Online Lending

[easysurfer]

Hi

I read this article in Kiplinger on online lending:
Risks and Rewards of Online Lending - Kiplinger.com

I decided to go ahead and dabble in it.

The online site I joined is The Lending Club (Personal Loans & Investing with Peer Lending - Lending Club), which was not listed in the article.

So far, I've only invested $50 (invested in two separate $25 notes, as lending club callss it). The $50 was free for joining from a referal link.

Anyone else ever try online lending? with good or bad results?

Thx

[dshibb]

I know the CEO. Yes its very straightforward. Take the interest rate subtract LC fee, subtract default rate(I hope you diversify) and whats left is your profit. You'll do fine. The problem can be the same as the bond market. 3 year loan and fixed interest + rising interest rate environment = can be problem.

[easysurfer]

Yes, I'm going to diversify and start out really slow.

Along with the initial $50, I'm going to use about another $770 for the time being. Why the $770? Because around $370 of it was chunk change in my 'piggy bank' I had when used to work and the other $400 is from my cashback bonus from Discover card. This way, it feels like I'm dabbling with 'house money'.

I figure with about $800 that would allow me to diversify in about 30 separate $25 loans notes.

Thanks for your reply.

[nickel]

I just waded in with $500 worth of "low risk" $25 notes, and $500 worth of "high risk" $25 notes. I'm particularly curious to see how Lending Club does when it comes to pricing risk.

[dshibb]

They have a formula on their website(its in table form I believe) that you can look up. It is pretty accurate in terms of looking at historical default rates.

In this environment I would look at it as more of a fun hobby than anything else.

[LeBlanc]

Easysurfer,
It's been 4 months now that you've been with Lending Club...what are your impressions so far?

[easysurfer]

Quote:

Originally Posted by LeBlanc Easysurfer, It's been 4 months now that you've been with Lending Club...what are your impressions so far?

Hi LeBlanc,

I'm still a fan of using the Lending Club. Their site is very intuitive to use and what is nice is they easily show my net annualized return. So far, I've invested a total of $935 with a net annualized return of 10.59%. I have a total of 37 notes at $25 each note. There hasn't been a single default on payments to me (knock on wood).

They even have a free trial, so if you know someone who uses Lending Club, they can invite you to join and have $25 credit to join (note, not all states are supported).

I think the one drawback is, if one decides to quit and cash out, one has
to sell (trade) the notes they own which haven't paid back the interest and principle -- probably at a lost. But I plan on sticking with this and not trade but when I have enough notes, just collect on the return of principal and interest.


Remember, I've only used piggybank and Discover Card cash back bonus money to invest.

[Ronnieboy]

I've tested the water and invested, I only have a few hundred dollars in it though. I have been in about 3 months, no defaults, and have a $100 loan, $50 and a few $25's. Average annual return is almost 12%.
Haven't tried to get any money out though....

[LeBlanc]

When you say "get the money out" are you essentially seeing unrealized returns until you actually withdraw the money? Is there an additional fee to withdraw if all notes have been satisfied?

[Ronnieboy]

Quote:

Originally Posted by LeBlanc When you say "get the money out" are you essentially seeing unrealized returns until you actually withdraw the money? Is there an additional fee to withdraw if all notes have been satisfied?

Every month when a payment is made, I get my portion of the interest and the principal. Technically I can ACH withdrawal this accumulated interest and principal at anytime. I just haven't done so, I say get the money out b/c with my luck Lending Club will disappear before I take it out
Due to the small amount I have in there, a $25 'investment' at 12%ish will only return $0.60 in principal and $0.23 in interest per month. I can either withdrawal that and take my $0.85 or keep it in there and reinvest when I hit another $25.
In theory, you can also sign up for the $25 to $50 bonus and immediately withdrawal that amount instead of investing it.

[clifp]

This thread inspired me to go back and look at my Prosper.com account.
I signed up for Prosper.com in Aug 2006 which is the granddaddy of peer to peer lending. I transferred $2500 into it over a couple of months. Between Aug 2006 and March 2007 I funded 37 loans, the 2007 loans were funded from interest and principal from the earlier loan.. The average interest rate was 17.3% and my average credit score was C+ (scale AA to E)

Of the 37 loans at least 16 and possible 2 more defaulted. Of the $2500 I invested I've redeposited $1920 into my checking account over the last 2.5 years. I have an additional $105 in outstanding loans. So realistically I am going loss ~20% of my $2,500 investment. Which is better than the stock market during that time period but hardly a path for riches.

The lending club looks similar to Prosper with the major difference that they set the borrowers rate rather than using an Ebay like auction system like Prosper does. I am not sure if this is better or worse but probably a bit safer.

A couple of points from my perspective. I found that people with poor credit score were not much more likely to default than those with good scores. Prosper used Experian credit rates. However, people with good credit score were considerably less profitable. In particular folks with good credit who were using a non conventional source like Lending Club or Prosper were typically borrowing money at the 10-12%. They were often able to borrow money cheaper in 6 to 12 months (although obviously credit situation has changed). So they'd repay the loan, resulting in a small profit. If they continued to have financial trouble they'd default on the loan, and the collection would get its typical $.10 on the dollar from them. So for the most part, you made small profit or took a big loss.

In contrast, the folks with poor credit would typical borrow money at ~20% which while outrageous is cheaper than credit card companies charge, once you've missed a payment. They do would often default, but since these defaults were spread out over 3 years load, I'd sometimes make small profit even when they defaulted.

Finally, in addition to the risk of individuals not paying you off the other significant risk is that something happens to the Lending Club. The prospectus say the Lending Club has 28 employees and it is backed by a couple of Venture Capital funds. I am almost positive the companies is losing money, so the other question you have to ask yourself is what happens to my loans if they company goes out of business.

[clifp]

I thought I'd bump this old thread because some of you searching for higher interest rates might be tempted to try your hand on the Peer to Peer lending which appears to be getting some press.

In a word, Don't.

My final Prosper loan paid off the other day, and I have now been able to calculate the cost of my experiment in a lending to folks on the internet. Of the $2,500 I loaned $2006 was repaid leaving me with a loss of $494 or a bit less than 20% over 3.5 years.

This appears to be exactly in line with the average loss of -7.2% per year reported by my fellow lenders. It is worse than the 3% loss of Total Stock Market or the 17% gain from the same investment in Vanguard junk bond.

If anyone wants to read more detail Slate published an excellent article a few months ago.

A pithier summary was posted on a Motley Fool.
"I think what Prosper shows is that those evil credit card companies charging 20-30% interest maybe aren't making as much as we thought and are probably charging fair interest rates given the risk they assume."

[ERD50]

Quote:

Originally Posted by clifp I thought I'd bump this old thread because some of you searching for higher interest rates might be tempted to try your hand on the Peer to Peer lending which appears to be getting some press. In a word, Don't.

To be honest, for me the surprise would be if this had turned out differently. Unsecured loans to strangers just isn't something that sounds attractive to me in any way, shape or form.

I understand you used small amounts, and maybe felt you were doing some favors to someone who could use the help, but as an economic decision, I just don't see it as viable.

Quote:

A pithier summary was posted on a Motley Fool. "I think what Prosper shows is that those evil credit card companies charging 20-30% interest maybe aren't making as much as we thought and are probably charging fair interest rates given the risk they assume."

Yes, so much demonizing directed to this or that industry. Yet, I don't see too many of the pitchfork people going into those businesses and showing us how it can be done for the benefit of all. Heck, they could go non-profit status just to get the 'product' out there - it should be so easy to beat them at their own game by taking 5-15% profit off the table, no?

-ERD50

[Onward]

My experiment with Prosper over the past few years (30 or so loans to people with medium-to-good credit) confirms clifp's. Due to defaults I have lost money overall. Not sure how much the Great Recession has skewed results. I'm in the process of withdrawing my money from Prosper and closing my acct.

[clifp]

Quote:

Originally Posted by ERD50 To be honest, for me the surprise would be if this had turned out differently. Unsecured loans to strangers just isn't something that sounds attractive to me in any way, shape or form. I understand you used small amounts, and maybe felt you were doing some favors to someone who could use the help, but as an economic decision, I just don't see it as viable.

In hindsight in definitely seems dumb. But back in 2006, credit cards were a big source of profits for banks especially for folks who carried balances. The concept of offering consolidation loans, as well small business, auto loans seemed sensible and splitting the difference between the 5% or 6% banks were paying savers and the 12-20% they were charging borrows seemed like a win, a win. Purely from an efficiency stand point, payments were automatically electronically deducted from the borrowers bank accounts is a lot cheaper than a paper billing and check system.

In fact it would have been a good system if the credit score Prosper was providing lender (they told us it was like a FICO score) was a good predictor of future default rates. It wasn't which leads me to believe that banks actually don't issue credit cards to everybody even back in 2006..

I personally made only one $50 loan on a feel good basis. I assumed (correctly) that a large number of people would lie about their situation. The credit penalties for defaulting a Prosper loan are the same as defaulting on credit card or car loan. Some people believed that by replacing an impersonal bank with an average Joe, who was say retired and the borrower had exchanged emails with would make it less likely that the borrower would default. The peer pressure effect that micro lending advocates like Grameen Bank talk about. This turned out to be wishful thinking or at minimum we can concluded that peer pressure to repays may work in village but not in a global internet village.

It was relatively cheap experiment and somewhat interesting. The really stupid thing is that I seriously considering putting $100K into the system. Several people did put that much money into Prosper, most of whom I understand had lower net worth than myself.

[Hamlet]

I think Prosper suffered from lax fraud control and lax collection efforts.

Credit card companies have much better results than the Prosper lenders did.
I don't have a lot to back this up but my impressions I got from the Prosper message boards, but I think that that is because credit card companies generally do a better job of verifying the application information, and if you do default they hound people until their deathbed and beyond.

Prosper's lenders had massive default rates from almost the very start.

Credit card companies only recently developed high default rates due to the economy.

Quote:

Originally Posted by clifp In hindsight in definitely seems dumb. But back in 2006, credit cards were a big source of profits for banks especially for folks who carried balances. The concept of offering consolidation loans, as well small business, auto loans seemed sensible and splitting the difference between the 5% or 6% banks were paying savers and the 12-20% they were charging borrows seemed like a win, a win. Purely from an efficiency stand point, payments were automatically electronically deducted from the borrowers bank accounts is a lot cheaper than a paper billing and check system. In fact it would have been a good system if the credit score Prosper was providing lender (they told us it was like a FICO score) was a good predictor of future default rates. It wasn't which leads me to believe that banks actually don't issue credit cards to everybody even back in 2006.. I personally made only one $50 loan on a feel good basis. I assumed (correctly) that a large number of people would lie about their situation. The credit penalties for defaulting a Prosper loan are the same as defaulting on credit card or car loan. Some people believed that by replacing an impersonal bank with an average Joe, who was say retired and the borrower had exchanged emails with would make it less likely that the borrower would default. The peer pressure effect that micro lending advocates like Grameen Bank talk about. This turned out to be wishful thinking or at minimum we can concluded that peer pressure to repays may work in village but not in a global internet village. It was relatively cheap experiment and somewhat interesting. The really stupid thing is that I seriously considering putting $100K into the system. Several people did put that much money into Prosper, most of whom I understand had lower net worth than myself.

[clifp]

Quote:

Originally Posted by Hamlet I think Prosper suffered from lax fraud control and lax collection efforts. Prosper's lenders had massive default rates from almost the very start. Credit card companies only recently developed high default rates due to the economy.

Exactly right. Although the ethically challenged CEO Chris Larsen is claiming the reason that Prosper lenders lost money is due to the economy, which is a pretty convenient excuse when you are relaunching a company.

[ERD50]

Quote:

Originally Posted by clifp In hindsight in definitely seems dumb. But back in 2006, credit cards were a big source of profits for banks especially for folks who carried balances. The concept of offering consolidation loans, as well small business, auto loans seemed sensible and splitting the difference between the 5% or 6% banks were paying savers and the 12-20% they were charging borrows seemed like a win, a win.

Well I certainly wouldn't call it dumb. You went into it with something you could afford to lose. While it doesn't sound attractive to me, and I think the odds are against it working, that does not preclude the chance that it could work for you, and it sure doesn't preclude me just being wrong. Nothing ventured, nothing gained.

Now, just looking at those numbers - I think they miss two things:

1) I'd assume the CC companies also have a larger 'portfolio' of occasional borrowers - people who carry a balance for a few months to get over this-or-that expense, but will pay it off. The CC gets a nice interest payment from them. I would think Prosper attracts people who are going into long term debt, and I just bet that the loan default rates are much higher in that group. I just don't think that someone with an occasional need is going to bother with the Prosper route, the CC is easy, and while 20% is a high rate, if it is just for a month or two it really isn't that much out of pocket. IMO, not enough to seek out alternatives when dong nothing (just paying the CC company) is so easy.

2) The CC companies are making money on the transactions, even from people who pay the bill in full each month. This diversifies their business a lot. A default here and there can be considered the 'cost of doing business' to gain all those 3% (or whatever) transaction fees (somewhat less net from those of us with rewards cards). To the CC company, if a strict credit check policy means turning down a lot of people and fewer transactions overall, then they might actually lose overall due to lower total transaction fees. This revenue stream is gone in Prosper.

Quote:

It was relatively cheap experiment and somewhat interesting. The really stupid thing is that I seriously considering putting $100K into the system. Several people did put that much money into Prosper, most of whom I understand had lower net worth than myself.

But you didn't, so it wasn't stupid. Considering something is never stupid.

And I'm not surprised that people with lower NW did put in that much (and will probably lose $ on the deal). That's also probably why they have lower NW than you

-ERD50

[calmloki]

Didn't do Prosper, but did make a substantial loan to a bunch of suits in a downtown office. Unsecured. Not a Good Thing. The suits and their company disbanded, I have random contact with one of them who is making very sporadic partial payments. Have to decide if there is anything more to be gained by spending $$ on a lawyer to sue for collection or if there is no profit in forcing him into bankruptcy. If I kiss the money goodbye it represents an amount equal to about a year of living expenses for us. Druther not do that, but don't expect to starve if the money is gone, so is it just money grubbing evil to hound a guy into bankruptcy when he does make some efforts? He has 4 kids and I don't know if there are any assets I could get my hands on - will have to ask our tax lady tomorrow if we can write off the loss - seems we could....

[easysurfer]

Not in Prosper, but in Lending Club. So far, haven't had a single default. Only a couple of late payments.