Peer to Peer Investing – Facts and Figures

When I first began my career in peer to peer investing I longed to answer the question “what is a good note mix?” This led me to delve into the years of statistical data compiled (and available to everyone) on LendingClub, fill out a few spreadsheets, and create the following results.

The savvy investor can use the following results to help determine the optimal risk and reward of their peer to peer investing portfolio. The results highlight the likelihood of a charge-off, returns, adjusted returns, and things of that nature. Coupling these

averages with my Peer to Peer Investment Calculator can lead to a successful peer to peer investing career.

Peer to Peer Investing

In another post I covered The Basics of Peer to Peer Investing and went over everything you should need to know to start investing your money in private debt. Here are some excerpts to get us started with a 20,000 foot view,

Peer-to-Peer investing (commonly P2P) is the practice of investing money in notes of loans for borrowers who are requesting a loan without going through a traditional financial intermediary and who are unknown to the investor.

Put simply, on P2P investing platforms a user can create an account as either an investor or as a borrower. The borrowers are there to get some money while the investor is there with hopes of making money via interest from the loans.

The borrower is required to provide some fundamental information similar to what is observed by traditional financial intermediaries such as income, liabilities, rent/mortgage payment, current employment, length of employment, etc. Additionally the borrower’s credit report information is also shown. Given this information the investor is to intelligently purchase loan notes and collect monthly payments of principal and interest. Thus, in the simplest form, you as a P2P investor are a bank.

If you are brand new to peer to peer investing, please read my article The Basics of Peer to Peer Investing before plunging into the following facts and figures. With little knowledge of the basics your head will almost certainly be spinning by the end of this post.

Returns

Historical Returns 

When taking returns into consideration we need to look at two types of returns, gross and net. For the calculations below, the interest earned can be found with many note calculators and is conveniently displayed in the results from my Note Interest Calculator.

The  Gross Return is the rate you can expect to earn on your investment assuming a best case scenario, that is the scenario in which none of your loans default. This can be found via total interest earned divided by the amount invested.

The Net Return or Net Adjusted Return is an adjusted return which takes into consideration the fact that loans default. This return is found by taking the investment’s final amount (after all loans are paid, charged off, etc.) less the original amount divided by the original amount.

This table shows the gross and net returns by grade from Lending Club,

Same results, but more visually appealing,

Why We Care

For some investors this is all the information they need to make their investment decisions. The data provided above tells us what percentage of our investment we can make back through any series of note through the gross return.

Furthermore, the net return tells us what we can expect to get back from our investment and is perhaps the more useful measure.

As we can see above, notes of Grade E (or of similar quality on other platforms) seem to be the best notes to purchase as their high interest rates more than offset their charge-off rates to produce the highest net returns.

We can also conclude it is probably best to avoid notes of Grade D and Grades F+G. Grade D, because it offers little return and more risk, as we will see, compared to Grade C and Grades F+G because their higher interest rates do NOT overcome their charge-off rates thus provide a lower net return then would notes of Grade E.