see if I can earn a decent return by investing just a small amount into the highest risk notes in all of p2p lending. So far, so good as my ROI is almost 21% but I expect that number will come down substantially in the coming quarters.

My Overall P2P Lending Returns

My overall TTM return was 8.58%. This is an improvement from my December return of 8.12% and puts me on track to increase my return across all accounts to over 10% by the end of the year. Most of the gain can be attributed to my Prosper accounts which continues to produce outstanding returns. This is certainly the highest risk part of my portfolio and if we suffer another economic downtown it will likely suffer the worst losses. My Lending Club account has a large portion of medium and low risk notes so my returns there are commensurate with the risk I have been taking.

The net interest number is also important. I have increased the gain generated by my p2p lending investments to $9,107 and this number should be well over $10,000 by the end of June. I will report back in three months.

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{ 22 comments… read them below or add one }

Danny S April 10, 2012 at 11:15 am

Great update Peter, I love the detailed update as it really helps to see where I might adjust my own strategies. Whereas before I was almost exclusively A,B,C notes on LC, I’m now focused on C,D,E,F only. And its helped boost my returns substantially. Per LC, my NAR is 11.27%. LendStars and Nickel both show my more accurate returns at 10.5%.

I’ve been super fortunate in that only 1 of my 790 loans has been charged off thus far, with 2 currently on not so stable ground.

I dont have ‘evidence’ to back me up, but one filter I stick to strongly is that the monthly loan payment cannot exceed 15% (and usually even 10% depending on other factors) of the borrower’s stated gross monthly income.

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Peter Renton April 10, 2012 at 2:40 pm

@Danny, If you want to get the highest returns possible from p2p lending then I always advise investors to go for the higher interest loans. But there is risk there. If we have another economic downturn like we did in 2008-09 I expect these loans will underperform. But if the economy keeps chugging along like it has I think these loans (grades C and below) will likely provide the best returns.

You can actually see some stats on your hunch of loan payment/monthly income on Lendstats. Scroll over to the right of the screen here and take a look: http://www.lendstats.com/loansearch/lc/lcloanfilter.php&sdm=01&sdy=2010&edm=04&edy=2012&size1=1000&size2=35000&cg2=&cg1=&fc1=&fc2=&inq1=&inq2=&dti1=&dti2=&oc1=&oc2=&tc1=&tc2=&rc1=&rc2=&rcp1=&rcp2=&cl1=&cl2=&dq21=&dq22=&msdq1=&msdq2=&pr1=&pr2=&ch1=&ch2=&inc1=&inc2=&el1=&el2=&lp1=1&lp2=1&lp3=1&lp4=1&lp5=1&lp6=1&lp7=1&lp8=1&lp9=1&lp10=1&lp11=1&lp12=1&lp13=1&lp0=1&ho0=1&ho1=1&ho2=1&ho3=1&trm0=1&trm1=1&states1=exclude&ex1=1&df5=0.5&df1=0.25&df2=0.5&df3=0.75&df4=0.99&xx=&lender=all&sho1=2&sho2=4

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Brady April 10, 2012 at 11:22 pm

Curious. Peter, you mention getting some defaults on LC and Danny S talks about a charge off. Why are you guys not offloading those loans on Folio at a discount?

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Peter Renton April 11, 2012 at 1:26 am

@Brady, Good question. I have been playing around with Folio again recently and the dynamics have changed quite a bit in the last couple of months. You can sell an In Grace Period note these days for just a 1-2% discount – that was not possible just three months ago. So, I may be looking into it more.

My main reason for not selling has been I don’t want to take a 15% hit for a loan that may well come back to current – and I know many of my loans have done just that. But it seems there are many more buyers than sellers these days so I probably need to take another serious look at it.

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Danny S April 11, 2012 at 7:12 am

Brady- I do sell my ‘in-danger’ notes off, pretty aggressively now actually.

The one that was charged off, person filed for BK within the time the note was still in its grace period, and so it pretty much became impossible to sell that note. LC’s external agency is pursuing a lawsuit against the guy, but I’m not holding my breath about any recovery.

But everything else, as soon as a note hits Grace Period, I try selling at a small discount to face value. And if for some reason its not purchased and it goes 30 days late, I discount it up to 50% just to get rid of it and avoid it going 31+ days late, where it then becomes very difficult to sell. So far, this strategy has worked very well for me, even though it is a bit time consuming.

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Bryce M April 11, 2012 at 11:02 am

Comments that one has 1 in 800 loans charged off are harmful to readers, in my opinion, because that is so statistically unlikely that it hides the fact that one is selling off problem loans on the secondary market (presumably at a substantial loss–or cheating with the “bug”).

I’ve not done any analysis on the secondary market, mainly because data is not as easy to obtain there. The theory goes that one shouldn’t be able to do any better on the secondary market by selling off problem loans because one would have to discount them, on average, to take into account the expected losses. Of course, I’m sure some people are suckers on the secondary market and not well-informed about expected loss/cure rates, so there are probably opportunities.

I’m just going to hold my notes to maturity, win, lose, or draw.

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Danny S April 11, 2012 at 11:21 am

I certainly didnt mean to mislead in my original post, and happy to ‘fix’ the omission by stating that I do aggressively sell trouble notes. For clarity and to provide a bit more detail into my performance:

On average, I find myself discounting Grace Period notes about 5%. If that fails, and the note goes 30 days late, I discount them about 33% to 50%. Also, a lot of times, GP notes go back to current, in which case I cancel the sell order.

I find myself selling, on average, 1 or 2 notes per month. And I have not had anything go 31-120 days (except the note that was Charged Off). I attribute that to (a) LUCK, and (b) Very stringent note selection policies.

I also have not done an analysis regarding hold vs sell on troubled notes. Based on LC’s limited data on recovery of funds after notes start going late, if I’m giving 33% to 50% discounts on 16-30 day late notes, I’m probably a bit ‘behind’ vs if I just kept them all and hope some get to current again. But, notes going 31+ days late are very difficult to sell, even at 50%+ discounts. So for me, because I want to avoid total loss, I’m willing to take the hit earlier on and dump the notes before they get to the point of no return.

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Brady April 11, 2012 at 6:39 pm

LC offers Recovery Rate by Loan Status (over 6 months) numbers in their investor statistics section on their website. That would be your easiest indicator of the amount of discount the market would dictate. For example, 84% of grace period loans are recovered.

Frankly, what I’ve found to be my trigger to sell, and what to spot check 100% of the time when buying on Folio is the collections notes on the bottom of the listing. You can find a loan where the borrower has increased their credit rating since loan inception and the loan is only in the grace period, but when LC tried to contact them about a failed payment their email bounced back and phone number didn’t work. Talk about a red flag. I’ve seen at least one that looked great, the borrower paid on time repeatedly, etc., but there was one line – that the borrower had filed for bankruptcy.

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Dan B April 11, 2012 at 11:50 pm

Peter………..Don’t forget that back in November 2011 you confidently stated your ability to open up a performance gap of at least 1.5% between your self managed LC Trad. IRA & the LC Prime Roth IRA, by the end of this year. I’m offering you the opportunity to concede defeat now & pick a less optimistic performance target. :)

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Peter Renton April 12, 2012 at 6:25 pm

@Danny/@Bryce, I don’t pay much attention to the number of defaults in an individual’s portfolio because anyone willing to take a hit can easily sell all their In Grace Period notes on Folio. Put them on there for a small discount for a couple of days and then keep dropping it 5% every two days until you sell – no defaults! This is why I like the XIRR() method of calculating return. If you are taking a hit selling notes on Folio it will appear in your return numbers.

@Brady, That is a good idea to read the collection notes at the bottom of the listing when buying on Folio. It is probably worth the 15-30 seconds of extra time before buying any notes there.

@Dan, I remember that prediction and I am going to stand by it for now. It will take a while to turn around a $60,000 account but my weighted average keeps going up so eventually that will be reflected in my returns. I think I will be over 8% on this account by the end of the year.

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Dan B April 12, 2012 at 11:01 pm

Peter………..Short of injecting fresh cash into the account there’s virtually no way that you’ll get to 8% by end of the year. And the likelihood of you being able to open up a 1.5% gap is less now than it was 4-5 months ago when I first stated that you wouldn’t be able to do it. Because the main factor won’t be how quickly you can reinvest payments into new higher yielding hand picked notes thereby raising your weighted average…………………but rather how much defaults will affect your ROI. Case in point, hasn’t your ROI in fact declined by about 1% since you took over the note picking for this account back in November? Despite your hand picking notes?

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RAS April 13, 2012 at 6:19 pm

What is the main difference in the calculation of XIRR ROI vs Net return stated on LC site?
What makes the XIRR ROI always less?

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Dan B April 13, 2012 at 8:05 pm

The official LC NAR number does not take into account the effect of idle cash, nor does it take into account any gains or losses incurred in the buying or selling of notes on the secondary market. Those are the main differences between that number & XIRR ROI.
The XIRR ROI method produces a more accurate “real world” number & though it is usually lower than the LC NAR number……………….it is NOT always lower. If you don’t leave idle cash around by reinvesting daily & couple that with turning an overall profit in your secondary market dealings then it is not only possible but probable that your XIRR number will be higher than the LC official number. This has been the case with all 4 LC accounts that I’ve managed for 1 to 2 1/2 years now.

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Peter Renton April 13, 2012 at 10:52 pm

@Dan, You may be right, but I will say this. I had 14 defaults on this account in the 1st quarter and each default dropped my NAR an average of 0.06%. That is still close to a 1% hit for the quarter which caused my real return to drop somewhat in the last quarter. I am optimistic but we will just have to wait and see.

@RAS, Dan covered the difference well in his answer. The cash drag can be significant if you take a long time to invest your new funds as I have done in some of my accounts.

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Dan B April 14, 2012 at 12:30 am

Peter………I’m pretty sure that I’ll be correct on this. Look at it this way………….You’re getting about $1200-1300 per month to reinvest from that account. That works out to 25-26 new $50 notes that you’re buying per month. That works out to 125-150 new notes that you’ve purchased since you took over the account in November. You said that each of the 14 defaults lowered your return by only o.o6%. And yet those 14 defaults negated all those new higher yielding notes these past 4 months & dropped your return a further 1%. So the reverse question is, how tiny is the increase with each new note purchased.

My guesstimate is that in a PERFECT month of zero defaults you’d be able to raise your return number by no more than 0.20%. Therefore if you have 8 perfect months in a row starting now you will be able to raise your returns by no ore than 1.6% before years end. But that’s with no defaults whatsoever. NOT going to happen.

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Ras April 14, 2012 at 2:34 pm

Is there a way to filter for income on the LC site?
Is there a way to filter for previous borrower on LC site?

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Dan B April 14, 2012 at 6:27 pm

Ras………….That would be no & no.

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Peter Renton April 15, 2012 at 10:57 pm

@Dan, It is difficult to say how much each new note will increase ROI but I think it would be more than 0.2% a month. Right now, I can see my NAR go up around 0.32% a month when there are no defaults and that number should increase as more higher interest notes contribute more. I have averaged about one default a week for the last six months and so if that rate is to continue I will need a bigger monthly gain from my newer notes.

@RAS, While you cannot filter for income on the LC site when you download the CSV file the income is included in the download so you can filter it in Excel. There is no previous borrower information available from Lending Club at all.

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RayJ May 7, 2012 at 6:51 am

What is the easiest way, at least on Prosper to find late loans and sell them through Folio? All the loans I see I have on Folio all say current, which I know is not the case. It is almost as if I can’t sell loans which are past due.

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Peter Renton May 7, 2012 at 1:22 pm

@RayJ, Your hunch is right. There is no way to sell late loans on Prosper, you can only put loans that are current up for sale on Folio. Lending Club allows the sale of late loans on Folio, but not Prosper.

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RayJ May 8, 2012 at 8:37 am

Thanks, oh well… They should at least let me click a sell notes button from my portfolio of notes, instead of working my tail off to see which notes I want to sell. They do a horrible job of providing an easy way to sell notes.

I wonder why LC allows late notes to be sold but Prosper doesn’t?
Either way at least I know the answer as to why I can’t sell loans that are in the grace period at Prosper.

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Peter Renton May 8, 2012 at 10:37 pm

@RayJ, There is a Sell Checked Notes button on Prosper from the Notes screen where you can just check the notes you want to sell and it takes you right to Folio: https://www.prosper.com/secure/account/lender/lender_search_notes.aspx

As to your question, I really don’t know why Prosper doesn’t allow the sale of late loans and Lending Club does.

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