Peer to peer lending

Peer-to-peer lending (also known as person-to-person lending, peer-to-peer investing, and social lending; abbreviated frequently as P2P lending) is the practice of lending money to previously unrelated individuals or “peers” without the intermediation of traditional financial institutions (banks). It takes place on online lending platforms that are provided by peer-to-peer lending companies on their websites and is facilitated by credit checking tools of varying complexity.

So yesterday sends me an email saying that they’re restructuring their P2P lending platform in such a way that it’s now legal in Michigan. I’ve often thought that P2P lending seems like a good way to get around the problems you hear about on the news, of small business owners and other decent causes being unable to get loans. But now that it’s actually available to me, I’m not so sure. Obviously it’s risky - but how risky? Russian roulette level? Being a participant in Jackass-the-movie level? Or just swimming-less-than-an-hour-after-eating level of risk?

Does anyone have experience with P2P lending? Good? Bad? Ugly?

It seems legit from a little research, but it looks like what they aren’t telling you is that the AA loans don’t go off for more than 1% or so, and you can get scammed by the crap loans, obviously.

Edit: I browsed a bit, and though it seems to be working, man these seem like bad people to give money:

Monthly net income: $100,000
Monthly expenses: $6,000
Housing Mortgage: $2800 /per month
Car Insurance: $4000/year
Car expenses: $
Utilities: $300/ per month
Phone, cable, internet: $400 / permonth
Food, entertainment: $
Clothing, household expenses: $
Credit cards and other loans: $30,000

So you’re deep in debt, yet you bought a roughly $500,000 house and a car I can’t even compute based on that insane insurance number. Keep in mind that the yield on this is 21%, so I assume he’s paying 23-25% to Prosper, and this is a debt consolidation loan. What fucking debt have you accrued that is helped by being consolidated at 25%?!

There is a very good reason that these people didn’t get a loan in the first place. They’d have to be a very bad credit risk if they were turned down by banks.

There are probably a few honest and good people in there. But its probably more bad than good if you take the Principal agent problem into account.

Hell no.

Oh wait, available to you? As in, you’d be the one getting the money? Well that’s a different thing entirely, it would depend on the rates. Looking on the site I see a lot of loans at >20% APR which is usurious in the purest sense of the word. You’d be better off rotating credit card debt, and that ain’t smart either.

As an investor I’ve made approximately 9% annually on a mix of A and B loans through the Lending Club for the past 4 years. I’ll probably be increasing my allocation to this in 2013.

The Lending Club is definitely the stronger of the two.

I lend through p2p systems in the uk, namely zopa and funding circle(business loans). Ive done it for years, it seems very safe, tiny default rate and great rate for savers/investors. Seems a win-win to me.

Could you give more information than this? Do you think the sites are misrepresenting the figures?

I would never try and pick one at a time, I would go for a diversified portfolio if I was going to try it.

I would love to hear some thoughtful negatives on something like the . It does sound too good to be true.

The service description is more than enough for me. They allow uninformed people (ie, the public, in other words you) to lend money to borrowers that can’t qualify for bank loans. But they aren’t a bank, they just pass the money back and forth. There’s no protection, and the rates are extremely high for borrowers. It’s like you’re giving out payday loans.

Either they pay you back at usurious rates (some over 30%+, which means you are taking advantage of them and a scumbag), or they have good credit and pay decent rates (and you could do almost as well investing in the market with much less risk) or they don’t pay at all (and you’re screwed).

When the wife and I got our Florida house we wanted to borrow on it. The idea was to borrow $30,000 to take care of my college debt and a couple of credit cards. No “serious” bank would touch us, because although we owned the property outright we hadn’t owned it long enough.

Now while I would love to take advantage of this I still won’t. Simply because I don’t know enough about it. Instead we’ll wait out the year until it’s allowed. I’d rather go to a credit union and say, hey we have been here for a year and get a smaller percentage. Please tell me why I’m wrong here. Convince me to go for a higher rate, if it actually is supposed to be better.

That’s kind of what I was afraid of. I like the idea of helping the honest and good, but I don’t have any idea how I’d filter them out. Examples like that guy Houngan pointed out above really worry me. On the other hand, helping people like RichVR appeals to me, and these P2P lending sites seem like the obvious place…I just don’t know that there’s enough info to separate the wheat from the chaff.

I’d say if you’re going in with the idea of “helping” people then you’re setting yourself up for failure. From what I’ve seen the only real strategy is to diversify your portfolio enough to offset the losers, and you’ll never be able to vet enough people to be satisfied of their need while simultaneously watering down the potential problems.

You don’t. The set-up isn’t for some guy to lend some other guy $20k. The set up is for some set of guys to pool assets at, say, $25/guy, and lend guy 1 $20k. If you do this with a full $20k, you’ve distributed your risk over 800 people. Theoretically*, this means you’re only taking the aggregate default rate as a risk, and nominal rates can be set to price in that default rate.

Of course, this all goes to hell in two cases:

  1. Where the aggregate default rate is so high that you can’t really charge interest to cover adequately. So if you have a 50% default rate and you want a 12% return, you need something like a 24% rate. (Half the loans will default yielding 0%, the other half will come back @ 24%, theoretically.) In reality you probably need more like 30% since I can’t imagine these loans have pre-payment penalties, which means your truly good loan takers are going to pay less than the 24% because they’ll try to pay the loan off earlier, but your percentage of defaults remains constant. If you look at The Lending Place’s landing page, this is the problem that leads to their lowest grade loans having crappy returns: Too much default.

  2. The entire model is akin to what was done with mortgages to lead up to the financial crises. “We’ll make good loans and risky loans, slice them all into pieces, and distribute those pieces among investors. Sure some of them will fail, but we can package the pieces up statistically so the return is still decent.” And it was until an underlying systemic failure brought everything down. As I understand it, this type of set up should be more secure because you get to choose the risk in your portfolio explicitly. If you don’t want to help securitize the equivalent of really shitty sub-prime loans, you don’t have to. But that won’t protect you from systemic problems that cause, say, people with middle of the road or even good credit profiles to default in historically larger than average number (which was essentially what sunk the mortgage bubble, though one could argue the unrealistic market conditions were a direct cause of that).

In short, you’re not giving a chunk of money to Joe Schmoe; you’re buying a cross section of personal loans which are loaned out at a higher interest rate than your return, but you’re essentially still cutting out all that bank intermediary crap to get a far better return than a bank would give, albeit by shouldering far more risk. (Theoretically, banks loan out your money as well and generate the interest they pay by charging more interest for loans and passing some of that back to you. However, banks shoulder all the risk up to some amount on your account, so keep most of the reward for themselves and give you only a pittance)

I’ve been using Lending Club for a little over 2 years now and It’s been interesting. Not something to rely on by any means but it can be an interesting way to add diversity. I started with about 5k investment and now have 318 current notes on the system. Every month or so I add about 10-20 more from the cash of previous payments. That’s the only hassle, finding the right loans quite frequently. I have over $100 right now in idle cash because I can’t find any worthwhile loans to fund at the moment. Here is my situation presently:

You can see I’ve already lost over $500. A lot of that was with my initial investment notes where I had no rules set on which loans to fund. I’m a lot pickier now. I also had put more then the minimum amount which I never do anymore. I’ve earned about $1.4k in interest so I’m still above the game. Again nothing to retire on but it’s been more of a test then anything.

My numbers match Jazar. I put in 3k for my test though I hand picked and rarely put more than $100 in any. I looked for mostly A’s with a few B’s. I relied on verified income, long term work history, and debt ratio when picking my loans. I think in the future I will not spend as much time selecting. As long as you keep to A’s and B’s you’ll keep your risk down, the return will hover around 8-11%.

I had a total of $36 charged off by the end of my test of $3000. Based on that I’m increasing my investment.

@mouselock defaulted loan is non-zero value. You should be able to sell it to collectors at 10-15c on the dollar.

Who are these As and why won’t they get a loan from a bank? Are all of these unsecured loans, or are there assets covering some of it?

They are unsecured.

Banks lend unsecured at 4-20%; I assume that anyone who can get sub 10% from a bank would do so. So why are you seeing only 8% return on sub-prime borrowers?

To compare - you can get about 5% from corporate bonds, and these are a lot more secure.

Yeah, that’s a fair point. Obviously it’s not just a philanthropic impulse, or I’d be donating money instead of loaning it. Maybe I’m just putting too much stock in what I hear in the media about the legitimate small business being unable to get a loan, or the upstanding citizen who had to leave an underwater mortgage and can’t get credit any more.

That sounds like a reasonable return. Beats the hell out of a CD these days. Maybe I’ll do like Ender and Jazar and try something small for a year. At the very least it should be entertaining.

So this is suddenly starting to sound very good to me for my mad investment money (the stuff I try to pick winners with.) Can I get some horror stories to offset all these wonderful 5% and 10% stories?