Is Peer To Peer Lending Coming Into It’s Own?
For several years now, the peer-to-peer lending has been gaining traction as a valid way to borrow money without going through a bank via social lending sides like Lending Club (aff) and Prosper. It’s been a great boon for borrowers and has received wide mainstream media coverage, as related in the following video.
But Is It Worth It For Lenders?
Some bloggers have begun including social lending in their alternative income reports and for every borrower, there has to be at least one (if not many) lenders, so obviously the lending interest is there. But is it worth it? After all, there may well be a reason banks are refusing to loan to many of these people.
As it turns out, peer-to-peer lending has yielded decent returns so long as you don’t get greedy. Jonathan at My Money Blog was diligent enough to put together some aggregate return numbers for Prosper lenders in a previous post. The data may be a year or two old, but should still be more or less representative. Keep in mind that with the credit crisis, default numbers are probably a bit higher across the board, but especially among borrowers with lower credit scores. Here are some important points to note:
- Loans made to borrowers with at least a 600+ credit score returned in the 9-10% range on an average annual basis. Not bad.
- Loans made to borrowers with less than a 600 credit score lost a significant amount of money.
- Defaults peaked at 10.03% for borrowers with a 600+ credit score while defaults for those with poorer credit reached an astonishing 31.34%
What Does This Tell Us?
It tells us sub-prime lender executives weren’t alone in their stupidity: the average Joe fared no better. In fact, most of them fared far, far worse. Sure, they may have charged in excess of 30% for loans to uncreditworthy borrowers, but it turns out that wasn’t nearly high enough.
Lending to prime borrowers, however, turned out to be a prudent move. A 9-10% return from prime borrowers with good credit is probably a risk worth taking since as an asset class, peer to peer lending is likely to be uncorrelated with other asset classes. Based on these numbers, I would suggest lending only to prime borrowers.
Of the two major social lending sites, I favor Lending Club (aff) over Prosper mainly due to the fact that Lending Club only accepts prime borrowers whereas Prosper will accept almost anybody, it seems. Of course, you could choose to lend only to prime borrowers on Prosper but the temptation of those 35% sub-prime loans may be too great, at least for me. I intend to start lending on Lending Club in the near future once I settle into a new job and my finances stabilize. As credit because harder and harder to obtain even for borrowers with sterling credit, I think an opportunity for significant gains is opening up for risk-tolerant peer-to-peer lenders with excess cash to invest. After all, many of these borrowers will have nowhere else to go.
Thanks for the awesome write up! Let me know how your lending experience goes once you are up and going.
DK
Product Ambassador
LendingClub.com
It may look good when you look at the last few years, but I think the future is going to be much different.
The question is what are these people lending money for?
If its to pay their mortgage, then they will eventually need to downsize because they are living beyond their means. If its to pay for consumer goods, then they need stop purchasing consumer goods that they cannot afford. Consumer lending no longer makes sense. Saving your money to purchase consumer goods is the model of the future.
Sorry for the tuff love, but I don’t think peer-to-peer lending has a future.
I have yet to read of any lender who has netted enough from these sites to justify the risk. The borrowers in these programs collectively comprisee the worst candidates for loans. They are also prime candidates for unemployment. Who wants to target them in this economy?
I am currently lending from Lending Club and have been very pleased with the experience. I have a rather large loan from them $13,150.00 and it has been a way for me to consolidate credit card debt at a much better rate. As far as being the worse candidates, I looked at the default rate for the last 120 days on lending club and it was around 2%. That is not that high considering current mortgage default rates have been hovering around 1% and these are unsecured loans.
Thanks for linking to my post. I can say that I have been lending using Prosper for 1 year now and have mixed thoughts. About a month into my lending experience, I decided to only lend to individuals trying to consolidate their credit card debt - just as Debt Stricken commented. I think there will be a place for peer to peer lending but it is hard to tell how big it will become given the current economic situation.
High Rates equal High Risk - loaning to anyone you can’t find easily is a risky business, that is why community banks and credit unions even exist. There are options….ZimpleMoney’s web product enables people or organizations to make and manage direct p-2-p loans. ZimpleMoney is focused on “naturally” occurring networks like family, friends, churches, schools, organizations, non-profits, charities and foundations. ZimpleMoney sends bills, receive and distribute payments, post to loan ledgers, sends late notices, sends alerts as to the status of billing and collection process and provides tax records. We also provide a digital document management tool to upload files. Take a look at our site at http://www.ZimpleMoney.com Zimpley, Steve Rabago, ZEO ZimpleMoney
if you’re interested in learning more and posing questions directly to Lending Club’s CEO/Founder check out MIT/Stanford’s VLAB event on January 20th. For more information go to:
http://www.vlab.org/article.html?aid=251
Renaud and Lending Club are the feature speaker/company.
If anything, it appears Social Lending in general more acceptance. I found it as an idea on change.org to be presented to Obama on inauguration day:
http://www.change.org/ideas/view/solving_the_credit_crisis_from_the_bottom_up