A little over a year ago (June of ‘16) we put $3,000 into the P2P lending platform LendingClub. It’s been a moderate success. As of yesterday, we had made a pre-tax profit of $234.11, which comes out to an annualized return of ~6.6%.
Now a 6.6% yield is okay, although from a risk adjusted perspective I’m not so sure it’s enough considering I’m making unsecured loans to strangers on the internet.
It’s all in fun though and at least it’s made money. The experiment will continue for better or worse. We don’t need that money any time soon, so we’ll just keep doing what we’re doing and see what happens.
I was clicking around on the LC website though, and I decided to see what the secondary market was all about. Now this has been around for a while, but you have to fill out some extra forms in order to use it, and I hadn’t ever gotten around to those forms until last week.
After completing the paperwork I was nearly instantly “approved” for trading notes.
For the unfamiliar, LendingClub (and I assume other P2P platforms, although I don’t know that for sure) has set up a secondary market to provide liquidity for their notes. Basically it’s a third party exchange that matches buyers and sellers for notes that have already been issued.
Sellers list notes for sale on the exchange that they don’t want to hold in their portfolio anymore. The seller decides the price they want as part of the listing process. If a buyer decides to pay the asking price, ownership of the note is transferred to the buyer, and the seller pays a 1% fee from the proceeds to the exchange for the service.
Presumably this came about (at least partly) because people are impatient. If you buy a loan with a 36 or 60 month maturity, it will take 3 or 5 years to get all of your money back (assuming the borrower doesn’t pay it off early). Unless, that is, you can sell the note to someone else, which the secondary market allows you to do.
The market also provides a mechanism to get rid of “bad” notes before they default. If you feel like a note is going to end up being charged off, you might be willing to sell it for a discount to at least get some of your principal back rather than face the prospect of a total loss.
Finally, the market could also provide a way to sell “good” notes for a profit. Don’t ask me how you could tell if a P2P note has appreciated in value or not. But the seller can list the notes for (nearly) whatever price they want, and there are a lot of notes on the exchange with the price set at a premium to par value.
Since we set aside our $3,000 investment with zero intention of touching it for at least 5 years, we’re not really interested in liquidating anything right now. As for trying to sell off bad loans before they default or profiting from loans that are doing well, I feel like that would skew the results of the experiment.
I’m interested in seeing how the default rates and early repayments play out in our portfolio compared to the broader averages. In other words, I don’t want to introduce any more variables than there already are.
So TLDR: I don’t really want to sell any loans on the secondary market. So why did I sign up for it?
Maybe I want to buy some loans on the secondary market?
Yup. I think I want to buy some loans.
Thus was born the Distressed P2P Debt Investing Experiment
I put another $1,000 into the lending club account which should be available to use starting Thursday 8/10. I’m still formulating my distressed P2P debt strategy, but I’ve got a pretty good idea worked out.
As long as you can buy the loans at a discount that’s greater than or equal to the increased default rate, you should be fine, right?
We’ll see. Like all wizardly investments, I’ll be documenting this one too.
So stay tuned!