Thoughts on peer to peer lending

[mikecan]

I was looking up ways to earn passive income and peer to peer lending came up as an option. Does anyone have any experience with this? For example, Lending Club states that returns by grades A-C have been about 4.5 to 8.25%

I would appreciate any insight if this is a viable option to earn some decent returns.

Thank you.

 

[REWahoo]

Check out these threads and search for others:

http://www.early-retirement.org/forums/f28/peer-to-peer-lending-63294.html
http://www.early-retirement.org/forums/f28/peer-2-peer-p2p-lending-70235.html
http://www.early-retirement.org/forums/f28/peer-to-peer-lending-51708.html

I wouldn't touch it even it I used your 10 ft pole...

 

[brewer12345]

Yep. I would not **** her with your ****.

 

[Derslickmeister]

Run away, turn and run as fast as you can...

 

[JDARNELL]

I have been dabbling in it for about 17 months. I have purchased a total of 246 notes and of those 15 have been paid off early, 3 charged off, and 3 that are late. Of those 3 I expect to lose 2 of them and salvage 1 on the trading platform. My adjusted IRR taking the charged off ones out is 13.9%. Most notes are C, D, and a few E. I took CFBs screen as a starting point and have modified. One reason my IRR is lower is that for a while I used an automated screening tool to purchase and I really made it conservative with C notes as I didn't look at it hardly at all. I am back to more actively purchasing so I go after a lot of D notes. Good notes will be fully funded in 2 min or less.

One of the major rules that I enacted comes from my interpretation of the Richest Man in Babylon. "Don't break the back of the borrower or their problems will become yours. So DTI has to be less than 15% and the amount of the loan payment can be no more than 10% of their monthly income." I also have moved off of renters. The latter probably not a big deal but I just made that decision.

Of my notes there has been only 1 that I could not find a correlation to that was written off. I thought I missed something in my logic however I chalk it up to a statistical outlier. The others could have been caught if I was watching more. However it was not worth my effort during that time period.

JDARNELL

 

[pb4uski]

For REWahoo, brewer and Derslickmeister, is your disdain for these from personal experience or just in principle?

I've had doing a bit of P2P as a part of my high-yield fixed income allocation in the back of my mind for a while but haven't yet had the courage or initiative to pull the trigger. But if JDarnell's experience is representative, I would find it appealing. At first until I have more experience it would be 1% of total nestegg at most.

 

[REWahoo]

The principal reason for my disdain is based on principle. No free lunch, high return = high risk, etc.

Not to mention that it appears to be a lot of work to research and manage.

 

[ERD50]

For REWahoo, brewer and Derslickmeister, is your disdain for these from personal experience or just in principle? ...

I'm none of the above, but when someone effectively asks:

"Do you want to make unsecured loans to complete strangers over the internet, who are looking for a loan rate lower than they can get through other means?"

I've got to think "Now what could go wrong with this?"

-ERD50

 

[Fishingmn]

I've been doing LC since September - results below. All are $25 notes. Still pretty early so I'm sure my return will drop off over time but still hoping for around 8-9%. It does take some time to buy notes but I think it's kind of an interesting process. There were hardly any notes to choose from in Jan/Feb but now there are 1,000+ at all times so finding ones that match my criteria is suddenly way easier.

I should note that I am not going to add additional money at this time as I do agree that this is pretty high risk and the results will likely tank if we have another recession. I'm doing it more out of interest to see how it goes than as a primary part of my portfolio.

 

[steelyman]

I've made loans to people I know, using the "Applicable Federal Rate" and was always paid back. They'd cover me too if I needed it.

 

[Texas Proud]

This is just my opinion, but spending ANY time looking to lend $25 to someone is a waste of my time...


Even if I were to earn 15%.... that is not enough to pay for the time commitment that it seems people talk about... I would love to see what the returns are for some of these people when they add a cost of time component to it... IOW, if you say $30 per hour deduction on your earnings, what is your return

 

[springnr]

I've made loans to people I know, using the "Applicable Federal Rate" and was always paid back. They'd cover me too if I needed it.

=
"Peer to Peer", see quote for definition

 

[Closet_Gamer]

I've always been intrigued but I feel like I'm at a substantial disadvantage to big lenders in the same way that as an individual stock buyer I'm at a substantial disadvantage to big Wall Street firms.

Big lenders are in the business of lending and have legions of people who can optimize interest to credit score and other factors. They also have a much lower cost of capital than I do. This is similar to Wall Street firms…they have legions of researchers and a lower cost of capital. Just as I'm very unlikely to outsmart JP Morgan on the value of GE stock, I'm unlikely to outsmart Bank of America on setting the right risk-adjusted loan price to an individual end user.

So I've always been intrigued, I just can't figure out why I'm better off doing P2P than say buying an index of junk bonds or a preferred stock ETF?

 

[JDARNELL]

This is just my opinion, but spending ANY time looking to lend $25 to someone is a waste of my time...


Even if I were to earn 15%.... that is not enough to pay for the time commitment that it seems people talk about... I would love to see what the returns are for some of these people when they add a cost of time component to it... IOW, if you say $30 per hour deduction on your earnings, what is your return

You could automate it, invest more on each note, or use their service to reduce time commitment. This is one reason that I started using an automation tool and more conservative notes. I am now in a situation that allows me to multi task while being captive at an activity. So what I need to do is set my alarms to be on at the times new notes are posted and run my screens. I have about a 3 min window to make a decision and purchase. At most I could get 3 notes during that time with what I am looking at. BTW I am not going to change my routine to make sure I am there.

I have another portfolio tool that quickly allows me to see changes in a note performance, if I take the time to check on it. Again not sure I would change my routine that much to make it happen.

I think you have to accept some losses or spend a lot of time trying to squeeze every bit out of it.

Its an interesting hobby and I enjoy trying to figure out strategies.

JDARNELL

 

[Fishingmn]

JDarnell is right - you can also just set up filters once and then bring up all the notes that match your criteria. It would take me 5 minutes to find $500-1000 worth of notes I like, even at $25/note.

I certainly understand if you don't like the concept or risk but saying the reason for doing it is because of time commitment shouldn't be one of them. Heck, I'm sure all of us waste way more time surfing the internet on useless sites every single day.

 

[phil1ben]

I applaud Jdarnell and Fishingman. All of us have different interests. I spend some time buying my own individual bonds and stocks--not just because I feel it is better for me personally but because I find it personally interesting. The added advantage is the return I realize. Some have responded that they do not "have the time" to do the research.

It appears that two on here have the inclination to invest a small amount of money this way. Rather than saying one does not have the time for it, wouldn't it be more accurate and respectful to simply say that you do not have the interest or inclination. Ben Franklin said, "if you want to get something done, ask a busy person".

However, you want to slice the issue, investing does involve risk and when one invests money (as opposed to an FDIC insured CD or similar vehicle) one is undertaking risk. Because of personal interest jdarnell and Fishingman have with knowledge determined that they want to place a very small amount of their portfolio at greater risk.

I also find the concept interesting.

 

[brewer12345]

I'm none of the above, but when someone effectively asks:

"Do you want to make unsecured loans to complete strangers over the internet, who are looking for a loan rate lower than they can get through other means?"

I've got to think "Now what could go wrong with this?"

-ERD50

+1.

Then add in that this is being done through a couple of flaky start-ups that could blow up and leave the whole investment in a huge mess. Oh, and the two platforms have apparently started letting institutional investors (who should know better) cherry pick the loans.

Yeah, sign me up... Not.

 

[Derslickmeister]

+1.

Then add in that this is being done through a couple of flaky start-ups that could blow up and leave the whole investment in a huge mess. Oh, and the two platforms have apparently started letting institutional investors (who should know better) cherry pick the loans.

Yeah, sign me up... Not.

That is my main issue with this as well. Big Money has moved in and secured all the low risk, higher retun loans. All the little folks (like us) are likely to get are the scraps and the ones they won't touch IMHO.

 

[gauss]

Check to make sure that the P2P platform that you are interested operates in your state before you get too far into this. Many states are excluded.

-gauss

 

[steelyman]

=
"Peer to Peer", see quote for definition

I just saw this.

My goal is not to make money, but to help through the rough patches. It's awkward for people to have to ask, and I'm sensitive to that. It helps to have some official-looking government table to agree on a rate.

 

[springnr]

Yep, I was just pointing out, in that scenario one would be dealing with their actual "peers".

I'm waiting on P2P v2 with the enhanced kneecap busting option, to improve risk factor.
:>) Not

 

[JDARNELL]

That is my main issue with this as well. Big Money has moved in and secured all the low risk, higher retun loans. All the little folks (like us) are likely to get are the scraps and the ones they won't touch IMHO.

Peer to Peer Lending is an interesting topic. If you go back and look at the other threads on the subject there sure are a lot of opinions however i think its like anything else. A lot of folks set on the sidelines and talk smack. If you are limping into ER with a small margin I don't think I would even try it. However if its only a few percent of your portfolio and you have more than you will ever need probably not a big deal.

No doubt some notes are offered to "Big Money" however right now there seems plenty to go around. It was not that way a few months ago. There are plenty of examples of people that are doing very well and of course others that aren't making it. I suspect is has to do with the level of research and knowledge over time. I think the quality of notes I am buying now are better than what I was buying a few months ago. I chalk that up to having a better grasp of what I am purchasing and my ability to take the emotion out of the purchases. I could have just given them x amount and have them pick the notes. Having seem some of the notes automatically selected in others portfolios there are several notes that I would have never picked. I made the decision that I was going to ramp on a certain timeline and scale knowing that in the short run I ran the risk of greater losses do to lack of diversification. I also recognize that as notes become more seasoned defaults rise. So there is a certain level of churning that probably needs to occur to weed the garden. I hope at some point they implement an option on their trading platform that will allow you to sell your entire portfolio at one time. It would be another quick exit strategy.

 

[Derslickmeister]

Peer to Peer Lending is an interesting topic. If you go back and look at the other threads on the subject there sure are a lot of opinions however i think its like anything else. A lot of folks set on the sidelines and talk smack. If you are limping into ER with a small margin I don't think I would even try it. However if its only a few percent of your portfolio and you have more than you will ever need probably not a big deal.

Yep, that was my reasoning (small margins currently). I could see it as a hobby or pastime that could make for interesting conversation, I just don't think this will be a part of many's mainstream portfolios anytime soon. Especially for risk adverse investors like me.