Learning from my past mistakes
As a peer to peer investor, when no one else is around I would find myself a loan. 😀
I’ve been investing with Lending Loop (LL) for over 3 years now. My first year in 2017 ended with a 10% return net of expenses. Then last year I made 11%. But in the meantime I was accumulating an unhealthy amount of delinquent loans in my portfolio. This hidden risk was not good.
So at the start of 2019 I decided to adopt a more strategic approach to choosing loans. I came up with the 10 Rules for Choosing Better Loans, which you can find here. New defaults have been in decline since I started using this more selective method. 🙂
In today’s post I’ll dive into my portfolio’s 2019 performance and explain my plans moving forward with this platform, including withdrawing my money.
LL as a platform has come a long way over the years. It hit a major milestone in 2017 when it helped fund over $10 million in total loans. By the summer of 2018 it had surpassed $20 million. And by the end of this year, over $60 million. Tighter lending restriction at traditional banks is pushing businesses to find alternative lending sources.
But with Canadian delinquencies on the rise, and higher expected inflation in 2020, it remains to be seen how LL lenders will do in the foreseeable future. There are also internal issues with the platform which I’ve blogged about in the past that have not been fixed.
In today’s post I’ll be going over the following:
- Breakdown of my 2019 return.
- My increasing number of loans in default.
- Recent changes to the platform.
- What I liked and didn’t like.
- My plans for Lending Loop in 2020.
For a general overview of how Lending Loop works, its pros and cons, and whether it’s right for you, please see my original review.
Liquid’s 2019 Portfolio Performance
Assuming all the scheduled payments over the next week are made on time, I will earn a total of $4,135 of interest in 2019. Luckily there were no loans written off this year.
- Interest earned $4,135
- Servicing fees -$443
- Bonuses $87
- Net earnings $3,779
Altogether my income for 2019 is $3,779 net of fees. By comparison last year I earned $3,369 net. So things are going in the right direction.
I began 2019 with $33,563 in my account. By the end of the year I’ll have $37,205. So my annual return is 11%. 🙂 Not too shabby. Despite using a more conservative approach choosing loans this year, the return ended up being about the same as in 2018. The new companies I’ve been lending to appear to be more diligent paying on time. 🙂 Here’s a snapshot of my current dashboard.
And here is my total earnings summary.
I’ve contributed a total of $28,000 into this platform, and it has made me over $9,100 of profit so far. 🙂 In the graph below, the difference between the purple and grey lines is my net earnings. It’s really satisfying to see a portfolio growing by itself. 😀
On the surface everything looks pretty rosy. But the devils are in the details. Behind the headline 11% annual return hides a slough of bad loans. Since there is no secondary market for Lending Loop loans, investors are often left holding toxic debt that are still marked at their original value, but are actually worth much less.
Concerns over my rising default rates and how it will impact long term returns
It’s disheartening to see a restaurant you like default on its loan commitment. Not only are lenders not earning interest anymore on this loan, but it’s also possible to lose 100% of the principal outstanding. The bankruptcy process can also take a very long time. Invested principal that’s not doing anything could be tied up for over a year.
In 2018 I had 6% of my outstanding principal in default. I thought that was pretty bad. But now it has shot up to 14%. Oh man. 🙁 Here’s a comparison of the last two years.
I currently have 10 loans in default. The misleading thing is all of these defaulted loans are still valued at their initial creation price. Since Lending Loop doesn’t provide any mark-to-market accounting of the loans, it’s hard to determine the impact these bad loans can have on my portfolio.
After 3 years my cumulative return is 33%, or $9,200. That’s pretty good, but this is before any price write-downs of impaired loans. It would be naive and short-sighted to assume there is no delayed risk built into future returns. My total impaired loans (loans that are either late or in default) are currently valued at $7,599.
So assuming 50% of all my impaired loans are eventually written off, then my cumulative return would fall to just 19%. And my annual return over the last 3 years would be only 6%.
Here are a couple of other possibilities.
Optimistic scenario: 25% of my current impaired loans are written off.
Cumulative return would be 26%. That would equal 8% annual return.
Worst-case scenario: 100% of impaired loans are written off.
Cumulative return would fall to 6%. That would equal 2% annual return.
I don’t know what the accurate reduction in the book value of my impaired assets should be. My best guess is the annualized return will end up being 5% to 8%, after loan write-offs.
The silver lining is that all 10 of my loans in default originated in 2018 or earlier. That means there hasn’t been any newly created loans that went into default since I began using the new criteria to choose loans. 🙂 Usually defaults don’t show up until after a year into the life of a loan. So I’m hoping to see fewer defaults in 2020. #fingerscrossed
Loan grades aren’t what they appear
If you think investing in higher grade loans will be less risky, think again. The proportion of B loans in default are higher than that of C loans. This means Lending Loop’s system for determining loan risk may be flawed. There is practically no reason to invest in B loans since they are more likely to not be paid back, while paying a lower interest rate than C loans.
This is why it’s so important to do your own research on the business you’re lending to. I don’t use the Auto-Lend feature for this reason.
New changes to the Lending Loop platform
Over the past year Lending Loop has made some changes to the website.
- A new portfolio analytics section that shows pie charts of your loans broken down by grade, loan duration, and industry. The majority of my loans are from B+ to C+ grades.
- All the comments made on loans you have can now be found in one place in the Loan Comments section.
- A total account value chart appears at the bottom of the Dashboard and shows your portfolio’s growth.
- Express Loans have been introduced. These are generally smaller loans ranging from $1,000 to $40,000 and are borrowed by sole proprietors.
Current thoughts on what I like & dislike about the platform
What works well
- Promotional offers. Lenders receive 2% cash back on new loans made within a certain period of time.
- The new performance graph is pretty neat. I just wish it would show the time (year) along the X-axis.
- I like receiving the monthly email summaries of my account showing how much interest I made that month.
- T5 income helps with personal loan applications. As most of you know, I’m currently in the market to buy a rental property. The amount of money financial institutions can lend me depends on my personal income, including investment income. 🙂 Thanks to earning $4,000 a year from Lending Loop, I can increase my mortgage borrowing capacity by about $20,000.
- I like finding hidden gems. For example, a food supplier that was recently funded has been in operation for 40 years. It’s always paid its creditors on time. It has over $10 million in annual sales, is profitable, and has $1 million in shareholder’s equity and growing. Yet it was somehow given a C grade instead of an A.
So unless I’m missing something this is clearly a low risk way to easily earn 15.46% in annual interest. 🙂
What could be improved
- The list of loans in the marketplace doesn’t show the company name or loan value anymore. But it used to.
Without the business name and loan size it’s hard to distinguish and compare the different offerings.
- Lenders in Quebec still can’t use this platform due to regulatory issues.
- It would be helpful to see how many different investors have committed to each loan in the marketplace.
- The Portfolio Analytics section could show more personalized stats. For example, it could display one’s return on investment. It could show the internal rate of return (IRR), or annual and lifetime rates of return with properly amortized defaults. It could also compare your returns to the average return across Lending Loop so you can determine how well your strategy is working compared to other lenders.
- The inflow of loans is too inconsistent. Sometimes there will be 1 or no loans available. This doesn’t offer lenders much of a choice if they want to stay fully invested.
Other times there will be 30 loans in the marketplace all at once. This can be frustrating to borrowers as it will be harder to fund their loans due to the constraints of investor’s capital slowly trickling in. It would be nice to see a more controlled volume of loans arriving.
- The monthly reports should be made available sooner. It currently takes about 2 weeks after the end of a month to receive the statement.
My Lending Loop plans for 2020. Time to take money out.
I have no interest to deposit new money into LL unless they find a way to integrate RRSP/TFSA into the platform. 🙂 The returns I’m getting lately have been pretty decent. But the high amount of loans in default makes me nervous. I expect to make 7% net returns in 2020 because a lot of my defaulted loans will be written off in the new year as their bankruptcy proceeding complete.
The lower expected returns, plus a slowing economy makes me think my money can be better used elsewhere. So at some point next year I will start withdrawing a few hundred dollars per month from my LL account, but continue to invest the remaining earnings.
Lending Loop can still be a part of a diversified portfolio. But the risk adjusted returns are not as favourable as in past years. That’s why I will reduce my exposure to these loans, and will cap my LL portfolio value at $40,000 – basically 4% of my net worth. 🙂
Random Useless Fact
Anyone can experience anxiety, and it’s not something to be ashamed of.
Thanks for the honest and unbiased review. I appreciate the nuances of “account value” and understanding why this is not what it seems.
From my experience the returns from Lending Loop are certainly competitive against other fixed income options. But at the same time I want readers to understand the risks associated with delinquent loans and how it can affect their overall long term return. 🙂 What I’d be interest to see if how my LL portfolio performs during a recession compared to my other investments.
Thanks for the detailed and informative review of Lending Loop.
I agree with your points of concern regarding defaults or possible delinquencies. Will come back to this part later.
Also you brought a good point that business name and loan size has to be listed in marketplace. Although I see business name when I go in to the loan details I dont see it in the marketplace listing making comparisons difficult.
The ratings seem to make little sense when we look at financials. Now coming back to defaults or deliquencies, the issue is they can significantly wash-off returns. On surface you see 10-12% returns but after writing off defaults or some deliquencies you may see net returns of 7% or less. The positive aspect is you get monthly payments (principal and interest). There is no clarity on collection/recovery and how long it takes so defaults would mostly mean zero recovery.
After writing off defaults 7% is probably what I would expect the final net returns to be. This is not a bad return by most measurements. But with the rising cost of living, and the full brunt of taxation on the interest income earned, the real return does not look very attractive.
There is also no possibility of any capital appreciation. A basket of high yield bonds can also produce similar returns, but you can have the option to either let the bonds mature or sell early for a potential capital gain.
I agree that net returns are decent when compared to savings interest, GIC, CD, etc. As you mentioned considering taxation, risks, etc it seems a bit cumbersome. For me personally REITs, MICs and monthly income stocks are better than LL even though the former has risks but the former can also be held in TFSA to shield from tax.
Nice update! Pretty sure I joined LL over two years ago using from your original review and referral code. I agree with your pros/cons and am still going strong on the platform with ~12% IRR return albeit with many late/default loans that still have to work their way through the system.
12% is pretty good, considering alternative fixed income investments. 🙂 I hope you don’t lose too much over the defaulted loans once the bankruptcy completes.
I managed to do pretty similar result wise with $200 deposited and my total earnings over 2 years are $51.75. I pretty well forgot about the platform I figured I’d toss a couple hundred at it a few years ago and voila.
That’s like being pleasantly surprised finding extra money in your pocket because you forgot you put it there years ago. Except in this case your money grew. 🙂
I joined lending loop because you recommended it. I’ve chosen to go with their risky D’a and E’s. I haven’t had anyone default on me in my year and a half. What happens is they start to lapse on payments, realize they could save money if they refinance with a bank and do that instead. At lower interest rates, this might not be possible, but because LL’s risk assessment is crappy, it gives me a margin of safety. If a recession hit, I expect things to be much choppier.
Hi Paul. Thanks for sharing your experience. I also think the next recession will impact things and probably send default rates higher.
Hi Paul. Long time lurker here. Curious what returns your strategy is getting and how your diversifying risk.
As a lender on Lending Loop I appreciate and agree with almost all of your assessment. A topic that I have not seen addressed very much is the tax treatment. There could be a very large difference between the before and after tax rates and this will be amplified as your defaults kick in. It is common to subtract the capital losses from the interest gains to determine the net rate of return. However from what I can tell, these do not offset each other. The interest is taxed at full rate while the capital losses (loan defaults) provide tax relief at 1/2 that rate. In other words, if your portfolio makes a 10% return and has 10% defaults you will actually lose money after tax (instead of breaking even). Lending Loop does not mention this anywhere on their website and I have not noticed it being mentioned explicitly in your blog (as thorough and thoughtful as it is). Can you please comment on this?
Hey. You’re absolutely right. I briefly mentioned this issue about the asymmetric tax disadvantage in my original 2017 review of the platform. It was the first complaint I had. But nobody (until now lol) asked me to explain it more in detail so I didn’t go deeper into it like you kindly have here. Earlier this month Lending Loop just charged off a huge amount of defaulted loans that originated from 2018 and 2019. About $2,000 of loans vanished from my account overnight. And there could be more write offs coming this year! So I’m thinking maybe the annual update for this year in 2020 will be a suitable time to address the tax issue as many other lenders have also announced a large part of their portfolios have been written off. You maybe have noticed this yourself. 🙂 We will need to face the tax consequences of this at next year’s tax season. I think it’s an unfair way to tax these loans, which is why I’ve been pushing Lending Loop to get RRSP/TFSA eligibility. But based on the nature of their business model this will be difficult, and may take many years to implement if it’s even possible.… Read more »