Update: Distressed P2P Investing Experiment

Nearly 3 months ago, I embarked on an experiment that involved investing in Lending Club notes on the secondary market. My idea was to buy “distressed” P2P loans at a discount that was higher than the default rate.

The really dumb, simple math goes like this:

If you can buy loans that are late (in the grace period or whatever) for $0.65 cents on the dollar (35% discount), but the default rate is only 25%…you will make money…like more money than the 6.5% returns I’ve been getting with my more traditional P2P experiment buying primary loans when they’re originated.

Why would people sell loans at a steeper discount than the failure rate? Lots of reasons I guess. But mainly I figure it’s unsophisticated investors who want to GTFO of the P2P lending space because they’re disappointed in the total returns they’re seeing.

Or they need the money or whatever. That is the cost of liquidity.

It’s not unreasonable to expect an arbitrage opportunity exists. It’s just a question of whether or not a schlub retail investor like myself can actually exploit it.

I do not know the answer yet, but if it is in the affirmative…it’s not easy.

Anyway, this is what’s going on with my junk P2P investing experiment.

Distressed notes purchased


Total amount invested


Outstanding principal remaining


Adjusted value of principal remaining


Payments received


—-Principal received


—-Interest received


—-Late fees received


Actual losses (charged off)

$8.16 (3 loans…$61.17 in original principal)

Principal in default

$16.29 (1 loan…$2.20 invested)

Principal 31-120 days late

$650.21 (29 loans…$234.71 invested)

Principal 16-30 days late

$0.00 (0 loans)

Principal in grace period

$0.00 (0 loans)

Principal issued and current

$109.04 (4 loans…$43.98 invested)

There are several different ways to look at this.

One way is to have complete and total faith in the robot overlords and accept Lending Club’s algorithmic adjustment to the principal outstanding.

According to the robots, the value of my distressed loans (after adjusting for default probabilities is $0.29 on the dollar ($227.87 out of $775.54).

Since I’ve received $16.64 in payments from these crappy loans, the theoretical value of this “distressed portfolio” is $244.51 (adjusted principal remaining plus payments received) which represents a loss of $44.54 on the $289.05 invested (15%).

That’s a bummer.

There’s another way to look at it though.

4 of these loans are now issued and current. That’s where my payments have come from and that is pretty sweet. I only paid $43.98 for those 4 loans, but they have outstanding principal of $109.04. If they end up not being bad loans and get paid back in full I will have made $65.06 in principal alone…never mind the interest received.

Of the $775.54 outstanding, how much will go into default and how much will end up being okay? If it’s just the $227.87 that the robots are projecting, that will be sad but not the end of the world. The interest I get when the loans start paying should make up for the $45 of losses.

I have no idea what is going to happen but this is pretty fun for a finance nerd like myself.

I have learned a few things, so here are my initial thoughts a quarter into this.

Rules are rules.

I published my rules for P2P investing shortly after I started this “distressed” P2P debt experiment. If a lot of the loans in the primary market are garbage, it is reasonable to expect even more loans in the secondary market to be garbage. When I bought these 37 loans, I didn’t really adhere to the same rules I use for picking primary loans.

Why? Well, I was impatient. Poor excuse I know, but that’s what happened.

It will be tedious but I think I need to stick by these parameters in the secondary loan market as well.

Pay Attention to the Loan Number

The secondary market will offer multiple chunks of the same loan. I didn’t realize this.

So, for example, I bought loan number 68508051 seven different times for a total investment of $71.84. I thought I was investing in seven different loans (and that’s how LC figures it…these investments represent 7 out of the 37 “loans” I purchased), but my risk exposure of that $70 is all hinged on one outcome.

That outcome is not looking good:

LC bankruptcy snip.PNG

Of course I would have realized this if I had been following my rules and selectively investing in the junk loans the same way I invest in primary ones.

But I wasn’t following those rules and I was kind of “bulk investing”, so this is what I get.

I’ll be more careful in the future, but the truth is that selectively investing in primary loans is already pretty tedious. Since the secondary market interface doesn’t have the same filtering mechanisms, it is even more tedious to buy junk P2P debt.

I think I can make money at it though provided I’m careful. I have the money to invest but maybe not the time.

Oh well. I promise to keep you posted on the results, good or bad.

What do you think? Am I an idiot for investing in junk P2P debt? Maybe I’m an idiot for investing in P2P at all?

Shout! Shout anonymously on the internet! Comments are encouraged.

3 thoughts on “Update: Distressed P2P Investing Experiment

  1. Seems a lot of trouble for suboar returns. I have a dim view of human nature at least when it comes to unsecured repayments. You can get 8+% returns from CEF with liquidity, why bother with p2p lending? It was just a fad among PF bloggers. The returns have come down from the early days.

    1. Oh it’s way too much trouble to be used as a serious investment vehicle. And I agree, the risk adjusted returns are horrible considering you’re giving unsecured loans to strangers on the internet. CEFs are way more better.

      I’m only messing with P2P because I find it an interesting experiment to play around with.

      For reference my target allocation to CEFs is around 20% of our holdings while the P2P stuff is less than 1%.

      Thanks for visiting and commenting. Don’t be a stranger!

  2. I agree that not enough individual investors pay attention to CEFs where inefficiencies abound. They are about 12% of my total portfolio. I’ve been partial to Pimco funds. Just added more on the recent pull back. Many seem to have -ve duration.

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