In early 2012 the Sharing Economy and crowdsourcing communities were just gaining moment and my job at the time was to hunt down emerging technology trends and identify opportunities utilize the technologies or business models within our space exploration research and development labs where we built unmanned robotic spacecraft. We tested any and every idea for viability: open source 3D printing collaborations with Thingaverse.com, hackathons, Kickstarter campaigns, “SharkTank” competitions, augmented reality, Peer-to-Peer lending, etc.
The job was fun, I got to mix my passion for playing with the cool tech toys with my job and it helped accelerate our ability to prototype new concepts faster. I even got invited to speak on several occasions to the staff and leaders of multiple Government agencies to share with them new opportunities to reduce costs by sharing resources across agencies.
During this time I came across Peer-to-Peer lending (P2P) and discovered the LendingClub, Prosper and Kiva lending platforms that had begun to generate steam after several years. The websites were made up of two communities, investors looking for a new avenue to invest their money at potentially higher returns than the stock market and borrowers who had difficulty acquiring loans from traditional banks for various reasons or were seeking lower interest rates the banks were offering.
I did my research and tested out different platforms, and I eventually settled on LendingClub in November of 2012. The platform had barely past $900M in executed loans when I join. A month later they passed the $1B mark, which turned into a catalyst for exponential growth. It had taken 3 years to reach $1B, six months later the platform surpassed $2B, a closed out 2013 at $3.2B in executed loans. As of December 2016 over $24.6B in loans have been distributed.
When I started using LendingClub I averaged between 18% – 20% returns. Because I like to be in control of my investments, I choose to individually pick each loan I invested in rather than allow the platform to auto select investments on my behalf. Back then about 40% of the loan requests were for credit card refi’s and debt consolidation, the remaining requests were for small businesses, home repairs, medical loans, weddings, automobiles, major purchases, etc.
While browsing the borrowers with credit scores at the bottom of the bucket, I came across a unique niche of loan requests from folks in the medical field for weddings. At first, I thought these were weird but I eventually decided to focus on this niche for my bread and butter strategy.
My strategy was to find recently graduated medical students living in the Midwest seeking loans to fund their dream wedding. Most of these lenders had horrible credit scores with D and E rankings and the best interest rate offerings for them were in the 18% – 28% range since they were considered “risky” by traditional banking standards. I felt the only reason they had such bad credit scores was because they had accumulated hundreds of thousands of dollars in student loans as they went from undergrad to medical school to residency, and probably did not have a long credit history outside of their student loans.
I did not see these folks as risky. I saw them as very low-risk opportunities for high returns. My theory was that these borrowers were high-income earners making $15k+ a month in the heartland of America, one of the cheapest areas to live within the United States. Since their loan was for a wedding they most likely did not have malicious intentions to not repay the loan. The borrowers were also at the beginning of their career so their earning potential would most likely continue to grow rather than diminish over time.
My search criteria was as follows:
- wedding loans
- borrowers occupation must be doctor, physical therapist, physician assistant, or registered nurse
- the location must be in the mid-west or southern states
- monthly payment could not exceed 10% of monthly income
Now, this may seem like a hard find, but back then I would find at least one loan request meeting my criteria at least once a week, and when I did I would throw $300 to $500 at the loan request. These were my cash cows and farmer Stuart loved his milk. Unfortunately, after eight months on the platform, wedding requests began to dry up and became few and far between. Nowdays I rarely find wedding requests on the platform and almost never find wedding requests from medical practitioners.
Learn to adapt because nothing lasts forever.
As my cash cows began to dry up, I had to seek out new investment criteria to maximize profits and keep risk low. I expanded my criteria to small businesses, medical loans, and auto loans. I only considered small businesses who took the time to provide details as to what they needed the funding for. They had to generate at least $60k in annual income and the loan payment had to be less than 10% of their monthly income. If they provided information on their type of business even better.
If a request simply stated it was a business loan for a restaurant or something or another without any further details that was an absolute rejection. But if the application took the time to state it was a new hookah bar/restaurant whose ventilation system broke down and they need money to fix the issue asap? No problem! I would take a chance on funding that loan. I would not invest more than $200 into these types of loans.
For auto loans and medical loans, my requirements were the same, less than $8,000 and payments must be less than 10% of the borrowers monthly take home pay. I would not invest more than $50 into these types of loans.
The criteria served me well for about two more years, By switching my risk profile my average rate of return dropped to about 15% through 2015, but I began to see an increase in the number of loan requests for credit card refi’s and debt consolidation and less requesters were providing details behind the need for their business loans. I also saw a significant increase in loan requests under a category called “other” begin to grow. I took this as a sign of changing tides, citizens around the country were beginning to slide further into debt once again and the market could possibly be flooded with more high-risk loan requests. Low-risk high return investment opportunities were going to become unicorns.
Here is the Dec 2016 mix of loan categories. Credit Card payoffs, loan refi’s and “other” make up 86.87% of the loan requests! Only 13.13% of the loan requests are for small businesses, auto loans, medical expenses, moving expenses, major expenses and vacations (people! Please don’t borrow money to take a vacation!). I did not find any wedding requests in the mix.
To adapt to the changing environment, I decided in 2015 to move all of my re-investments into A & B rated loans that only carry a 6% to 13% interest rate. By the end of 2016, my average rate of return had dwindled to 9.49% I may have gotten too conservative and I need to correct my course.
My goal for 2017 is to increase my average rate back above 10%. To accomplish this I plan to explore all loan types but tighten up my award criteria, hunt for unicorns, and invest larger sums of money into these rare finds. My theory is that by being extremely picky I will be able to seek out high reward / very low-risk loans. Because the opportunities will be difficult to find, I am willing to invest more money into each of these loans. In other words rather than shotgun blast my investments across a diverse set of loans to hedge against risk, I am going to perform like a trained sniper who sits patiently looking to pick off the most valuable assets.
My criteria for 2017:
- Borrower’s income must be over $80k/year
- Loans requests must be less than $15k
- Borrower’s total debt-to-income ratio must be below 20% after the inclusion of the new loan
- Employment history must be at least 3 years
- Borrow must not live in a city or state with a high cost of living
- Borrowers with a history of at least one previous loan on the platform and a record of on-time payments will be prioritized
I have loved the Peer 2 Peer lending platform for the past four years, it has given me an opportunity to help others while making a pretty profit. I have also gained a ton of insight into the income levels of different job categories and learned about the underlying debt situation of our society. Citizens are in debt at all income levels across the nation, it doesn’t matter if they make $30k a year or $250k a year. Financial irresponsibility does not discriminate across incomes, race, gender, or geography, however, I on the other hand, do discriminate against poor investment opportunities.
I am confident in my ability to get my rate of return back up, but if I cannot turn my profits around and exceed a 10% return by the end of 2017, I will leave the platform and move my money to RealtyShares, Vanguard’s VTSAX index fund or an individual stock depending on how the market is doing. If I see no improvements in my performance by August, I will consider cutting my account earlier. At the end of the day I have to do what makes the most financial sense and optimize my investment portfolio to maintain the best returns at a risk level I am comfortable with. As most of you know I recently began using the profits from my LendingClub account to pay for my new car. If I cannot maintain at least a 9.5% return, I will have to subsidize my car payments with money out of my pocket. This is unacceptable because it goes against my goal of acquiring free cars for the rest of my life.
I was wondering how my peer-to-peer investing experience compared to others over the years, and I found out that Mr. Money Mustache started a LendingClub experiment in 2012 with $10,000 and increased his investment to $20,000 after 4 months. I found this interesting as it was the same year and same amount of money I started my account with but I slowly added a few hundred from time to time not an extra $10k. So how do we compare?
Well in Feb of 2013 MMM reported a 20.12% return, which dropped to 15.37% a year later, then hovered around 12% through 2015 and then declined to 9.56% as of January 2017. More or less our rate of return mirrored each other throughout the years.
I also found an interview with a guy named Jeff Clements on the PeerFinance101 blog, praising a $10,000 profit. Jeff also started P2P investing in 2005 when the industry was in its infancy. For the first 3 years, he returned an average of negative -12.79%. He turned his first profit in 2009 and hit his best year in 2011 with a 20.99% average return. By 2016 his average rate of return had dropped to just over 12%. So my performance was way better than Jeffs over time, but now he’s kicking my ass since I got too conservative.
A few other sites I browsed showed folks averaging between 9.3% and 12.89% returns, so it looks like I am currently under performing, and my target for the end of 2017 will just put me back in the “average” category. If I can land at the higher end of that range, I’ll be content.
I am a strong believer in P2P lending, I find great value in the platforms, and I feel it is a great way to make money while help others. I do not believe P2P lending is going to die anytime soon, the platforms are solid, the technology is getting better and it is keeping the banking industry on its toes which will keep interest rates for consumers competitive.
Unfortunately, I feel the booming economy is leading too many consumers back down the slippery slope of over spending and luxurious living subsidized by debt. I am not looking to feed the bad habits of folks who cannot properly manage their money, and if the majority of loan request are going to be for credit card refi’s and debt consolidations, I am going to take my money and play elsewhere, with more responsible borrowers.
Readers, what are your experiences with peer to peer lending and the state of the economy?