Peer to Peer Lending

[bizlady]

don't mean to hijack this post, but this fits in.

There is an organization called Kiva that loans money to mostly individuals in third world countries. It works on the same principal as above--many put up money to help an individual or group of individuals. No interest is earned, but you help others survive and provide for themselves. My loans have been paid off 100% ove the last couple years-though some a little slowly. When one is paid off, I invest I another. Anyway, if interested, it is Kiva.org

 

[Martha]

I was really skeptical of Prosper when it was first posted about back in 2006. I still think it is a bad investment and iffy on several legal fronts. http://www.early-retirement.org/forums/f28/interesting-new-loan-site-19540.html

That said, I am intrigued by the poster that used Prosper to pay off his high rate credit cards with a lower rate loan. Excellent idea. Good for borrowers, not so good for lenders.

 

[devans0]

This has the smell of mini-boom to me. Early adopters get paid better, but as scammers catch on to the "free" money, default rates will jump is my prediction. I commend the credit card payer on reducing his debt.

Confession time! A number of years ago, DW ran up $50000 in credit card debt and juggled balances with teaser rates on cards such that we paid nearly no interest and paid off the cards. It scared the poop out of me when I found out what she did. It could have ended our marriage. I panicked and negotiated lower rates with the card companies, but cashing in savings and extreme LBYM paid everything off quickly. The happy ending is FI. DW received her degree, as did our daughter as did I, all at the same time and the increase in our earnings repaid that debt many times over.

 

[Onward]

Prosper just changed the game significantly by switching to pre-calculated interest rates, rather than accepting competing bids from lenders. This is similar to what Lending Club has always done.

Here is how Lending Club advertises returns to investors over the past three years:

For more info: Compare Returns - Lending Club

Note that LC has a lot to gain from trumpeting high returns. Also interesting is that there are multiple LC lenders with more than $1m in loans made.

I lent on Prosper fairly extensively from 2006-10 and ended up with a small (5% total) loss. I'm trying LC now, more as a hobby than a serious investment. But I'm trying to keep an open mind.

 

[easysurfer]

I'm going to opposite route.

I started investing in Lending Club about a couple of years ago. It seemed really interesting and fun. I'd read the stories of the people asking for a loan. But lately, I've been just seeing it as another investment and too time consuming for my interets -- barely skimming over their applications and decided to no longer invest and just cash out when the last of my loans are due. (Out of almost 100 loans, I've had three default and a few that are currently late).

But if I was on the other end and looking for a loan, I'd definitely consider Lending Club.

 

[Westernskies]

Asking strangers on the internet for advice about lending money to strangers on the internet seems somewhat strange to me.

 

[ERD50]

I'd much rather use leverage to boost the potential return (and risk) of that 7.28% Corp Bond Fund Index than loan unsecured money to internet strangers.

To put it less analytically - I think these things are insane!

-ERD50

 

[easysurfer]

To be a bit of a devil's advocate, we also seek out opinions of or offer opinions to total strangers on a bulletin board about ER

I remember back in the days of w*rk. For my job I interacted with others accross the country. It was a bit odd, that I some folks I had talked to for over a decade and never saw their face. It was also odd, when rolling over my pension/401K to my current IRA. The voice on the other line seemed friendly enough, yet my life savings being processed by a complete stranger.

 

[Onward]

To put it less analytically - I think these things are insane!

Appreciate your frankness , but I wouldn't call Lending Club insane. It's just another investment vehicle with certain risks and rewards. The question for investors is whether the rewards justify the risks, and so far it looks like they might.

Keep in mind that all LC borrowers are prime (FICO 660+) borrowers with a debt-to-income ratio (excluding mortgage) below 25%. LC approves only 10% of loan requests, and the loans are relatively small amounts of money (always under $25k and often under $10k). Overall default rate has been 3%. Loans are graded for risk, and you have the option of investing in only the highest-grade (lowest risk) loans, which have a much lower historical default rate.

I don't want to sound like a LC commercial, though. Unsecured loans are not ideal, and my experiment with Prosper ended with a loss.

I'm interested in questions like:

1. How does the performance of LC loans correlate with more traditional assets like stocks and bonds?

2. How might LC loans be used to improve/stabilize the returns of a more traditional portfolio?

3. How can you take a passive/indexing approach to investing in LC loans, so that you are guaranteed the "market" return (9.68% to date, after defaults and fees, if you trust LC's numbers)? Is it necessary to invest in every single loan?

You get the idea.