Lending Loop Performance: Over the past two years, I’ve been fascinated in alternative investment vehicles other than buy and hold real estate and stocks.
Real estate investment has been great to me but I want to diversify and have more short term investments.
I have a small stake in stocks but the stock market keeps reaching higher highs, and it’s getting very expensive so I don’t really want to invest in more.
So I was very excited when I heard peer to peer lending was relaunching in Canada, which suggests that Canada is coming to terms with peer to peer lending models which are already popular in the US, Europe and elsewhere.
My experiment started with Lending Loop, the first peer to peer lending platform in Canada.
The company received the green light from the Ontario Securities Commission after a brief pause to meet securities compliance. Lending Loop is now a registered dealer in every province and territory, but not currently available to investors in Quebec
I am happy to report on my performance to help you make an informed decision lending with Lending Loop.
Peer-to-peer lending like Lending Loop maybe a viable option for you as it is for me if you take the time to understand the risks and rewards. If this sounds like you, read on.
Lending Loop – How it works
Lending Loop is really crowd sourcing funds where they match lenders to small business borrowers.
Lending Loop effectively turns anyone who wants to be one into a bank. Individuals can sign up to become investors in small businesses, who in turn come to Lending Loop looking for loans.
And the best part is you can invest as little as $25, where you own a small part of a business note and rewarded with a healthy return.
And you collect monthly interest plus a bit of principle back until the borrower pays off their loans. And a double win is that you support the growth of local Canadian businesses!
In turn, small businesses can access affordable financing at a fair interest rate and gain exposure to lenders across Canada.
Lending Loop – Returns
Last year, my goal was to spread $1000 over 10 different loans such that even if there is an occasional default, it is very unlikely that I will get a negative return overall.
To date, I’ve almost reached my $1000 goal. I’m happy to report that I’ve received many monthly payments and so it has met expectations. I’ve already boosted my investment account to diversify my loans even more, focusing on quality loans so that if I get a charge-off on a loan, it won’t impact my overall returns.
So far, I’ve hit 8.0% (after Lending Loop fees) which is far greater than the <1% that I was earning in savings.
My performance is also aligned with Lending Loop’s estimated yield for 2017:
Delinquent Loans Is A grim reality and Key Lessons Learned
I know no one wants to hear this but delinquent loans are a grim reality.
So far, none of my loans have been charged off, and I have 1 loan that is delinquent.
I have a loan that is delinquent in the C rated loans and this is also aligned with Lending Loop’s statistics for going into arrears more often that A rated loans.
I plan on investing in many more loans to diversify my account to have a big enough cushion to guard against future charge-offs.
And to invest in smaller increments (between $25 and $50) so that no one loan can do damage to my overall returns.
I’ve come to terms that there will always be businesses out there who don’t survive and pay out their loans. It’s just a part of doing business.
A lesson learned is to take advantage of the $25 minimum investment so that you have many more loans (ex: $25 over 40 loans with a $1000 account). If you invest with $200 per loan with only five loans, this carries a higher risk because one default could wipe out most of your investment gains.
Another lesson learned is there are a limited number of grades A and B loans so it might be harder to diversify than I thought so keep this in mind if you are only loaning out to grade A and B loans. You might not have 40 loans to diversify with. I might have to modify my plan if this continues as so.
How to Decide if you Want to Invest in Lending Loop?
Do you want a bit of income every month or do you want it generate a lot of wealth in the future, which are two different goals.
Lending loop is a good potential income generator, not a wealth building generator,
But a word of caution: don’t be distracted by the high returns and fail to properly assess the risks vs rewards.
Only invest money that you can afford to lose because there will be some losses as this involves risks.
Plus the principle investments you make are illiquid so it will take some time to get all of your money back depending on the loan term.
So I highly encourage you to only invest a small percentage of your net worth.
Your net worth is the sum of all your assets (cash, savings, mutual funds, equity in your home, etc.) minus your liabilities (student loans, credit card debt, mortgages, etc.).
10 Tips for Investing with Lending Loop
This has been a learning process, and I’m happy that I have a much better understanding of how peer to peer lending works now that I’ve done it for almost a year.
Here are some tips from my experience investing with Lending Loop
- Ease your way into it. If you’re a cautious, low risk investor like me, and aren’t sure if P2P lending is right for you, start off with A rated loans to get comfortable with the process. You’ll still make decent returns and can diversify into lower rated notes over time.
- Higher interest rates are appealing but it also comes with higher risks for borrowers. Diversify with quality loans to reduce your risks.
- Watch for and utilize your monthly cash payments. Once you invest in loans that become fully funded and active, borrowers will start making scheduled payments every month that will be deposited into your account. You can then use that cash to invest in more loans or withdraw if needed.
- How are the small business borrowers instilling trust with you? Look for a good description of their reasons for their loan. Look for responsiveness to questions in the Q&A forum. And look for full financial statements.
- Peer to peer lending loans are still a worthy investment if you have the time to invest researching the individual companies. Things to keep in mind: What is the reputation of the business? Do they have a good brand? Have they been in business for a long time? Are they registered in better business bureau?
- Start with a small percentage of your net worth and spread your money out sufficiently. Although these loans are backed by personal guarantees, nothing is guaranteed in life and defaults are a reality.
- Be aware of the risks. Peer-to-peer lending is “higher risk” than putting your money in a savings account so if you’re not comfortable with this, it may not be for you.
- Start slow with a set budget and give yourself a few months to see how it works.
- Carefully review the financial statements. It is a reasonable expectation to see three years’ worth of financial statements when the company has been around for five years so look out for that.
10. Take advantage of the Q&A forum to learn more about the business. Scour through the Q&A forum to learn more about their business and financials. And if you still have an unanswered question – ask them.
Thanks to Lending Loop for supporting this blog. I am very excited that Canada has embraced peer to peer lending. And I’m so happy to be one of the 6,959 investors helping businesses in Canada.