Peer to Peer Lending

[jpg7n16]

Thoughts?

I'm pretty much against people having debt, so I think I might feel like a hypocrite if I started lending them my money. But then it could be a form of lower interest than they have which would help them get out of debt faster. So I'm kinda torn on the whole P2P lending idea.

So I would like to hear what others thoughts on P2P lending as a whole. Thoughts? Pros? Cons?


I am not interested in comparing site A to site B in this thread.

So please don't post about why Proper is awesome, or Kiva, etc. - if you like what they do, please discuss their system ONLY - not their site. Thanks.

[disneysteve]

I like the idea. Although we often speak of the types of people who are in debt due to their own bad habits, there are lots of people who fell into debt due to a job loss, illness, medical bills, etc. that were really not their fault. Now they are stuck paying 20 or 30% interest on credit cards. They may have good incomes now and working to get out of debt but it is tough to make progress with those kinds of rates. If they can borrow at a P2P site for 5 or 6 or 8%, they can dig out a lot faster.

I actually tried to sign up at Prosper but it isn't available in my state. I like how those sites let you evaluate risk yourself or do it for you and let you spread small amounts around to multiple lenders to help reduce your default risk. Better to lend $50 each to 10 people than $500 to 1 person.

Obviously, it would be better if everyone was debt-free, but that just isn't the reality. I think P2P sites can help people get there quicker.

[jpg7n16]

I saw that thread DS That's actually what got me thinking about this one!

ok- so you like the interest rate reduction side of things. Do most sites use credit scores? Thier own credit rating system? Or post the info for you to determine for yourself? (I tend to disagree with FICO about what makes someone creditworthy)

I assume the P2P system would let you choose not to lend to people who just want some extra cash?

How would you know if they use the money to actually pay down debt, or to go double down on 11? (Blackjack)

[disneysteve]

Originally Posted by jpg7n16

Do most sites use credit scores? Thier own credit rating system? Or post the info for you to determine for yourself? (I tend to disagree with FICO about what makes someone creditworthy)

I assume the P2P system would let you choose not to lend to people who just want some extra cash?

How would you know if they use the money to actually pay down debt, or to go double down on 11? (Blackjack)

I think they use FICO or something similar. People requesting loans also supply income info and their intent for the money. Could they fabricate everything? Possibly. That's why you should spread your money around among many borrowers. I don't know all the details since I'm not eligible to participate (at least not with Prosper).

And what's wrong with doubling down on 11? As long as the dealer isn't showing an ace, that's exactly what you should do.

[jIM_Ohio]

If I expect 6% returns on my bond funds, how much return can I expect from peer to peer lending?
Might be a good way to use a portion of emergency fund if its a large EF (like 24 months expenses).

[jpg7n16]

DS - I'd rather see income statements PLUS balance sheets. (Preferrably from the past 3+ years) As the credit score calcs ignore assets.

And nothing at all is wrong with doubling 11 - but I want more than 10% on my money for such a great situation!


Jim- from what I've seen, they'd quote around 10% - but then you'd need to likely factor in some writeoffs which would bring that return down. My guess is their marketing will quote 10%+ and you'll get a few % less than that.

But since I don't know exactly how it all works, that's just my best guess.

[jpg7n16]

But you guys don't think it encourages debt a bit too much??

That's my main beef with some of the international ones I've looked at. It seems to be that they think you can't get ahead w/o debt, which is why these poor people overseas need to borrow our money.

Some of the scenarios, I just don't see how we'd ever get paid back. Like "I need money for food" - great, I'd love to help, but won't you need food again after you eat? Then you're just starving and in debt - and it's my fault.

I'm not sure I could do that.

[jIM_Ohio]

Originally Posted by jpg7n16

But you guys don't think it encourages debt a bit too much??

That's my main beef with some of the international ones I've looked at. It seems to be that they think you can't get ahead w/o debt, which is why these poor people overseas need to borrow our money.

Some of the scenarios, I just don't see how we'd ever get paid back. Like "I need money for food" - great, I'd love to help, but won't you need food again after you eat? Then you're just starving and in debt - and it's my fault.

I'm not sure I could do that.

Regardless of what it encourages, if it helps my bottom line, I would do it.

[kork13]

Originally Posted by jIM_Ohio

Regardless of what it encourages, if it helps my bottom line, I would do it.

Gordon? Gordon Gekko, is that you??


I'm also interested in P2P lending, though I've never really looked too closely into it. I figure at some point in the future I'll try it out. Yes, it sort of encourages debt, but most people won't be caught into the wiles of massive debt with a <$500 loan. My understanding is that alot of the people using P2P lending is for short-term, carry-over stuff.

[disneysteve]

Originally Posted by jpg7n16

But you guys don't think it encourages debt a bit too much??

No. When I was researching Prosper, the vast majority of the requests were from people who already had debt and were looking for a better way to get it paid off by lowering their interest rates.

Some of the scenarios, I just don't see how we'd ever get paid back. Like "I need money for food" - great, I'd love to help, but won't you need food again after you eat?

Then you choose not to fund those loan requests. For example, I saw requests from people who wanted money to buy a motorcycle or to take a vacation. Sorry, that's not a valid reason to go into debt in my mind. Had I been able to participate, I would have chosen the requests from folks with 30% credit cards who were getting killed in interest charges and were looking to refinance at 10%.

Originally Posted by jIM_Ohio

Regardless of what it encourages, if it helps my bottom line, I would do it.

As long as it is legal, I'd agree. The folks coming to these sites to request funds are coming willingly. I see nothing wrong with helping them out. It isn't like you'd be charging payday lender rates of 1,000% interest.

[jpg7n16]

Ok some of that makes sense, only lend to those who are reducing interest rates to get out of debt.

What type of recourse do they have against someone who defaults on a P2P loan? Like the same as a bank or credit card with unsecured debt? I assume the websites would have collectors and whatnot.

I also assume the website sets the interest rate. Do you have any control over that? Like can you say "I'll lend to you at 12%" and they accept/decline?


Thanks for the help BTW.

[Slug]

Originally Posted by jpg7n16

Ok some of that makes sense, only lend to those who are reducing interest rates to get out of debt.

What type of recourse do they have against someone who defaults on a P2P loan? Like the same as a bank or credit card with unsecured debt? I assume the websites would have collectors and whatnot.

I also assume the website sets the interest rate. Do you have any control over that? Like can you say "I'll lend to you at 12%" and they accept/decline?

First my disclaimer that this is based on my Prosper lending experience.

You have basically no recourse on bad loans. Prosper forbids you from contacting delinquent borrowers and will ban you if you do it and they report you. Prosper sends the loan to collections and writes it off after about 120 days. In most cases if a loan goes late on Prosper from a borrower lower than a B rating on their site, you can kiss your money goodbye. I'm no idiot, and even I got sucked into lots of bad loans as you see on my stats.

The other thing you need to know is that the default rates listed on Prosper have been massaged so know that this link is displaying the data in its best light. As you can see, over 20% of loans on the site were defaults. This is of course a much higher rate than anyone was expecting but scammers and deadbeat abound on the site creating multiple accounts and very similar sounding loans. You have to do A LOT of due diligence. I have not made a loan since 2008 and would be reticent to ever do it again. The only reason I'm escaping with my shirt is because I loaned a friend a huge portion of my portfolio $, and he is good for it and pays on time (and I can go to his house with a bat if he isn't :-)

In terms of interest rates, you pick a loan you like, you bid an interest rate and an amount. It works like Ebay. If more people come after you and bid more $ at a lower rate, you can get bounced out of the loan. The final interest rate is the highest rate left among the bidders on the loans at the close of bidding. Every lender gets that rate. So, be careful about bidding the lowest rate you would accept on most loans.

Mostly, just don't do it with anything except play money.

I'm waiting on Microventures to start up right now. That's more a VC focused opportunity to fund business ideas. It's too early to have an opinion about, but it could be interesting.

Good luck.

[ferriwinkle]

Slug, I see from your stats that your average borrower has an "A" rating, I loan to only D or HR (high risk) borrowers. I have funded 14 different borrowers over the last year, and 4 have paid their balance off, and none have paid late. I am expecting to have issues at some point, but their is risk, but I trade that for my 26% average interest rate. I am not suggesting that anyone follow what I'm doing, but I see it as an investment, and i can be riskier, as I'm only 30 years old.

[Broken Arrow]

I was waiting for you to respond, slug. Your sentiment is basically how I feel about most P2Ps. At least with stocks and bonds, you can look a company's financials and get an idea of whether they are liquid enough to pay you. True that such numbers can also be massaged into the best light possible, but that I think that's still better than only seeing a borrower's credit rating.

Also, "diversifying" your funds with several borrowers does not exactly mitigate risk any more than CDOs and SIVs have mitigated risk in subprime mortgages. If your pool of borrowers have a low collective rating, then it's still risky as a whole. This isn't how diversification is suppose to work, but many still buy into this line of thinking.

[tulog]

How does Prosper get compensated?

[tulog]

I believe this whole operation is extremely unattractive from the perspective of being an investor for the following reasons:


1. No guarantees on return of capital. If a loan defaults, it is probable that no collection can be made.

2. No ability to enforce a defaulted loan through the legal system. In the real world, if you make a private loan to an individual and they default, you can take them to court, show evidence of the contractual debt, and get a judgment that is good for 10 years and can be renewed. (In California for example, you can renew a judgment after 5-10 years, each time you can add the accumulated interest at a 10% annual rate, plus any costs of collection to the judgment balance. The new judgment balances then accrues interest on this higher balance). This is a very strong incentive for a debtor to pay the judgment in full before interest accrues.

At some point you will collect the amount owed you. Prosper forbids you from having any contact whatsoever with a defaulted debtor. This is a huge red flag, and a very big investment risk.

3. The market return is going to be 1% lower than private market lending for the same risk borrowers. This is because Prosper takes an entire 1% as a fee.

I would stay far far away from this type of investment.

[tulog]

Originally Posted by Broken Arrow

I was waiting for you to respond, slug. Your sentiment is basically how I feel about most P2Ps. At least with stocks and bonds, you can look a company's financials and get an idea of whether they are liquid enough to pay you. True that such numbers can also be massaged into the best light possible, but that I think that's still better than only seeing a borrower's credit rating.

Also, "diversifying" your funds with several borrowers does not exactly mitigate risk any more than CDOs and SIVs have mitigated risk in subprime mortgages. If your pool of borrowers have a low collective rating, then it's still risky as a whole. This isn't how diversification is suppose to work, but many still buy into this line of thinking.

Agree entirely. This is extremely risky. In my opinion, even the borrower's credit data is not a useful statistic. This is because you do not know the name of the borrower, where they live, or how they obtained the credit rating that they supposedly have. You have no evidence, other than the rating was calculated in some unknown, proprietary method by Prosper. Since you do not know who the borrower is, what their name is, or their financial condition, you will not even know if their financial circumstances change during the 36 month loan period - for example, if they declare bankruptcy you would not even know!

[tulog]

Originally Posted by Slug

...You have basically no recourse on bad loans. Prosper forbids you from contacting delinquent borrowers and will ban you if you do it and they report you...

Even if you wanted to contact a delinquent borrower, how would you accomplish that? You don't have their name or address, or any other means of identifying them. Unless you already knew them before you made the loan, which is unlikely.

Even if you knew who they were, you would have no legal resource or leverage with a delinquent borrower, since your note is made only between you and Prosper's intermediary bank.

[gambler2075]

I think it is completely insane to loan money to some unknown person on the internet who may not even be who they say... and to have no recourse to collect on the debt? wow, I guess there is a sucker born every minute.

Here's who you could be lending to...

Prosper Lending Review: A Prosper scam: The story of Jessica Wolcott

g

[ea1776]

Originally Posted by tulog

How does Prosper get compensated?

Good question. I'm not sure but my guess would be one or both of the following:

1. Borrower and/or lender pay a small fee for each loan.
2. Borrower pays a slightly higher rate than the return the lender gets, and Prosper takes the "juice".