Hacker News Reader

Comment by throwaway600613 | Hacker News Reader

Peer-to-peer lending can potentially be a great source of passive income. For example, if you invested $100,000 in lower grade (C-G) notes on Lending Club with an aggregate 12.0% net annualized return, you'd receive approximately $6,000 in cash payments each month.

View on HN

It's worth noting that the money received from the peer-to-peer lending counts as income, and hence can be taxed quite highly if you're already a high-income individual and/or live someplace with a state income tax.

I invested a moderate chunk of money in lending club, and I don't regret it, but between the defaults and early payoffs, I ended up at around ~8% return, and then had to pay income tax on that 8 percent, which cut it way down.

That being said, there's the more intangible return, which is that some of hte people I selected to fund were trying to get out of high-interest debt, or fund purchasing a car for work, etc. Some(all?) of it was probably BS, but it was nice to feel like you were investing money in someone who had a specific need and helping them achieve it.

I'm not doing that anymore though, it's just not worth it.

One strategy is to use an IRA on Lending Club and a taxable account for lower yield investments that are taxed as capital gains.

If you re-invest the returns are you still taxed on them?

Yes, the payments are interest, so you need to pay tax on these even if you reinvest in further loans.

Default rates on Lending Club are high enough you get ~33% of the quoted interest rate due to defaults.

I'm not saying you're wrong, but do you have data supporting this statement? I've been interested in peer to peer lending for awhile and this turns me off a bit.

I've made 8-10% per year (defaults included) for the past 2 years on lending club. There are investment limits based on your income that you legally have to follow. I believe its 5% of your income/assets max. They don't confirm your income/assets but there are regulations related to it.

It also takes work to liquidate quickly. So if not selling notes on a second market you're locked into your investments for up to 5 years.

Thanks for this, didn't know there was a limit. Apparently it's 10% of your net worth [0] and there are other restrictions by state [1]. Which is a shame, because it beats the pants off the stock market.

[0] http://kb.lendingclub.com/investor/articles/Investor/Is-ther...

[1] http://kb.lendingclub.com/investor/articles/Investor/What-ar...

Well the person I was replying to was suggesting G notes:

https://www.lendingclub.com/info/demand-and-credit-profile.a...

8.99 / 23.47 = 38%

https://www.lendingclub.com/info/statistics-performance.acti...

Their median return is 7.2%.

The top 90th percentile is 9%.

> For example, if you invested $100,000 in lower grade (C-G) notes on Lending Club with an aggregate 12.0% net annualized return, you'd receive approximately $6,000 in cash payments each month.

That just isn't a situation that happens for 99% of people.

Personally, I've seen worse returns and I know a number of other people that feel the way Lending Club came up with these numbers is fudged a bit since almost everyone I know ends up below the median.

https://personal.vanguard.com/us/funds/snapshot?FundId=0040&...

The reality is, its returns are reasonably high risk [as you are limited in how many you can invest due to the caps the other guy mentioned] and if you get a bad basket you are screwed.

I'd rather invest in stocks given the real returns for the average person in Lending Club are about the same. Also, literally 0 of its proponents factor in what happens during a major recession [ default rates will skyrocket ] which will make even these modest returns terrible very quickly as loans default.

I played around with this and found that the default rates were high, even among highly rated borrowers.

I assume that $6K/month includes return of principle? Otherwise that's 72% annual return, not 12%. So you're saying you get about $1K/month in profit and $5K/month in returned principle?

Reply on news.ycombinator.com