It's been eight months since I started this thread, and I've learned a lot from the people who posted here. Thanks especially to EJW93, Brewer, and JDarnell. Let me know what else you learn about P2P lending!
If you're TL
R and only going to read one post in this thread, it should be Khufu's:
http://www.early-retirement.org/forums/f28/peer-to-peer-lending-63294.html#post1240224
P2P lenders are not being adequately compensated for the risks they're taking. That's mainly because nobody-- not Lending Club or Prosper or anyone else-- seems to be capable of accurately predicting loan default rates from the short history available. Nobody appears to be able to remember what Wall Street did to CDOs and MBSs a few years ago, either.
I've finally finished digging through the prospectuses and 10Ks and media articles and blogs. There have been some interesting changes over this time, too:
- Prosper's near-death experience
- Lending Club's struggles to retain their core retail lenders while courting their new institutional lenders
- Google's buyout of some LC investors
- The struggles of both companies as they attempt to scale up on their current fee structures.
Most of you regulars have already seen the blog posts, but I'll link them here to tie it all together. They should be read in the order they're linked: a general overview of the P2P business, advice for prospective P2P borrowers, and then more advice for P2P lenders.
The problems with peer-to-peer lending
Peer-to-peer loan calculator
More problems with peer-to-peer lending
There's way too much money chasing too few borrowers. Posters have mentioned that their actual returns are lower than advertised, and I suspect that's only going to continue. Both companies disclose how they calculate their returns data, but it essentially consists of assuming that (1) all funds are immediately reinvested and (2) defaults are only recognized months after the borrowers have stopped paying. P2P lenders should run their own Excel XIRR spreadsheets for the actual returns data, and I'd recognize defaults if the loan goes past 30 days late.
Lenders have to be willing to lock up their money for 3-5 years or else harvest the principal & interest payments (which lowers their actual returns). 800 loans @ $25 ($20,000) appears to be the minimum number for guaranteeing that you'll break even, which is probably better than paying fees on a checking account. If you're trying to distinguish investing skill from luck then it will take at least $180K in loans @ $25 (7200 loans). That $180K should be less than 10% of an investor's asset allocation, and preferably 5%. The automated investing tools of the P2P companies are not yet up to this task, unless you're an institutional investor who's willing to pay extra for concierge service.
There is some liquidity in the secondary market but it can take a week or two to receive the full value of the loan, and this liquidity will dry up at the next hint of a recession.
If you're reading this board then you already know there are better ways for P2P borrowers to get out of debt.
The best I can say on the whole sector is that P2P borrowing actually seems like a better deal than P2P lending... and P2P borrowers already have better alternatives.