After less than two years, I decided to shut down my investments into peer to peer lending. I wish I could tell you it was like a fairy tale and I lived happily ever after. Sadly, I can’t. I felt really confident when I first jumped into this trendy investment circle about 2 years ago. After all, the reviews typically showed amazing returns. You don’t see a lot of reviews that show the low sides.
If someone did show their lower than expected returns there was always an explanation. A lot of the time they didn’t diversify their loans enough. If a loan defaulted then they were out of luck so it would skew their returns.
Here’s my peer to peer lending review…
Not familiar with peer to peer (P2P) lending?
Peer to peer lending is essentially turning you into a banker. You become the lender rather than a bank and you get the interest return from the person you loan your money to. Sites like LendingClub (which I used) and Prosper offer the intermediate service to connect you to these loans in need of fulfillment. They take a small cut as a service charge.
I decided to put in roughly $10,000 into the account and see how it played out. Originally, I tried to hand pick a few loans here and there. It felt pretty tedious so I went with the automated approach instead. They offer a nifty feature to let you classify the percentages of the types of loans you want to lend to and it balances your money automatically. All in all, the interface is pretty slick and easy to use.
I tried to avoid the common mistake of the P2P losers. I diversified! How did that work out for me?
Less than a 2 percent return…
Well at least I’m not in the red! But… I could have just put my money in a CapitalOne 360 savings account and gotten over 1% with absolutely no risk and instant access to my money! A lot of companies are now offer a high-yield savings of a 1.6% return at the moment. Not far off from what I’ve been getting from P2P lending. Of course, it’s possible it gets slightly better, but time will tell.
The Lending Club stock has dropped dramatically over the last few years as well. They tried making some revisions a while back, but the returns have not since gotten any better. Unfortunately, since these are loans out to other individuals I can’t just withdrawal all of my funds. I have to wait up to 6 years for some of these loans in order to get all of the money returned. Luckily, most of the loans are 3 year terms and I’m not investing any further. I’ve gotten a fair chunk back already. It seems that most of the people that actually tend to pay don’t want to hold the loan for the full-term. Can you blame them!?
You can see that investors aren’t as confident in the future either. Initially, returns were high. Now I tend to read a lot of other bloggers out there mentioning their intent on pulling their funds out of peer to peer lending sites. I noticed a lot of their returns were better than mine even, but they also probably got in before I jumped on the trendy wagon. Could be they just know something I don’t!
Am I an exception?
I did try to give it another shot and re-invested my funds temporarily, but the numbers did not get better. This is just one mans opinion, but the numbers speak for themselves. I was still willing to experiment with this investment. As with any investment, you don’t really know until you try it. Some are riskier than others.
I do think the returns could have been better had I decided to actually hand pick them. I set most of this to automatically buy based on my allocations. I’m guessing that since you’re not picking them yourself you end up with a lot of the lower end of the grade loans. I haven’t verified this, but it would make sense why the returns aren’t up to par.
It obviously still works, but it’s definitely less than my expectations considering the site boasts much higher returns. I still follow by the saying, “don’t knock it ’til you try it”, but if you do decide you want to try to be a lender, tread carefully!
Have you tried peer to peer lending? If so, how’d you do?
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