Is it worth investing in P2P Lending (loans) : A short statistical analysis – part 1

Previously we had a major post on different asset classes and where P2P lending fits in a well diversified portfolio. Today, we would do a statistical analysis of annualized returns of loans in P2P lending, specifically, those that are available on major platforms specializing in consumer debt financing namely Lending Club and Prosper.

Of the two major consumer debt marketplaces in the USA, Lending Club (LC) has received the majority of media attention sans successful IPO in December 2014. Due to the exposure, more so than ever, retail investors are looking at LC as a viable alternative to generate stable returns. Let us take a deeper look.

BOND RETURNS:

Let us evaluate BND (Vanguard Total Bond Market ETF) returns which we will take as a good estimation of the bond market in general. Since 5/2007 till 12/22/2014 BND payed a total dividend of $22.07 (see monthly returns graph below)

Vanguard Bond ETF Yields

In these 2763 days, the Bond price it self has appreciated $8.91 (it increased from $73.84 to $82.75)

The Annual return is: (82.75 + 22.07)/(73.84)]^(365/2763)  – 1   = 0.047 or 4.7%

 

Calculating MarketPlace (P2P Lending) returns: Internal Rate of Return (IRR)

Previously we discussed how returns on lending platforms are amortized. An exact calculation of returns can be complicated. It is not as simple as the quoted annualized return stated on many deals for the individual investor. As Reamerge is a peer lending platform, investors should be aware of the calculations.

ROI

The simplest of calculations is Return on Investment or ROI. Mathematically its

ROI = (α – β ) / α

where α stands for an arbitrary ending balance and β is the initial invested balance.

It would work something like this – you invested $3,000 and a year later that grew to $3,300. Based on formula above your return was 10%