How to Adjust to the New P2P Lending Reality

In the last six months the landscape for investors has changed significantly at both Lending Club and Prosper.  It was just back in January when Lending Club had more than 2,000 loans available to investors and at Prosper this past November there were more than 1,000 loans. But that is no longer the case today – now both companies have typically between 50 and 200 loans available. What has happened?

A Flood of Investors Interested in P2P Lending

I think we will look back at 2013 and see this was the beginning of the mainstream acceptance of p2p lending as an investment. It certainly has caught the attention of large institutional investors. Not only that but I have been told that new retail investors are also flocking to p2p lending in record numbers.

This increased level of interest has led to a lot more competition among investors. Back in the old days (just over two years ago) at Lending Club and Prosper you could ask borrowers open-ended questions and ponder their responses for days on end as you consider whether to invest in a loan. Very few loans were fully invested in less than five days. Today, many loans are being fully funded within five minutes.

In this post I am going to share how I am adapting to this changing environment to ensure I can still put my money to work and earn a double-digit return.

New Lending Club Investment Strategies

At Lending Club the mix of loans on their platform is roughly the same as it always has been. B and C grade loans still dominate accounting for over half the loans issued so far this year. The only marked difference between this year and last year as far as loan mix goes is that there are fewer A-grade loans, which I imagine is driven by investor demand. But there is competition for all loans (with the exception of most A grade loans), so here are three things investors can do to adapt.

1. Remove Verified Income Loans from Your Filters

If you use verified income as one of your filters then you are really having a hard time, actually an impossible time, finding loans. Every loan at Lending Club is being fully funded within 48 hours these days. But it takes that long for borrower income to get verified. So, as Lending Club explained in this blog post last week they are still performing the same number of income verifications – over 60% of loans. It is just that investors don’t get to see which loans are verified any more because the loans are funded before the borrowers income is verified. Most of the time there are zero loans available that have verified income.

2. Invest Right After Loans are Added to the Platform

It is common knowledge to many investors now that Lending Club adds loans to their platform four times a day – at 6am, 10am, 2pm and 6pm Pacific time seven days a week. If you login promptly at those times and run your filters you will have plenty of loans to choose from.

3. Be Quick

This is the most important one today. If you never want to miss a loan you will have to give up on reading the descriptions and asking questions of the borrower. Popular loans can disappear within minutes, sometimes even seconds.

Now frankly, this is a pretty silly system that I expect will change soon. There is no need for Lending Club to put a strain on their servers four times a day – I think we will be moving to a more real time system some time later this year, probably after Lending Club implements their long awaited Auto Invest feature.

New Prosper Investment Strategies

While not as dramatic as Lending Club, Prosper has also had a recent surge in investor interest. And long time Prosper investors know that with large investors like Worth-Blanket2 competition for some loans has been strong for a while now. Prosper has also changed their mix of loans in recent months. Instead of being dominated by the C and D grade loans as was the case for most of 2012 now A and B grade loans are most prevalent on their platform.

1. Don’t Focus on Repeat Borrowers

If you have read my How I am Investing in 2013 post you will see that two of my four Prosper filters focus on repeat borrowers. Unfortunately, these filters now produce very few loans. In fact, my Automated Quick Invest (AQI) has only found three loans this month for my repeat borrower filters. There are plenty of repeat borrowers available at the A and B grade levels but the D, E and HR grades are few and far between now.

2. Expand Your Filters

This is something I was reluctant to do but my cash was building up in my Prosper account. So, rather than allowing my cash to just sit there I decided to add some new criteria. I now have an AQI setup for two additional filters. One is my Super Simple filter that I wrote about a few months back and the other is a broad income based filter (Grades C, D and E, Income >= $50K, Inquiries = 0, Term = 36 months). After several weeks of having my cash balance build up it is being reduced at the rate of $1,000 a week now.

3. Be Quick on the Lower Grade Loans

There are fewer low-grade loans (D, E and HR) on Prosper today than before. Those that do come onto the platform are snapped up in minutes. Prosper adds new loans at 9am and 5pm on weekdays and noon on weekends (all times Pacific). You should login at those times to have a chance at the lower grade loans. If you are focused on A and B grade then you will have plenty of selection at any time.

There is No Going Back

I know many people here complain about the dominance of institutional investors and how the small investor is getting squeezed out. While, it is certainly more difficult than before to put your money to work astute investors can still find plenty of good loans.

The large investors are here to stay. In fact, there is more interest from institutional investors in Lending Club and Prosper than ever before. We are not going back to loans staying on the platform for days on end. For some investors, that might mean they no longer want to invest. For me, I still find this a great place to put my money and I am adapting to this reality.

What about you? Have you changed your strategy at Lending Club or Prosper this year? As always I look forward to hearing from you.

  • Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.

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