Why I think P2P lending is a bad idea
Photo by: Unhindered by Talent
The rage around money lending these days, at least in the blogosphere is Peer to Peer Lending (P2P). Services like Lending Club and Prosper enable loans between individuals, bypassing traditional loans generally provided by banks. The P2P concept in theory, allows individuals to reap many of the same rewards as banks. Unfortunately you also assume the same risks as well. Cash Money Life has a great introduction to P2P if you want to read more.
I haven’t written about P2P before, as it isn’t something I’m interested in nor would I advise my readers to consider it. Here’s why:
P2P Lending enables debt
I’m not a fan of borrowing money and couldn’t in good conscience recommend these these services to my readers. I’m a firm believer that the “borrower is slave to the lender” and P2P lending services just further promote the already far to popular concept of if you don’t have the money, just borrow it.
According to a recent survey mentioned in article I read, 27% of people looking to P2P for loans did so because they couldn’t get loans at more traditional institutions. 36% said they used P2P to get a better rate. Based on my research of rates, I didn’t see a significant difference, especially with the recent rate cuts. Here’s the best one: 33% said they did it to avoid credit cards. Huh? While I am all for not borrowing money from credit cards, I’m not sure if just getting another loan is any better.
Recent announcements talk about P2P companies suffering from high default rates and their recent efforts to partner with collection agencies just confirms my thoughts that a large portion of the people loaning on P2P sites really shouldn’t be borrowing more money.
P2P lenders are loaning money to many people who already have bad credit and are over their heads in debt. Providing loans to this demographic is the same as being an enabler to someone that has a problem. Lending to them provides them with the opportunity to make their already bad situation worse.
Why would you want to loan money on P2P sites? It’s certainly not out of the kindness of people’s hearts, but to make money. P2P lenders see P2P lending as an investment. What this boils down to is making money from people that are potentially already in a financial mess. Personally, I couldn’t sleep at night doing that, nor would I want anybody to be a slave to me (Proverbs 22:7).
I also found that many people looking to use P2P where trying to get lower interest loans to consolidate or move debt from higher interest rates loans/credit cards. Paying lower rates is good, but better options are to reduce expenses and increase income. Just think about, borrowing money to pay off borrowed money…is it really the right thing to do? It could be, but it can also be a very slippery slope.
P2P Lending is risky
Assuming that many of the borrowers are high credit risks, it’s risky for those lending the money. Not to mention that it is more risky than investing at this point. The P2P companies are working diligently to reduce the risk, but the bottom line is you aren’t guaranteed to get the money you loan out back if the borrower defaults. Comparing this to the 30 year stock market history, it has a proven trend of 10%+ returns. I’m not really sure why anyone would want to do this vs. investing.
I find it interesting that the P2P lending industry is growing rapidly, yet banks are tightening down significantly on their loans due to the sub-prime crisis and overall economic decline. What this confirms for me again is that people who can’t get money elsewhere are going to P2P loan services to get money. That screams risk to me.
Why all the hype?
In writing this up, I did a great deal of reading on P2P, and in particular spent a great deal of time reading perspectives of bloggers on the topic. What I noticed was that these P2P sites have high paying affiliate programs and sign-up bonuses. This makes me wonder if all the hype around P2P lending in the blogosphere isn’t really due to it being such a great idea or investment, but due to the fact it pays referrers well.
Don’t get me wrong, I am all for bloggers making money, but it does make me question the overall hype and actually credibility and future of the P2P industry. Pretty much every article I read included affiliate links and mention of the $25 bonuses provided by Prosper, Lending Club and other P2P services. I am sure my thoughts on this may generate some controversy, but I’m just being honest.
I had planned to put a list of articles here from other bloggers that offered their thoughts against P2P lending, but it would seem Ana from DebtFREE-Revolution and I are in the minority. I’m okay with that. If you wrote up something against P2P lending, let me know and I’ll add your article.
Here’s another one I was informed off: Prosper.com – Good or Evil? from Credit Withdrawal.
What are your thoughts on P2P? I’m certainly no expert, so please keep me honest. Would you apply for a P2P loan?