Why I think P2P lending is a bad idea
By glblguy
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?
March 6th, 2008 at 12:08 pm
Great post – I have been thinking about lending on one of these services lately, but I was a bit conflicted. Your post helped to clarify some of the thinking for me. thanks!
March 6th, 2008 at 12:20 pm
I think it’s a bit much to accuse other bloggers of self-interest. The fact is that they make money from P2P lending, and they (generally) encourage others to do the same. Referral fees from P2P lending sites like Prosper and The Lending Club are for all members, not just members with a website – unlike the referral fees from say Amazon.
Blogging about making money through a financial product is completely on-topic if you are a personal finance writer. Most of the people I’ve seen write about P2P are completely open about making money through referral fees, and actually encourage their readers to do the same – this is no different to posting your ING referrals on your blog, and encouraging readers to game the system there.
Thinking more about the topic at hand, I don’t think that the borrower is a slave to the lender. Economic systems have come a long way in the last few thousand years, and people without access to capital (through borrowing or other means) are at the very bottom of the heap in modern society. I’m proud to invest in micro-lending though Kiva, and I’m happy to make money through P2P lending through Zopa in the UK. P2P may or may not have a great on-going business case, but it’s certainly a reasonable enough idea not to dismiss out of hand.
March 6th, 2008 at 12:31 pm
Gibble, glad to finally see your post on P2P LOL It’s been kind of lonely being the only pf blogger to come out publicly against this. You did a great job researching this post, and showed some courage pointing out the referral angle.
March 6th, 2008 at 12:45 pm
I totally agree with you. I’ve been uncomfortable with the idea of P2P lending, and I wasn’t sure why. You’ve totally clarified the issue for me. Thanks!
March 6th, 2008 at 1:07 pm
While referral fees may be nice, I agree with Plonkee that those are just icing on the cake, so to speak. When I write about something I believe in, I do so because I believe in it. And I do add referral links if available, because I took the time to write it up and explain it. But I write about things I get no referrals from – for example my cell phone prepaid post this morning, I just like prepaid cell phones.
I promote ING links on my site even though I ran out of my own referral links, to spread the money around. I like when people get “free” money, which the LC/Prosper referrals are. Money for you and money for them. (Not that I have written a post with referral links about either – yet).
As for the whole concept of P2P lending, I haven’t decided what i think. When I have looked into it, the interest rates seem higher than average, which makes me suspicious, but maybe I just have access to better interest rates than the average person.
March 6th, 2008 at 1:13 pm
I think this post will make a lot of people think. Good on ya for posting it GLBL, it takes some brass. I stumbled it and hope it catches on for the sake of opening the debate on this issue.
I think you make some excellent points.
March 6th, 2008 at 1:54 pm
How is P2P lending that much different that borrowing from a bank? Basically I see it as cutting out the middle man. Personally, I’ve always questioned what makes money easier than a bank. (Of course oil company comes up.) When Prosper.com started up, I was instantly a fan of that idea. Yep, it could become big enough to compete with the banks. I decided to try it out. Figured that I would shoot for an 5-10% return since that would be more than I was getting on some savings bonds that I had to cash in. After a few months I reevaluated and said, well if the stock market as a whole should return 10% over time, I’ll see if I can consistantly get 11%. Now, a year later, I am averaging a 13-14% return. Compounding the interest at that rate should outdo any other investment you could make. I’m not saying it’s a great deal for the borrowers. But it’s way better than their 29-35% interest on some credit cards. It’s a great rate for an unsecured loan. Perfect for the timid small business owners who don’t want to beg their bank for some money. Overall, isn’t P2P lending a great idea?
March 6th, 2008 at 2:26 pm
I’ll side with you on this issue. I definitely don’t have a problem with someone doing P2P lending, but it’s not for me.
March 6th, 2008 at 2:34 pm
@Plonkee and paidtwice – I REALLY struggled with the wording on the whole blogger issue. I did not intend to imply that all bloggers are blogging about it just to make money. I clearly realize that is the case. However, if you do a search on Google blogsearch, you’ll find MANY blogs advocating it, but offer little to no value on how to use, what it is, and/or the benefits.
My point in making that statement was to throw the point out there that much of the buzz MAY be due to the high payments, I did not intend to paint every blogger the same color. M-Network members, Money Blog Network members, Lazy Man, The Digerati Life, and other highly reputable bloggers endorse since they believe in or at least believe in the concept.
Again, I really struggled with the wording. Sounds like it still wasn’t clear enough. Hopefully my comment explaining what I met helps.
March 6th, 2008 at 2:37 pm
This article claims that “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.”
That statement is just not true. Particularly at Lending Club, we praise ourselves for having a minimum standard of 640 Fico score and at most 25% Debt-to-Income ratio. By all standards that is considered “prime”. There are many reasons why people request loans. There is good and bad debt. Remember that we live in a credit society where so far banks have been benefiting from the “spread”. I think the time is ripe for exposing loans as an alternative investment asset class that has so far been exposed only to the financial institutions of the world. Its a now a free marketplace.
March 6th, 2008 at 2:38 pm
I signed up to lend on prosper when I first heard about it but didn’t lend any money because I wasn’t in a situation to “invest” (I’m still not). Since then, I’ve decided that it’s also not for me.
After reading Jacob’s post on why he’s not doing it anymore (http://earlyretirementextreme.com/2008/01/lending-victoriously-to-strangers.html) I was doubly decided that the risk just wasn’t for me. And on top of that, I do have a problem with lending people money to help them pay off debts… isn’t that just sort of defeating the purpose? :)
March 6th, 2008 at 2:48 pm
@Mike – Sure, P2P rates are better than the 20%+ rates some card companies offer, but far worse than the many 0% offers available too.
I’m going to be a hard sell on the whole lending debate, as I am pretty anti-debt, especially unsecured debt which is what these sites promote. I’ve just been personally burned, and Dave Ramsey’s success is evident that MANY folks have been as well and the debt truely is a problem in our society.
Personally for me, I just could loan money out to that demographic nor would I suggest anyone borrow unsecured debt period, either from a bank or P2P.
March 6th, 2008 at 3:00 pm
Hi Joaquin, thank you for taking the time to comment. I will say that your standards out of the 4 or 5 various companies I looked at seemed to be higher. With that being said, I did find research and articles for the P2P lendng industry as whole showing that the default rates are increasing and are higher than standard lending default rates. I am not sure how this relates to your minimum standards, but does reflect negatively on the industry as a whole.
It would be interesting to hear from you if the ramp up in collection agency relationships is due to the increased volume of loans or due to a higher percentage of defaults. This wasn’t something I could easily find.
March 6th, 2008 at 3:48 pm
@glblguy – I don’t doubt that there are some bloggers promoting P2P lending just to get themselves some referral bonuses. I think there are bloggers promoting lots of things they don’t believe in to just get referrals. I just think that there are a lot of bloggers who do believe in it and getting referrals is just a great side benefit.
Kind of how I think about myself and ING. :)
Thanks for further clarifying :)
March 6th, 2008 at 4:02 pm
P2P lending is just coming to Canada so I did some googling and found out more. The one company that was operating out of Montreal, according to ePaynews.com has been “shuttered”. Since this is the first I’ve read about the topic, that was interesting to find out!
On the side of lending to pay off debt, I would agree. There are often needs that we have, that would require either a loan or a credit card bill. If I had the choice in the matter, I would rather take the loan – and I am not sure that I would be approved for one from my bank. As a Canadian, it isn’t really an option, but it may be worth having an alternative to the bank – “It’s a wonderful Life” comes to mind.
March 6th, 2008 at 6:11 pm
Hi glbl,
It’s probably too early to make any rational conclusion about the industry at a whole, but here are our statistics (http://www.lendingclub.com/info/statistics.action)
Note that we have a 9-to-1 rejection ratio. So far we have processed about $10 million + in loans while rejects are in the order of $90 million. This should give some comfort to our lenders.
March 6th, 2008 at 6:11 pm
The whole idea that P2P lending is enabling debt in a way that does not already exist is entirely bogus. Yes, there are some people with poor credit who can only get loans on P2P sites, but I’ve seen dozens of loans “rejected” at Prosper and LendingClub automatically has a reasonably high standard for borrowers.
If you truly feel that debt makes the borrower a slave to the lender (something I agree with in principle), then you should avoid financial institutions altogether. The interest you earn on your savings account or your CDs is coming, in part, from the interest banks earn on loans. Investing in any financial institution is further enabling debt!
It’s much easier for average, uninformed investors to lose money in unwise P2P lending decisions than in other forms of lending (CDs and money-market accounts function as lending, though the banks take a much higher cut than with P2P). Of course, any form of investment that offers higher returns than treasury bills will include a significant amount of risk — investors should no more put money into P2P lending without doing due diligence than in the stock market or real estate.
March 6th, 2008 at 6:31 pm
What a great post!
You really nailed it with your comment about the amount of referrals that bloggers get for writing about Prosper and Lending Club. While I do think there is quite a bit of interest in these loans, the referral programs have undoubtedly caused the number of posts on the topic to increase by a lot.
And bloggers are supposed to be unbiased – yah right!
I do have to quibble with your argument about providing more debt – with the incredible amount of credit available now, I don’t think a bit more makes any difference. If a borrower has a chance to lower their rate then I don’t see how that can be a bad thing.
I also wouldn’t count on 10% + equity returns – the long term return for the US market is about 9.5% and that is not counting any sort of fees ie trading fees, mutual fund costs etc.
Mike
March 6th, 2008 at 7:16 pm
@Deamiter, you said: “The whole idea that P2P lending is enabling debt in a way that does not already exist is entirely bogus”
It’s another option for people to get into debt. Given a portion of people look to P2P options due to being declined at banks would in fact imply it is further enabling it.
@Four Pillars – You said: “I don’t think a bit more makes a difference” – Mike, that’s like saying if I save $1 it doesn’t make a difference…sure it does. It’s not all about lowering rates, in some instances the returns to lenders is 10+%, that implies high risk (i.e. low credit rating) loans.
I agree, mathematically lowering rates is a good thing, but people facing debt problems often reduce the rate and keep the old card only to pile it up again OR get a loan for more than their current debt, transfer it over and then go buy a new HDTV with the rest. That’s the demographic I’m concerned with here (the 1 marshmallow people like I was).
re: stock market – It all depends on how you factor the numbers (taxes, fees, etc) and who’s number’s your looking at. I know this number is real debatable, and investing isn’t my forte, so I won’t even attempt to argue :-) I’d just show my ignorance!
March 6th, 2008 at 8:29 pm
GLBL– I think the mention of credit cards is actually legit. Many people recognize that when they buy something on a credit card, that charge sits around like an undigested lump for years. In comparison, any loan with fixed monthly payments is a better deal. When I started knocking down CC debt a few years ago, that was the first and best thing I did–I got a bank loan that covered the CC sums, and canceled the cards. It saved me a fortune in interest and in spending on “open” card limits.
I do wonder whether the debt consolidation loans made on P2P sites are successful for the borrower–do they cut up the cards and manage their finances better?
March 6th, 2008 at 8:30 pm
I think you might be making some poor assumptions about debt. There is always more debt available in our society. When people talk about not being able to get loans, they’re largely talking about a specific business loan, or a specific mortgage from specific lenders. Yes, there is a point at which a person accumulates so much debt that they literally cannot get a loan, but these people find it extremely hard to get loans on P2P sites too (and aren’t even considered at lendingclub).
At the very worst, P2P lending might allow a tiny minority to add that last little bit of debt before they have no other option but to declare bankruptcy. By the time a person is rejected by all other lenders, they are no longer being enticed into a debt-driven lifestyle, they are fully dominated by debt.
In short, the worst case is that P2P lending allows people to live in debt for a few more months before they are forced into bankruptcy. Either way, they end up with a second chance and zero debt. Besides that extreme case, P2P lending is just one of hundreds of ways people can borrow money to enable businesses and to recover from major hardships like prolonged dying of a family member.
March 6th, 2008 at 11:05 pm
Gutsy to take this subject on, glblguy :)
I don’t mind taking referrals, or see any particular difference between that and the Google adsense ads I see right now on your page selling “$1500 in 24 hours payday loans”, for example. And I am not picking on that, because Google is what it is, and most of us are in blogging for money, not just for the free expression of our ideas. But to me there’s the same moral problem with having an ad for payday loans as a P2P site. In both cases, we are seeking to get paid. Does having a payday loan ad on your site make you less objective? No. Does having a referral button for Lending Club make me less objective? No. Does being a paid writer for Prosper mean I wouldn’t criticize Prosper ever? no.
I have made this comment on several other blogs, too – if you have an issue with lending, you really shouldn’t have money in banks or work for the financial industry or be paying interest to a bank for a mortgage, etc… I had a client, a Fortune 500 bank, for about a year during the subprime runup. I don’t kid myself. My consulting fees were paid for by someone’s misery today, when they can’t pay for their outrageous mortgage. If you have money in a bank, chances are good that money is being lent out somewhere else – so that’s contributing to debt.
LC and Prosper do grant free money to both the referrer and referee, so I don’t have any problem pushing people to sign up – at LC you don’t even have to lend or borrow, just sign up and voila. I get paid to write for Prosper, and I have micro-portfolios with LC and Prosper. I would never invest a significant amount, and I have tried not to lend to people who don’t appear to be able to handle their loans – but hey, if not, I can’t be responsible any more than I can be responsible for my bank loaning my money out to someone, can I?
And Mike (Four Pillars) – are bloggers supposed to be unbiased? My blog, at least, is anything but. I’ve got all kinds of biases all over the place. The blogosphere is one of the last places I’d go for objectivity. That’s why none of us are willing to say “this is advice” – we all say “this is not professional advice – before you invest or touch a penny please talk to someone who is actually a professional” – right? My blog’s supposed to be for entertainment purposes and to provoke some thought, but I bring my own biases about debt, the purpose of money, etc. to everything I write. Just my opinion….
—
But seriously, good take on a subject that is pretty one-sided – THAT I agree with 100%. :)
March 6th, 2008 at 11:19 pm
Wow, great conversation! After all this, there isn’t much I can say (without writing a blog post, which I will respectfully defer ’til next week). I understand both sides of the issue.
For now, I stand by the principle of P2P lending. I think it offers something to everyone involved – borrower, lender, and middle man (p2p company).
Are there people who will default? Yes. Are there honest people who will diligently pay every cent of their debt? Yes. I believe it is the same as people who use credit cards or borrow from a bank.
I think it will be interesting to see where the P2P industry is next year, and again in 5 years. :)
March 7th, 2008 at 2:11 am
What about microloans to small businesspeople in developing countries?
http://www.kiva.org
You don’t earn interest, but they supposedly have a very high rate of repayment.
March 7th, 2008 at 6:14 am
@Deamiter – I don’t think I am. I am not a fan of debt, in particular when it comes to giving unsecured loans to people who already have debt problems. Is this a problem specific to P2P, no, does P2P enable it further, sure, it’s another option for people to use. Let’s leave mortgages out of this, as they are secured.
I think at worst, P2P is potentially giving another option to someone who is potentially out of control with debt or heading down that path. Can you as a lender know this? No. Could I sleep at night knowing that is a possibility? No. Maybe others are, and I respect that, but not a choice that is right for me.
@Steve – Come on Steve, I have only minor control over what Adsense shows, we as bloggers have full control over what affiliate or referral ads we display. You’re comparing apples to oranges. I do make every effort to control the payday ads though, but it’s a losing battle. I think Trent over at TSD had similar issues. Hopefully through my writing, my readers will know better than to click on Payday ads.
So you, you are objective. You offer insights into P2P, your perspective and you spend time writing useful and valuable articles on P2P. Do you promote it to make money? Sure, but I think you believe in and use it. Similar for me with YNAB, I promote it, make money from it, but use it everyday and really like it. I think that’s ok.
Where I have issue is when people see a product that pays well, and they promote it purely for money sake. No value add, no insight, just a “Hey click here”. To be honest, I might even be ok with that, however I do feel like it contributes to the overall buzz and visibility of the product, which doesn’t necessarily imply it’s a good product or that people believe in it. See what I’m saying? My intent wasn’t to “zing” bloggers, but more about making an observation that the buzz may be directly due to the benefits bloggers receive…not all mind you, but the blogosphere overall. Some blogs such as yours are very objective with a high level of integrity, as you well know…others are not.
Re: lending/borrowing. In a perfect world where everyone pays of their debt, people don’t get levels of credit they can’t pay off and they aren’t forced into outrageous interest rates I might be ok with lending and debt under SOME circumstances…particularly hardship situations, and large purchase secured items like houses, cars, etc.
I’m even cool with people using credit cards wisely for points and cash back…would I do it? No. Would I recommend it to the demographic of people that read this blog, people in debt and struggling to get out? No.
You said: “I have tried not to lend to people who donÂ’t appear to be able to handle their loans – but hey, if not, I canÂ’t be responsible any more than I can be responsible for my bank loaning my money out to someone, can I?” I think that’s great, and would suspect that is the case for many lenders. The difference is YOU are making the choice to lend with P2P, your bank is making the choice for bank loans.
Again, don’t get me wrong, I fully respect other people’s opinions and realize this is not a black and white issue. I don’t like it, I wouldn’t do it, but fully respect the choice for others to do so, I just don’t agree.
March 7th, 2008 at 7:02 am
OK, well reasoned response, although I would argue you have TOTAL control over what adsense shows, since you have the ability to show adsense ads (knowing they will put these types of ads there) or not show adsense ads. I don’t think it’s different at all, we both chose to display certain ads on our sites. “when people see a product that pays well, and they promote it purely for money sake.” – isn’t that adsense? Or is adsense providing a useful service? 4 of the 5 ads I’m looking at now are for loan programs.
And on my site I push the lending aspect. I say repeatedly on my site that I can’t give much debt advice. I advise people to sign up for the cash, sure – I get paid, they get paid. It’s probably easier for me to assume people can use debt wisely, since I have only entered into debt two times in my life: a mortgage and once, stupidly, a car loan that I paid off 3 years early. Other than that, I’ve never owed a dime to anyone. I put myself through college without financial aid or money from my parents, etc. etc. So it’s easy for me to think debt is easy to control. But you’re right that some people will have problems with debt just like an alcoholic has problems with a beer.
But listen, I agree with you completely on the question of whether bloggers are doing this for money. Would I have buttons up for LC and Prosper if I didn’t get referral fees? No. Would I write about them? Yeah, because it’s an interesting concept to me, and I think (as I’ve written on the Prosper blog) that if used correctly P2P lending is a powerful tool for starting businesses when banks won’t come through, or consolidating debt. It’s really a matter of perception. Some people look at a gun and see security for their home and their family, some people see an evil killing device. Some people look at a beer and see a tasty beverage, some look at it and see a despairing addictive substance.
If you’re looking for people who mindlessly flog a product, P2P lending is certainly one of the most visible villains today, but bloggers flog all kinds of things all the time simply to try to get money.
In a few days at prosperlending.blogspot.com I’m even going to be one of several writers responding to a question about a person who’s thinking of investing heavily in P2Ps and I do my best to scare him right back off of it!
Listen, I think we’re in agreement on the principle but just on different sides of the argument. Stick to your principles – if you believe debt is by and large harmful, P2P lending is definitely not something you should support. The world is short on people who stick to principle, so good for you that you do, and doubly so that you’re willing to stick up for your principles publicly. :)
March 7th, 2008 at 8:06 am
GLBL, I actually agree with you that the number of posts about P2P lending is due to referral programs. I personally have no problem with this. Some posts add value; some don’t. Those that don’t eventually will lose readers. That’s true of everything we write on our blogs.
I do take issue, however, with some of your perspectives about P2P lending. For example, you write “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.” Why is reducing expenses and increasing income a “better” option. Why even compare the two? Do both, they seem equally valid to me.
You also write that “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 shouldnÂ’t be borrowing more money.” Actually, default rates at Lending Club are less than 1%. This rate surely will go up, but for consumer lending, the default rates are not out of the ordinary.
Finally, you write “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 canÂ’t get money elsewhere are going to P2P loan services to get money. That screams risk to me.” There really is no comparison between the two. Many P2P borrowers have excellent credit scores and could easily get a more traditional loan. They go to P2P sites because interest rates are better. That being said, if unemployment rises, so will defaults. P2P lending is vastly different than say investing in a bond fund. The risks are different, and lenders need to be aware of this.
Finally, I think one’s views of debt will dictate in large part their views of P2P lending. For those that think debt is “bad”, do you have a home mortgage? Have you borrowed to buy a car? Do you invest in bond funds? Debt can be very bad, but it can also be a great way to raise capital.
March 7th, 2008 at 9:32 am
Steve (Brip Blap) – the specific biases I was referring to, are the ones that are created by a monetary incentive. There was a time when I didn’t realize bloggers could make any money and they were only giving their honest opinions (however biased or incorrect those might be) which is not the case with mainstream media.
I’ve come to realize that my assumption was incorrect however I still believe that the blogosphere is a great place to get information. A great example is low cost, passive investing which is not something that gets a lot of play in mainstream media.
I think my specific point was that the absolute number of p2p articles (good and bad) on the net has been influenced by the referral payments. Given the number of very informative p2p articles on the net, this is obviously not such a bad thing but (if true) does show that monetary incentives influence blogging.
Mike
March 8th, 2008 at 9:47 pm
I agree. I just don’t get all the hype. Seems like a big waste of time to me. People just need to learn to live within their means.
March 8th, 2008 at 10:36 pm
Loaning my money to people I have never met or vetted online isn’t for me, for profit anyway.
I do support kiva.org and loan some money interest free to a micro-loan 3rd world type environment.
March 9th, 2008 at 12:53 am
I can see how some people would feel uncomfortable lending to strangers, worse if its online. I felt the same way when I first used Ebay/Paypal where I sent money to someone I never met with no assurance that the good I bought was ever going to reach me. We all know that rest is history.
When you place money into Banks(e.g. through savings, money market accounts, CDs, etc.) these monies are effectively “put to work” and most likely lent out to total strangers by these institutions without you even knowing it. The difference between the black box model that bank offers and the white-box model of P2P lending is two-fold: a)you have the opportunity to decide where your money is invested — and thus who to help — b) you share the risks and most importantly the profits that financial institutions have endured/benefited from since their inception. Why do you think banks are some of the most powerful and wealthiest institutions in the U.S.?
No one can deny the lending business has been a very profitable one, specially if done carefully — lending consciously would have avoided the sub-prime mess!. No one can deny either that the recovery and growth of any economy is based on the availability of work, liquidity, credit and spending. Selling and buying, borrowing and lending (saving being another implicit form of lending) are at center of the economic equation. Using technology to make these processes more transparent and direct has to be a good thing.
March 9th, 2008 at 8:07 am
@DR – It’s a better option as you avoid going further in debt. People in these kinds of situations often struggle with using debt, call it an addiction. Going further into debt or getting a lower rate loan can be dangerous.
re: default rates, I did mention in the article that Lending Club had a higher standard than others I looked at. My comment was more general to the P2P market than just Lending Club.
Re: lower rates – I keep hearing that, but I’m not seeing it. I looked around a great deal and the rates seemed at least the same and often higher.
March 9th, 2008 at 1:08 pm
1. I don’t know about other P2Ps, but Prosper has a minimum credit score level below which they will not allow someone to become a borrower. You also have to have documented income and a checking account in order to borrow. It follows that Prosper does not arrange for lending to the worst-luck (or “worst-habits”, as you like) cases out there. And sometimes a person has turned their life around but their credit report and score do not yet indicate that. You quote the Bible a lot here, so I’m going to guess you get behind the idea of getting saved and turning your life around, right? People do it in a secular sense as well.
2. Spending less and making more money are great ideas in themselves, but they won’t lower an interest rate, and if you don’t lower your interest rate, you by definition cannot spend less. This is where refinancing a loan makes sense. It can be a slippery slope or not, depending on who’s doing it and under what circumstances. A knife can cut food, or it can stab someone to death.
3. While I do not yet have the means to make loans on Prosper, I would like to start, and I would rather invest my money that way than invest it through a mutual fund where I don’t know what companies they are investing in nor whether those companies have a net positive or a net negative effect on world politics and social conditions. For instance, I wouldn’t want to invest in The Limited, because they use sweatshops. But I would not mind investing in a single mother who is launching her own business and needs start-up capital. I feel that has a net benefit for society, and it surely has a net benefit for the single mother.
You’re free to disagree, this is just my take on it. Your mileage may vary.
March 9th, 2008 at 1:19 pm
Re: lower rates – Don’t let the 0% APR credit card for 6 months teaser fool you. Let’s look at the numbers. Check out creditcards.com and Bankrate.com. At Bankrate, for example, you can look at the average credit card rate or on the flip side the average interest rates that saving/checking accounts or CD’s offer you. Note that P2P lending deals so far with unsecured “personal” loans, so mortgages, HLOC and car loans are excluded. Secure loans (with collateral) are typically lower, nonetheless P2P offer similar, if not lower rates than HLOC’s for example.
Re: Only people with bad credit (“the desperate type”) go to P2P lending sites – Well, according to the Issued Loan by Grade distribution on LC you can find here (www.lendingclub.com/info/statistics.action) you can observe a distribution among A’s to G’s that resembles that of a “normal” bell curve of the larger US population. Check out our rating system (www.lendingclub.com/info/how-we-set-interest-rates.action) which starts with FICO score ranges but also includes debt-to-income ratio and size of the loan as modifiers.
I think this blog posting has been more focused on criticizing irresponsible borrowing (i.e. borrowing beyond one’s financial means of repayment) and irresponsible lending (i.e. lending without doing proper due diligence) than analyzing the virtues and pitfalls of P2P lending. BTW, I do think that irresponsible borrowing/lending is a terrible idea :-0
March 9th, 2008 at 5:44 pm
@Joaquin – I’m not a fan or borrowing period as I, in general, don’t like using other peoples money, specifically for unsecured debt…and even in that scenario I agree it’s sometimes necessary, but I don’t like.
So with that in mind, to some extent you are right. My point in writing this article was that P2P is just another opportunity for people to abuse debt.
I realize that those in favor of borrowing (and lending) aren’t going to understand my view.
Also keep in mind that LendingClub is one of MANY P2P sites on the internet, with more springing up daily.
While I may not have convinced people, I certainly hope I presented a different view and perspective of the P2P industry. I think this view was necessary due to the numerous article’s promoting. I think knowing and understanding both sides is important.
@Dana – Whether I agree or not isn’t important, it’s a personal choice for you. My intent was to provide some items for consideration. I think borrowing is risky and people can’t appreciate that until they’ve been faced with not being able to pay back the debt they owe. Trust me, your perspective changes.
March 9th, 2008 at 10:10 pm
There are a few concerning thoughts I had reading this article…
– You list that default rates are high at P2P companies. Lending Club has had no defaults to date.
– Prosper, which has had defaults is simply is a marketplace like Nasdaq – matching buyers and sellers. Not every stock on the Nasdaq is a good, wise investment. Your job is to look for the good ones.
– Affiliate links – I had been writing positively about Prosper for 5 months before they had an affiliate program – thus I feel it is fair to keep the same stance and put an affiliate link – it pays no different than ING affiliate links which I see that you have.
– Tricia from Blogging Away Debt consolidated her credit cards at a cheaper rate. It’s hard for me how this is a negative thing in comparison to her prior situation. Best case scenario, saying that P2P Lending is bad, is a generalization and not applicable in every instance.
– It’s not surprising that P2P sites are growing rapidly. They are new, so they have no other direction to grow in. When ING came out with high interest rates, it grew rapidly as well. My website has grown rapidly in the last two years, but it doesn’t necessarily mean that people are getting lazier or that they are paying more attention to personal finance.
March 9th, 2008 at 11:00 pm
I’m just starting to get through the comments, thanks for excepting me from the blogs that don’t add value with their posts (I think).
Dough Roller had a great point about doing both – lowering rates and saving money by reducing expenses.
Justin makes an interesting point, “Loaning my money to people I have never met or vetted online isnÂ’t for me, for profit anyway.” With respect him, anyone investing in the stock market is loaning money to strangers as well.
Many corporations have some kind of debt. It would be challenging to find an index fund that consists of companies without debt.
Thus, as others said, it becomes difficult or impossible to invest anywhere without enabling someone else’s debt.
March 9th, 2008 at 11:35 pm
@Lazy Man: Comparing an index fund, which invests in thousands of companies that are regulated and audited to loaning money to individuals online is the classic apples and oranges comparison. Whoopie, Sam from Idaho has a 680 credit score. How nice. Now I only have a couple thousand more people to loan to to get anywhere near the diversification of an index fund. Unless maybe Sam’s note is backed by the full faith and credit of the US government, oh, that would be a treasury bond fund.
March 9th, 2008 at 11:47 pm
Many consider the S&P 500 a pretty diversified index fund. Others consider the Dow’s 30 stocks reasonably diversified. I don’t think you need to be in thousands of P2P loans to be diversified. I think it could be done with considerably fewer loans.
The US government has always had my faith, but the following dollar is starting to erode that trust. It doesn’t help to make 4-6% in US treasuries, when the dollar is losing more than 6% a year.
My philosophy is that all these investments should be a part of well-balanced portfolio. It’s just another asset class to reduce risk.
July 22nd, 2008 at 11:05 am
I think a distinction needs to be drawn between criticizing p2p lending as immoral and criticizing it as a bad investment opportunity. Personally, I believe that money should be regarded as a commodity just like any other and don’t have a problem with people buying and selling it. An argument grounded in “debt=slavery” probably won’t convince me not to use a p2p service. On the other hand, I’m still unsure of the merits of p2p lending as a business venture. Arguments on that level are much more likely to influence my decisions about where to place my money.
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