$30,000 Beat-the-Benchmark Experiment – One Year Update, Prosper and LendingClub

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After posting Part 1 yesterday, here is Part 2 of my Beat-The-Market experiment one-year update. In order to test out P2P lending, I started with $10,000 split evenly between Prosper Lending and Lending Club, and went to work lending other people money and earning interest with an 8% target net return.

I tried to keep these portfolios comparable in terms of risk level, while still trying to maximize overall return net of defaults. I reinvested any new money from interest and early loan payoffs regularly for the first several months, but recently I stopped reinvesting my money as aggressively as I was thinking about selling everything (also LendingClub inventory was a little sparse at times). I ended up with $1,044 of idle cash at LendingClub and $862 at Prosper. More on that later.

$5,000 LendingClub Portfolio. As of November 1st, 2013, the LendingClub portfolio had 218 current and active loans, 28 loans that were paid off early, and none in funding. Two loans are between 1-30 days late. 6 loans ($126) are between 31-120 days late, which I will assume to be unrecoverable. Three loans have been charged off ($69, two A-rated and one C-rated). $1,044 in uninvested cash. Total adjusted for late loans is $5,304.

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$5,000 Prosper Portfolio. My Prosper portfolio now has 209 current and active loans, 40 loans that were paid off early or payoff in progress, and none in funding. 7 loans are between 1-30 days late. 6 are over 30 days late, which to be conservative I am going to write off completely (~$127 in remaining principal). 8 have been charged-off ($186, 4 A-rated, 4 C-rated). $862 in uninvested cash. Total adjusted for late loans is $5,300.

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Which one is better? Both my LendingClub and Prosper portfolio ended with essentially the same balance of $5,300. That works out to an annual return of 6% for both, net of fees and assuming all currently late loans will be charged-off. Overall, Prosper paid slightly higher interest rates but also had slightly more defaults. My loan selection filters were on the conservative side, which may have been a mistake. Most of my defaults have been from A-rated loans! I would say that my lack of timely reinvestment also lowered my potential returns by roughly 1%. Here’s a chart tracking the LendingClub and Prosper adjusted balances over these past 12 months:

As you can see, they have diverged but it’s still hard to pick a clear winner. The net returns are the same so far, although there are also more <30-days late Prosper loans in the pipeline than LendingClub. In terms of user tools, I did prefer Prosper’s automatic reinvestment system which was completely hands-off and available to all with no minimum balance requirement.

I’m still undecided as to what to do next. Now that I’ve held them for a year, I could try and liquidate all my loans this month and see what my final “market” price would be. But if I held longer and started reinvesting again, perhaps more interesting wrinkles would appear and I could make some stronger conclusions. That would also mean another year of dealing with the minor-but-present tax return hassles.

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  1. John Wilks says:

    I would urge you to keep investing and updating us on a quarterly basis please. I gave up in Prosper completely and moved everything over to Lending Club. I’m still concerned though that the company itself could go out of business and that all my funds could disappear.

  2. What are the tax return complications with investing via either program? I’ve followed this part of your investing experiment with interest but don’t exactly remember any tax issues being mentioned

  3. I want to bite into an LC or Prosper rough IRA but it’s 10k min to avoid fees (over 2 years). If they had it lowered to 5k or less and/or give a substantial bonus I might had.

  4. The returns so far are amazing. Tempting to ignore all the risks and just go for it like lenders did before the housing bubble.

    Please keep up the experiment and see what happens. It just sounds too good to be true.

  5. @John Wilks – Thanks for the feedback. In my non-expert opinion it would appear Prosper is more fragile in that regard than LendingClub. I can’t recall exact numbers but the valuation of LC is much higher than Prosper based on venture capital capital injections. Hedge funds and institutional investors are also investing with LC as well.

    @MT – It’s just not as simple as a 1099-B from your broker, here’s a post outlining some of the issues:


    @Serge – I agree, I was thinking that I might put in a year’s worth of IRA contributions so I wouldn’t have to worry about tax stuff but $10k is too much for me.

  6. You’re also assuming that none of your currently active accounts will go into default, isn’t that kind of a flawed position to hold? Or am I missing something?

  7. I’m coming up on 3 years of investing in Lending Club. While it’s been a fun alternative investment, the lack of loans that meet my criteria and the lack of an automated investment feature (that Prosper seems to have) has dissuaded me from continuing to deposit money into my account.

    I think LC has plenty of room to grow (mortgages, student loans, etc). And I’ve been happy to receive annual returns between 5-8% over the past 3 years, especially in todays low rate environment. However, until they fix the problem of “stagnate cash” just sitting there and all the best loans getting snapped up within seconds of publishing, LC won’t be getting any more of my money. They should at least offer a return (say, 1%) on cash just sitting in the account.

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