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Peer to Peer Lending Becoming More Popular

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I was listening to NPR’s Morning Edition the other day when they started talking about peer-to-peer lending companies like Lending Club and Prosper (currently closed pending SEC approval).

I’ve written about peer to peer lending a few times before, first when Prosper’s Peer to Peer Lending Marketing debuted and then once again when LendingClub offered their peer to peer lending service.

I personally don’t invest using either service because I didn’t have confidence in an untested system in a totally new paradigm. However, if I were a borrower, I’d jump at the chance to borrow money from individuals rather than the monolithic lending industry. You’d be kidding yourself if you didn’t think the lending industry, be it loans or credit cards, doesn’t jump at the chance to lock you in to something complicated and counterintuitive (option ARMs anyone?).

The borrowers probably benefit the most in this arrangement. The experiences profiled in the Morning Edition clip echo many that I’ve read online – borrowers get the opportunity to get loans with better terms and with less headache. While you are still ranked by your score, you get to add a little color commentary not captured in credit histories.

For investors, I have read that default rates were higher than they first listed and individuals are finally learning why the lending industry acts the way it does. A lot of people default. The benefit of peer to peer lending is that investors can invest small amounts into many loans, thus diversifying their risk. I like the idea of having another avenue to invest in outside the typical stock/bond/whatever paradigm but I’m still apprehensive.

While I’m still not sold on the idea of investing in peer to peer marketplaces, if I needed a loan I wouldn’t hesitate to put them on my list of places to get a quote from. What are your thoughts on the peer to peer lending industry?

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12 Responses to “Peer to Peer Lending Becoming More Popular”

  1. kitty says:

    For a borrower, it may be a good deal or not depending on the individual’s ability to borrow in a bank or get one of those 0% offers from credit card.

    For a lender, it seems risky to me. Especially now when the corporate bond yields are so high. Why would I lend money to someone I don’t know, if I can lend money to American Express or Citigroup and get yield-to-maturity of 9%? Sure, AmEx isn’t doing that great and neither does Citigroup, but I’d imagine the probability that either of these companies goes bankrupt and defaults is lower than even the highest rated person on Prosper. Just as on Prosper you can get higher rate with riskier customers, you can get higher rates with junk bonds. I just searched bonds – my CD matures this week and I am thinking of taking advantage of current high yields on bond market, both municipal and corporate – and I saw some bonds yielding over 50%. They weren’t even junk bonds, they were investment grade (BBB and better) if you can trust the ratings, of course. I don’t, so I’ll probably keep to better known companies or municipal bonds. At any rate, at least at present, I don’t see any advantage of Prosper over corporate bond market. After the bond yields come down – maybe – but peer-to-peer still seems risky to me. That is unless you know a few mafia guys personally who could help you collect :-) .

  2. Patrick says:

    I’m an investor in Lending Club. So far so good. I’ve got investments ranging from 9% – 18% with a Weighted Average Rate of 10.76%. Nobody has defaulted yet. I’m happy with it and will continue to invest a little at a time.

  3. Jim says:

    I think this is exactly what the securities market is. It links people with money to invest, to people who are looking to borrow money at interest. I feel like this P2P method can have way less overhead than the current brick and motor system and as such can benefit all parties involved in the same way that Ebay brought bidding markets to regular people. Not an expert, but I suspect this is the next big thing.

    I think this is just another market for diversification along with stocks, bonds, real estate, foreign currency, etc.

  4. William says:

    I thought a few friends of mine were crazy when they first starting investing in Prosper, but I eventually became a convert. They’ve earned a pretty substantive ROI, even accounting for the surprisingly high number of defaults. The trick with an investment like this – as it is everywhere, really – is to diversify across borrowers.

  5. Matt @ SF says:

    Like most, I was highly skeptical of P2P lending. I started tinkering around with Prosper just to get comfortable with it using a few hundred bucks at a time.

    While it sounds risky, I think it’s primarily up to you to pick the “winners” who will have the greatest chance of paying you back. Like most everything, it comes down to the research you put into something and time you’re willing to wait until the right investment comes along.

  6. I agree with Jim’s comments, P2P lending is going is the next big thing, replacing antiquated brick and mortar systems of current securities markets. Like so many other business the Internet is allowing finance companies, i.e. Loan Originators to seek capital for lending not from institutions but from the end investors themselves … cheaper and more efficient.
    My only concerns with the typical P2P companies is the unsecured nature of their business and the ability of a bad guy to give them bad information. The finance business if full of rewards but also full of underwriting and servicing. I’d like to see the P2P guys offer some type of comfort in the way of collateral or an option to sell my investments to Prosper or Lending Club if they mess up. I would love to see the collection notes on a loan that went bad, and especially before it went bad. I love the idea and think it is “the next big thing” but I’m going to stick with collateralized loans, which by the way, are out there.

  7. CK says:

    I’d be interested to see someone with documented high returns from one of these sites.

  8. High Returns are relative but I show you documented returns on Loan Market Direct …

  9. DebtKid says:

    @ThinkDifferent “I’d like to see the P2P guys offer some type of comfort in the way of collateral or an option to sell my investments to Prosper or Lending Club if they mess up. I would love to see the collection notes on a loan that went bad..”

    LendingClub recently opened a secondary trading market for our notes. This offers the liquidity to sell your investments when you choose.

    Also, regarding collection notes, we do that too : ). You can see the details of the collection process here (https://www.lendingclub.com/info/collections-process.action), but if you login to your account and look at the “status” you can see any collection notations on your notes.

    Hope that answers some questions!

    ~debtkid
    LendingClub Product Ambassador

  10. DebtKid … I’m impressed … just convinced me to open an account to see this for myself! And to the rest of you/us … I’ll report back.

  11. PennyScraper says:

    I have recently tested the waters of P2P lending by funding 2 loans of $50 each on Prosper.com. I am earning an average interest rate of 16.72%and my debtors are still current so I am still happy with my little experiment.

    Prosper is currently in the process of creating a secondary trading market for their notes so they are not accepting new lender registrations.However new borrowers can still get loans which wil be funded by Prosper own funds.

    Check my blog for referral links

  12. KCMendes says:

    This is a neat idea.

    I researched some on my own and found Prosper lender’s returns are documented here: ericscc.com. Overall, I noticed lots of defaulted loans (20-30%), especially high risk ones, so you have to know how to pick.

    Lending Club looks better. they seem to be very strict on the credit side on borrowers, and their default rate is around 2-3%. I opened an account with $500 to test it out. Anything’s better than the stock market now.


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