Peer to Peer (P2P) lending is a method of acting like a bank and lending money (with a large group of like-minded capitalists) to folks who want to borrow money at better rates than they can achieve from commercial sources. The two largest players in this space are LendingClub and Prosper.
I picked LendingClub, primarily based on their early proactive SEC filing compared to Prosper's reactive measure.
I like P2P for diversification purposes, sort of a bond type play. While the "value" of my portfolio would decrease somewhat with inflation like a bond investment would, by reinvesting the returning principle and interest on a monthly or weekly basis, I think it would be better than a bond investment in the same scenario.
Here are some of the pluses and minuses that I've seen:
+ The biggest plus is the interest rates available to the lenders. Even if you were to stick with the cream-of-the-crop notes with A ratings, you would earn interest rates of at least double what you could find anywhere else, including the accounts that require a certain number of transactions per month to keep the rate you're getting.
+ As I mentioned diversification of assets is a plus. Depending on your acceptable risk requirements, you can earn better than corporate bond rates with commensurate risk levels.
+ Unlike junk bonds, since the investment in each note can be as low as $25, you can spread your risk over many more individual notes.
+/- Your investment is not totally illiquid, as there is a reselling market available, however, it would probably take considerable time to completely liquidate your account and you might not receive 100% of the value, depending on how long you were willing to wait.
- Unless you automate the investments, there is a time factor to consider. That's why I went with $100/note on my initial investment. I'm doing $25 for the re-investments.
- A true depression would probably cause massive defaults on the loans. However, in a depression, (outside of cash), most investments would tank.
- Defaults can cause a frustration factor. It's not easy seeing your money disappear because some anonymous borrower decides that their credit rating is not important. However, keeping your eye on the big picture can ameliorate that issue.
- Another possible minus would be with tax preparation. Jacob seemed to have a complicated time with his Prosper trial. I'll see how that goes when I receive the paperwork at the end of the year.
I'm standing pat with my initial $10k "test" investment and I'm reinvesting the returned principle and interest. I may re-evaluate in 6 or 9 months to see if I want to put more money in the pot.
Peer to Peer Lending
-
jacob
- Site Admin
- Posts: 15994
- Joined: Fri Jun 28, 2013 8:38 pm
- Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 77
- Contact:
Indeed. Taxes are a major pain. For each default... let's say you put $10k in (as I did) and spread them on 400 loans at $25 each. And say your default rate is 10% (note that default rates are given per year... not for the duration.). Then you'll be dealing with 40 defaults per year. That's one statement for each of those "non business bad debts". This makes for a hefty tax statement!!
-
Robert Muir
- Posts: 280
- Joined: Thu Jul 22, 2010 10:15 pm
Kevin M, are you sure? You might want to check again:
http://blog.lendingclub.com/2009/08/31/ ... investors/
My understanding is that most states that cannot be primary investors, are still allowed to buy notes on the resale market. This actually could be a plus because they can take advantage of folks who need to liquidate and find some good deals. It's too much work for me though, I'll stick with primary.
http://blog.lendingclub.com/2009/08/31/ ... investors/
My understanding is that most states that cannot be primary investors, are still allowed to buy notes on the resale market. This actually could be a plus because they can take advantage of folks who need to liquidate and find some good deals. It's too much work for me though, I'll stick with primary.
I was really drawn to the idea of Prosper when it first came out, but it sounds like the experience has been a nightmare so far for investors who has been in it for a while.
The default rates on sites like Prosper are actually 40%+!
Check out stats/graphs here: http://fred93blog.blogspot.com/2010/03/ ... stats.html
And read as much as you can handle here:
http://www.prospers.org/forum/
Personally I found the discussion on that forum strangely fascinating. Anyway, it has more to do with Prosper than the Lending Club, but I would still be extremely concerned about peer-to-peer lending.
The default rates on sites like Prosper are actually 40%+!
Check out stats/graphs here: http://fred93blog.blogspot.com/2010/03/ ... stats.html
And read as much as you can handle here:
http://www.prospers.org/forum/
Personally I found the discussion on that forum strangely fascinating. Anyway, it has more to do with Prosper than the Lending Club, but I would still be extremely concerned about peer-to-peer lending.
I don't think recent data can contribute to an overall trend. Personally, after close to 40 or 50 loans and only 3 have failed, that isn't too bad.
Plus, with people that had A+ ratings so to speak losing their jobs unexpectedly (like fire fighters, police, nurses), of course stats are going to be high. Credit card defaults are ridiculously high too
Plus, with people that had A+ ratings so to speak losing their jobs unexpectedly (like fire fighters, police, nurses), of course stats are going to be high. Credit card defaults are ridiculously high too
I've had a great run with LendingClub. I'd have to check but I'm getting a fantastic return, well over 10%. My oldest notes are about a year old, so far I've had no defaults.
Here are some of my fears:
*too much money is chasing too few good borrowers. Especially during times of promotions.
*a system for gaming LendingClub pops up and gets really abused. For example, I've seen the same small employer "verifying" multiple user's income.
I've taken loans out with LendingClub and they did call my work to verify employment. Before they got a hold of me they canceled the loan application due to lack of verification. Pretty much like a credit card, but LC does take a cut on each new loan and therefore has incentive to be sloppy.
I've only invested in notes that met my qualifications:
*approved by LendingClub (verified)
*not getting the loan for idiotic reasons (ie: boat).
*not a "back to the wall" level of utilization.
*employment in sectors I think are stable.
I would like to put much more money into LendingClub, but it can be pretty time consuming. If you do the $25 per note (I don't) 10k is 400 notes... If only 10% of notes you investigate meet your specifications that's reading through 4,000 applications.
I always plug LendingClub to people in debt every chance I get. It's much simpler and a better deal for everyone involved. Seems like there should be a more than ample supply of potential LendingClub borrowers.
Here are some of my fears:
*too much money is chasing too few good borrowers. Especially during times of promotions.
*a system for gaming LendingClub pops up and gets really abused. For example, I've seen the same small employer "verifying" multiple user's income.
I've taken loans out with LendingClub and they did call my work to verify employment. Before they got a hold of me they canceled the loan application due to lack of verification. Pretty much like a credit card, but LC does take a cut on each new loan and therefore has incentive to be sloppy.
I've only invested in notes that met my qualifications:
*approved by LendingClub (verified)
*not getting the loan for idiotic reasons (ie: boat).
*not a "back to the wall" level of utilization.
*employment in sectors I think are stable.
I would like to put much more money into LendingClub, but it can be pretty time consuming. If you do the $25 per note (I don't) 10k is 400 notes... If only 10% of notes you investigate meet your specifications that's reading through 4,000 applications.
I always plug LendingClub to people in debt every chance I get. It's much simpler and a better deal for everyone involved. Seems like there should be a more than ample supply of potential LendingClub borrowers.
-
Robert Muir
- Posts: 280
- Joined: Thu Jul 22, 2010 10:15 pm
Akratic, if I saw that graph, I'd be wary about investing too! I've only been in 1.5 months with, as I said, one default, but it's good to see Q's positive results.
I'm sure a con artist could find a dozen ways to scam the sytem.
I'm hoping that LC gets really good at sniffing out the baddies.
JH, like you, I skip the stupid loans. I also skip small business loans and pretty much stick with "good reason" and debt consolidation loans.
I'm sure a con artist could find a dozen ways to scam the sytem.
I'm hoping that LC gets really good at sniffing out the baddies.JH, like you, I skip the stupid loans. I also skip small business loans and pretty much stick with "good reason" and debt consolidation loans.
Interesting range of experiences here! We have a similar scheme in the UK (Zopa), but it does seem to have some slight differences which make me feel a little securer than appears to be the case with its US cousins.
The biggest difference is that there are two ways to lend. Either to individuals on listings in which they pitch for their loan (which sounds like how it's done by Prosper and LC from the comments above), but there's also the option to lend into 'markets'. Here Zopa themselves process and approve the loans (or not!) and lenders just pitch into the pot by selecting which market they want to lend into. These are rated A* down to C with a 'Youth' market which is rated differently, and each rating can have a 36 or 60 month term. The lender can choose a rate to offer for each market. For instance I've set up three offers, all 36 month, A* @ 7.5%, A @ 8.2% and B @ 9.9%. I don't touch C or Y, but rates over 11-13% are common there (but defaults/lates are way higher...)
Some other features which seem different (but maybe it's just not been mentioned?) Zopa uses a credit rating agency for all borrowers, and they employ a collections agency to chase defaulters, even to the point of court action if necessary. Obviously some still get through the net, but it seems a good level of protection against willful fraud.
Our tax situation is different too, as any interest must be declared as un-earned income and losses are not offsettable against tax - though that is being challenged.
I'm quite happy with it so far, been in about 4 months now, and no late payers or defaults. If that continues for the rest of the first year I might put a bit more in. So far I have about 1% of my financial assets there and I regard it as my riskiest asset class.
The biggest difference is that there are two ways to lend. Either to individuals on listings in which they pitch for their loan (which sounds like how it's done by Prosper and LC from the comments above), but there's also the option to lend into 'markets'. Here Zopa themselves process and approve the loans (or not!) and lenders just pitch into the pot by selecting which market they want to lend into. These are rated A* down to C with a 'Youth' market which is rated differently, and each rating can have a 36 or 60 month term. The lender can choose a rate to offer for each market. For instance I've set up three offers, all 36 month, A* @ 7.5%, A @ 8.2% and B @ 9.9%. I don't touch C or Y, but rates over 11-13% are common there (but defaults/lates are way higher...)
Some other features which seem different (but maybe it's just not been mentioned?) Zopa uses a credit rating agency for all borrowers, and they employ a collections agency to chase defaulters, even to the point of court action if necessary. Obviously some still get through the net, but it seems a good level of protection against willful fraud.
Our tax situation is different too, as any interest must be declared as un-earned income and losses are not offsettable against tax - though that is being challenged.
I'm quite happy with it so far, been in about 4 months now, and no late payers or defaults. If that continues for the rest of the first year I might put a bit more in. So far I have about 1% of my financial assets there and I regard it as my riskiest asset class.
I've been a lender on Zopa (UK) since June 2009 & I wrote about it a few months later.
Since then I've had one late payment, but they were back on track the month afterwards. I've currently got 87 loans on the go. I've had 12 loans repaid early (well within the 3 year term). I'm still happy lending my money peer to peer & I am very impressed with the service.
I only lend in A*, A & B markets I'm getting returns of just over 7% after fees. Lenders pay 1% of money lent back to Zopa.
I only lend into the credit checked markets. If you read the Zopa forums it appears that the majority of defaults come from loans made on the listings section. I occasionally read the listings for my own amusement & can't say I'm surprised that this is the case
It is interesting to be involved with, not least because it does highlight that those of us wanting a passive income from investments are often dependant on other people taking out loans.
Since then I've had one late payment, but they were back on track the month afterwards. I've currently got 87 loans on the go. I've had 12 loans repaid early (well within the 3 year term). I'm still happy lending my money peer to peer & I am very impressed with the service.
I only lend in A*, A & B markets I'm getting returns of just over 7% after fees. Lenders pay 1% of money lent back to Zopa.
I only lend into the credit checked markets. If you read the Zopa forums it appears that the majority of defaults come from loans made on the listings section. I occasionally read the listings for my own amusement & can't say I'm surprised that this is the case
It is interesting to be involved with, not least because it does highlight that those of us wanting a passive income from investments are often dependant on other people taking out loans.
I have been using lendingclub for about 2 years now. I have 1 default and 4 that are 90 days late or more. My total amount of loans is 100 with an average yield of 10.5%. If the 4 that are 90 days or more late all default my return will be around 2.5%.
IMO you are better off with a high yield corporate bond ETF. You will have a shot at about the same yield with much less risk.
IMO you are better off with a high yield corporate bond ETF. You will have a shot at about the same yield with much less risk.
@Orinoco - must admit I tend to read the listings more for entertainment value than any expectation of finding a suitable bid
The one exception, I pitched £50 on to one of the PRIME listings, which has a capital guarantee of 70% underwritten by PRIME. On top of this any borrower on one of those listings has already jumped through a lot of hoops, drawn up a business plan, and are by definition mature and enterprising. Well worth funding IMHO, and of course I liked his business idea.
But the rest... how often do you see 'accountants' or 'financial advisors' or whatever earning £100k and needing a loan to consolidate debts?!? I just love the irony of comparing their income to mine and seeing which of us is there with spare cash to lend
The one exception, I pitched £50 on to one of the PRIME listings, which has a capital guarantee of 70% underwritten by PRIME. On top of this any borrower on one of those listings has already jumped through a lot of hoops, drawn up a business plan, and are by definition mature and enterprising. Well worth funding IMHO, and of course I liked his business idea.
But the rest... how often do you see 'accountants' or 'financial advisors' or whatever earning £100k and needing a loan to consolidate debts?!? I just love the irony of comparing their income to mine and seeing which of us is there with spare cash to lend
-
Robert Muir
- Posts: 280
- Joined: Thu Jul 22, 2010 10:15 pm
Well, it was a nice trial investment. For me though, I have to call it an investment that's not worth it.
So far, out of my $10,000 investment:
$200 has defaulted,
$561.70 is > 31days late, headed for default, and
$181.38 more is "in grace period".
So close to a 10% loss on my principal so far.
Now, admittedly, if I had limited my investments to $25 each, I may not have had this large a loss. But I didn't feel comfortable making the investments automatically and I didn't want to spend that much time finding the right fits. Obviously it turns out that I'm a lousy judge of good loans and automatic would have done a better job.
I won't be reinvesting my "profits" - I'll just slowly divest myself over the next 2.5 years. I might even break even by the end.
So far, out of my $10,000 investment:
$200 has defaulted,
$561.70 is > 31days late, headed for default, and
$181.38 more is "in grace period".
So close to a 10% loss on my principal so far.
Now, admittedly, if I had limited my investments to $25 each, I may not have had this large a loss. But I didn't feel comfortable making the investments automatically and I didn't want to spend that much time finding the right fits. Obviously it turns out that I'm a lousy judge of good loans and automatic would have done a better job.
I won't be reinvesting my "profits" - I'll just slowly divest myself over the next 2.5 years. I might even break even by the end.
-
jasoninmississippi
- Posts: 101
- Joined: Mon Sep 20, 2010 3:17 am
Robert and Jacob - I agree with both of you. I do small and medium loans to people that I know and I still have 5% default rate. I seem to have better luck on loans that have collateral "land or cars" and even then there a chance to lose money. The big problem I see, is that when I become debt free in 18 months, is were to put my money? After my history with my 401k and Roth, invested in mutual fund, after 4 years I am back even. I might be crazy but I though when one is investing one should make a return. Jason
I am very happy with my LClub returns, I must be pretty a-typical. Lucky, I guess. I just look for people who don't have insurmountable debt, are using the loan for a reasonable purpose AND have employment I consider stable.
Some of my favorites are about to graduate PhDs that have a 98% utilization with 8k in debt!;)
Some of my favorites are about to graduate PhDs that have a 98% utilization with 8k in debt!;)