Your guide to peer to peer lending

Work Still Needs to be Done in Spreading the Word

by Peter Renton on February 23, 2011

I was reading the Wall Street Journal over the weekend and an article titled Six Ways to Boost Your Investment Income caught my eye. Of course, I wondered if peer to peer lending was going to be part of the article – it wasn’t. The article gave some fairly typical fixed income ideas such as CD ladders, bonds, TIPS, and MLP’s. It was a decent article and it may have even given some investors new ideas.

No Mention of Peer to Peer Lending

Then I was tooling around on the CNNMoney site (the online home of Money Magazine) yesterday when I came across this article from last month: Where can I get am 8% return on my investment? Of course, I thought about p2p lending as well, where the average investor (at least in the last two years) is earning returns around this number. But once again, there was no mention of it whatsoever.

So, here we have two widely read personal finance publications with major articles on investing and not a word about peer to peer lending. Clearly there is much work that still needs to be done. Now, if you are reading this blog post then no doubt you have at least a moderate interest in and understanding of p2p lending. But unfortunately you are in a very small minority. The majority of the population, including financial journalists, are either ignorant of p2p lending or have dismissed the concept for whatever reason. In fact, I did a little digging on Google and on CNNMoney the only mention of p2p lending whatsoever in the past year has to do with funding for small business. There are precisely zero articles on p2p lending as an investment. In the Wall Street Journal there was one short article about investing in p2p lending in September last year.

Having said all that I know both Prosper and Lending Club are working hard to try and change this. There has been some great publicity on p2p lending so far this year.  I covered some of the best publicity from last month in this blog post, and this month there has been this great article on AOL Daily Finance and a more reserved piece in the New York Times. But there is obviously more work to be done.

Spread the Word

I have three goals with this blog. One is to keep everyone informed about developments in p2p lending for both borrowers and investors. The second is to cut through the marketing hype and bring investors the truth about p2p lending and how they can maximize their returns. The third is more general, and that is just to spread the word about p2p lending. All three goals are important but I think the industry as a whole, myself included, are falling short in spreading the word.

Now, I am still very bullish on the concept of peer to peer lending. I will continue to put new money to work here as well as reinvest all my earnings. But until we see peer to peer lending appear as a viable investment alternative in major financial publications it will remain on the fringe of the investment world.

What do others think? All p2p investors have a somewhat vested interest in seeing p2p lending grow because both Lending Club and Prosper need to be far bigger than they are now in order to be a sustainable business. Are you telling your friends and family or are you happy keeping this great investment opportunity to yourself? Be interested to hear your thoughts.

{ 36 comments… read them below or add one }

Phillip McFarland February 23, 2011 at 6:03 pm

I tell all of my friends and family. I have gotten two to sign up but are still a little hesitant to put a substantial amount in it. My family is also the same and scared of the new concept and thus won’t invest in it.

Peter Renton February 24, 2011 at 6:50 am

Thanks Phillip. I think people are naturally suspicious of any new investment. This is why they need to hear it from friends/family AND from publications that they trust. Then they will likely be more inclined to take the leap.

Shannon February 24, 2011 at 8:30 am

Hi Peter,
I work with Gen Yers and advise on their finances. Most young people seem really interested in it, but like Phillip said, hesitant to actually put their savings in as an investment.
People are worried that the companies will go under and also that the lenders will default.
I think it will come around, but you’re absolutely right, until more mainstream publications talk about them as an investment option, people will remain scared.

Alex February 24, 2011 at 8:31 am

Peter
Greetings from across the pond!

Some interesting points here, as always. Thanks for pointing me in the direction of the AOL article as well – very balanced perspective.

I wonder if – as we have found in the UK – there’s a reluctance to talk about P2P lending in the traditional media beyond an acknowledgement that it is there, as there’s little incentive for journalists to speak well of it
i.e. it’s understood as a concept, but the perceived risks of advising people into a bad debt experience outweigh the upside of bringing them a story about a smart investment strategy. So journalists will talk about it, but urge caution, which is not particularly inspiring for the unengaged..
And perhaps the same applies to individuals as well.

Keep up the good work on your blog!

Alex

Lewis Zwick February 24, 2011 at 8:42 am

The concept is great. Anyone involved working with minority groups know there is an underground Indian Bank or Chinese Bank which works on the exact same concept. But I keep hearing from you that there is more supply of money (investors) than demand (borrowers).

Peter Renton February 24, 2011 at 9:14 am

Lewis, it has been the case the last couple of months that there was an excess of investor money, particularly on Prosper. But as of right now, there are 501 loans on Lending Club and 168 loans on Prosper, much higher than we have seen, so I think the balance is changing.

Peter Renton February 24, 2011 at 9:32 am

@Shannon, Thanks for your comment. I know people are worried about the future of both Lending Club and Prosper which is understandable. I think when these companies become profitable, which should be next year, we will see a lot more interest as that argument goes away.

@Alex, Thanks for your nice comment. Always nice to hear from the mother country! One of the things I think both British and American media have in common is that they like to write about fear. That seems to be more engaging to the public than a positive story. And with something new like p2p lending it is easy to play on people’s fears. Although as time goes on and the industry gets more established worldwide it gets harder to push the fear story.

Lisa February 24, 2011 at 10:45 am

Hi….
I’ve been an LC investor for approximately 2 1/2 years now and have just under 500 active loans. In the recent past I had been talking with my family and friends about p2p Investing. I consider myself a fairly savvy investor, used the LC filters as I thought wise, and didn’t take too much risks with my loans. However, despite this fact my summary page return rate keeps dropping and is right around 5.7% as of this morning. So far I’ve had 17 loans default. When I add in the investment cost/fee, the defaults, etc. I don’t see that I’ve even made this much % so far on my increasing investment. I continue to add more funds each month, but I must admit I’m a bit wary at the moment. Trying to educate myself further, I joined this blog to increase my knowledge. I’m now filtering based on the statistical recommendations, so I hope my return rate will improve. When it does, I’ll feel better about recommending P2P to more people again. Any advice from the group for me?

Rob G February 24, 2011 at 12:26 pm

Peter:

I think you’re doing a fantastic job in covering the space and getting the word out. We do need, however, 100 others like you!

One of the best ways to increase the reach of Lending Club investments is for our investors to continue to share their experiences either privately with friends and family or publicly through blogs or news media. There is nothing more powerful than a happy investor!

Keep up the good work!

Dan B February 24, 2011 at 6:18 pm

Lisa’s experience illustrates precisely why p2p has & will continue to have an ever growing “credibility” problem. Let’s look at the facts…………..

Lisa is both outperforming the average Lending Club investor & under performing the average investor at the same time if one is to believe the official numbers. Why do I say this?
Well, she’s dramatically under performing with her 5.7% return compared to the stated 9.67% for the average investor & yet she’s significantly outperforming since she’s only had 17 defaults after 2 1/2 yrs. LC states a 2.4% annual default rate which would translate roughly to 28 defaults after 2 1/2 yrs. So how can these 2 sets of “facts” be both true? Well, the short answer is that they’re not. The average investor certainly doesn’t make 9.67% as I’ve been saying over & over again for months now. How can we as p2p investors recommend p2p in good conscience to family/friends when the official numbers are so far off from reality?

Yeah, p2p is a great investment………………but ignore the official numbers because they’re BS? Is that the sales pitch we are to use? And what return number do we use when our friends/family ask us?
8%, 7%, 5.7%, 4% or less? I could easily argue that any of those numbers are more representative than the official one. But it’s that type of uncertainty that makes p2p look like just another load of BS.

And like Lisa, how much disillusionment will these new investors tolerate when they put in the time & work, realize that they’re doing better than average & yet see their return numbers plummet to below average? So are we really sure we want to recommend this to friends & family?

Here’s what I’ve done……………I only mention it to people who have at least 6 figures to invest in this & who I believe are predisposed to let me run their accounts for some sort of fee. I don’t involve them in any of the mental gymnastics that I go through. I just give them a bottom line number that I know to be achievable & run their accounts just like I do my own.

Mike February 24, 2011 at 6:23 pm

Lisa, there’s a lot of good information on this site regarding how to filter the loans to increase your return. You may want to check out http://www.steadfastfinances.com There is a subsection on P2P lending there. I’ve been on LC for about the same amount of time as you with a similar number of notes. I have defaults too, but not nearly as many as you. I am careful to avoid any loans for medical expenses, as this is the number one cause of personal bankruptcy in this country. I also try to avoid states hit heavily by the mortgage/foreclosure crisis. Investing in borrowers with zero credit inquiries also should increase your return. Keeping your investment in each loan to $25 will also help reduce the impact of any one loan defaulting. Default rates vary across loan grade dramatically. You didn’t mention how your total portfolio is distributed, but if you are gunning for huge returns in the lower grade loans, you will definitely see more defaults on a percentage basis compared to higher grade loans.

By the way, the person who commented after you is Rob Garcia, one of the head honchos at Lending Club. I hope he read your comment, as you don’t sound like a ‘happy investor’.

Mike February 24, 2011 at 7:24 pm

Dan, I agree that LC’s official numbers are overly optimistic, but can’t Lisa’s outperformance/underperformance be explained if her defaulted notes had, on average, more principal invested than her average note did? In other words, if your average investment is $50, for example, and you have a note that defaults that you put $200 into, won’t that bring down your ROI more than if a $25 note defaults?

Dan B February 24, 2011 at 7:54 pm

@Mike………Come on now, of course it can be explained that way……………..to a very small extent. And it could also be that all the loans that defaulted were purchased on weekend nights after 10pm. But let’s deal in reality, please.
Why don’t we ask Lisa? And while we wait for her answer, why don’t you give me some odds that you’re willing to back up with your own money as to whether your explanation is the one.

We’re talking about a 4% point discrepancy on official returns………………while she’s outperforming the average default numbers by 40%!

And so why isn’t there someone from LC jumping all over me on this? Or on the numerous other posts where I’ve made similar statements? Could it be because I speak the unpleasant truth??

Peter Renton February 24, 2011 at 9:53 pm

Thanks for your comments everyone.

@Lisa, You have certainly provoked some discussion here. We would all love to know the breakdown of your loans (as in what grades) and the average amount invested and if your strategy has changed over time.

@Rob, Thanks for your comments. Obviously not everyone who comments here is a happy camper, which is fine. It is good to get an honest discussion like this going.

@Dan, Good to hear from you as always. You bring up some good points, but we should also mentioned that you are talking the averages here. If a portfolio is heavy on A’s and B’s they are going to have a much lower default rate and probably a lower return as well. We will wait to see what Lisa comes back with. And I am not sure why someone at LC is not voicing their opinion here based on this and your many other comments. I know many people there read this blog, so I will have to check with them next time we speak or Rob do you want to chime back in?

@Mike, Good advice there. I am a big fan of Matt at Steadfast Finances, he has the highest return out of anyone who publicly shares their investment data. We can all learn from him. I will be very interested to see how defaults impact his NAR as time goes on.

Dan B February 24, 2011 at 11:08 pm

@Peter…………..Lisa’s portfolio isn’t heavy on A & B notes, because if it were then her weighted average rate couldn’t possibly have been high enough in order to survive 17 defaults & only be down to 5.7%. 17 defaults would take her much lower than 5.7%.
And if you reread her post you’ll note that she’s indirectly suggesting that the 5.7% is a number that is at the low end of her experience to date. So she must have started with a weighted average rate north of 12-12.5%……………which means she can’t be heavy on A & B notes to have that type of average.

Lisa February 25, 2011 at 7:02 am

Thanks everyone! I’ll post some more information later today in response to the questions posed. Currently I have 14% A grade loans, 51% B grade, and 22% C grade. I’ve been fairly conservative here. Today I mainly fund $25 a loan and have much better filtering than I did at first. With my initial investments I funded $100 or $200 per loan in some instances and a couple of these were charged off when they were about half paid. In total, 7 of my charged off loans were for $50 or more and the rest were $25 each.
In addition to the defaults, today I have 18 that are late, so that is probably also lowering my return %.

Thanks for keeping the dialogue respectful,
Lisa

Dan B February 25, 2011 at 8:30 am

So Lisa, was I correct in guesstimating that your weighted average rate is in the 12% or higher range?
Although it may not seem so, you were more than a bit fortunate to have those larger charge offs make as many payments as they did before charging off. There are a few people here that have apparently had charge offs after only 1 or 2 payments. I’ve had one that made only 3 payments.
Thanks for sharing,

Peter Renton February 25, 2011 at 3:29 pm

Ok, Lisa has been kind enough to send us screen shots of her returns. Here they are. Dan, you were pretty much spot on with your weighted average rate guess.
/wp-content/uploads/2011/02/LC1.gif
/wp-content/uploads/2011/02/LC2.gif

Dan B February 25, 2011 at 6:02 pm

Uncanny isn’t it? And keep in mind that my guesstimate referred to her weighted average rate BEFORE the defaults took her down to 5.7% & before they were charged off & removed from the calculation. Add those 17 notes back in & you’ll be even more impressed at my accuracy.

So what do I win?

Peter Renton February 26, 2011 at 9:42 am

Well Dan, if I was Oprah I would give you a new car or a trip Australia but since I am not you will have to settle for the adoration of the many fans of this blog.

Rob G February 26, 2011 at 11:15 am

@Peter: thanks for engaging the community in this conversation. It is very interesting that an unhappy customer experience is defined as somebody making over 5.5%.

@Lisa: I’m glad you’ve shared your experience in a very honest and open way. Your account seems to fall perfectly within the normal curve of returns. I’ve looked at your account and will be discussing it with our investors services team during the week. If you have a few minutes next week, we’ll be happy to share out insights.

@Dan B: you raise an extremely good point in that we have done a poor job in managing investors expectations of returns. By publishing a real time Net Annualized Return, we have indeed set the expectation incorrectly for those who make a great return that is below that number. This is a problem we are actively working to address. A more accurate way to look at returns is to plot the curve of investor return distribution, which can be found on our real time stats page. These graphs show that as the number of notes invested in increases, the distribution of returns becomes more concentrated around the platform average. For instance, all investors with 800 or more notes have enjoyed positive returns. Happy to discuss further through this thread or phone.

Rob G February 26, 2011 at 12:09 pm

The graphs I referred to in my previous post can be found here:

Real time:
https://www.lendingclub.com/info/statistics.action
(bottom right)

Updated monthly:
http://www.lendingclub.com/public/diversification.action

Best regards,
Rob

Peter Renton February 26, 2011 at 2:22 pm

Rob, Thanks for your feedback. And I think you hit the nail on the head with your comments to Dan. A fixed income return of 5.77% over the last two years is decent. However at Lending Club it looks bad. Two reasons:
1. You advertise that average returns are 9.67%.
2. You have that silly Compare link on the home screen under the NAR. If you insist on keeping that Compare link you need to make sure you are comparing not just the the number of notes and NAR, but the age of notes. Otherwise the comparison is meaningless. Actually it is worse than that, because it can make people getting decent returns feel like a failure. For example, my NAR is 7.85% on my main account (which I am happy with) but I am in the 30th percentile. Ouch.

Dan B February 26, 2011 at 3:04 pm

@Rob G………….Peter is absolutely correct. When you sign up for a CD, the number that is advertised IS the number you will get. If one were to put a chunk of change into XYZ mutual fund on Jan 1st & hold it through the end of the year, the return one will get is pretty damn close to whatever number is listed, regardless of whether it’s a stock, bond or whatever type of fund. So why does the “average” investor have to come to p2p & face a completely different set of rules?? Why do we need to look beyond the 9.67% when that is the number that is everywhere? When that is in many cases the number that likely drew them in to p2p in the first place?? Why in fact, do you need to “manage” investor expectations at all? Why can’t the numbers speak for themselves like they do in every other investment type? And why is the fact that no investor (with 800+ notes) loses money something to be that proud of when that should be a given? And finally, (& my apologies Lisa) your right, 5.7% isn’t bad these days……………but 2 1/2 yrs ago when Lisa started with LC she could have locked in a 3 yr CD at 3-3.5% & avoided all the BS. And, guess what, she’s got 18 more “lates” in her porttfolio! We both know that half (if not more) of those are going to default in the next few months. How will her NAR compare then to that FDIC insured 3 yr CD then??

Rob, I hope you appreciate the fact that I’m not going to ask you any “tough” questions today. Incidentally, none of the above is about me. I wouldn’t call myself a “happy” investor, but in fairness I can’t say that I’m displeased with my personal results.

Mike February 26, 2011 at 8:29 pm

Have I got a deal for you! I’ll give you 6% on your money if you loan it to someone you will never meet or contact. In addition, stated income may or may not be verified. In fact, the purpose of the loan may or may not be stated truthfully. The loan will be unsecured, and he or she can declare bankruptcy at any time and keep all of your money. I’ll guarantee that if you make $25 loans to at least 800 people, you won’t lose any money. Who’s in??

Flip side…our financial advisor thinks bankruptcy might be the best way to go for our situation. I’ve heard that you can score some easy cash at Lending Club before we take that step. Take out a loan for 20 or 25k, and don’t make a SINGLE payment on it. Then file for bankruptcy and the loan is discharged.

Looking at the two sides of the coin, I believe the risks taken with these types of loans justify a return of more than 6%.

Dan B February 26, 2011 at 8:57 pm

@Mike……..I couldn’t agree with you more.

Of course I think the p2p companies understand your points all too well. And that’s why the 9.67% is prominently displayed instead……….not to mention the whole “feel good” song & dance routine that is bandied around by the companies & their cheerleaders.

Peter Renton February 27, 2011 at 4:06 pm

@Mike/@Dan, Whether or not you think a 6% return is worth the risk of p2p lending is purely subjective, but you have clearly stated your position. But I certainly concede it sounds bad if you go in expecting closer to 10%.

You accuse Lending Club and Prosper of unsubstantiated positive propaganda but then you both provide the world with unsubstantiated negative propaganda. Come on now, gentlemen, you can do better than that. You both know that the person who makes no payments on a p2p loan is a rare occurrence. I have just over 1,600 notes in four accounts between LC & Prosper and the above scenario has happened to me twice, or roughly 0.1% of the time. Just to put it in perspective for people who may stumble across this comment thread.

Dan B February 27, 2011 at 4:59 pm

Peter………..Everything I say here I back up with facts. And not the “fuzzy” stuff that others float out here & try to pass as facts. Where exactly have I used unsubstantiated negative propaganda? Please be specific. Because if you can’t, then you owe me an apology. As the owner of this blog you should know better than to talk out of your a**

Mike February 27, 2011 at 5:17 pm

I would simply like Lending Club to publicize an actual real world rate of return, including the drag that unused cash has on your account. I’d like them to graphically display their loans like Fred93 does on his blog, so potential investors have more realistic expectations as their loans mature. I’ve had four loans default due to bankruptcy after very few payments, and one that is late now after ONE payment. Rob G., if you’re still following this thread, could you share how many loans have defaulted due to bankruptcy over the last year or two? I know that I can’t get that information from the statistics you choose to release.

Peter Renton February 28, 2011 at 7:30 am

@Dan, I am sorry if I offended you. I know that you normally back up everything you say with the hard facts which is why I had to question your agreement with Mike’s comment. My comment was directed at Mike’s bankruptcy claim as it implied this kind of thing was a common occurrence. You both know it isn’t common and your agreement with Mike implied otherwise. So, it wasn’t so much a comment of yours that concerned me but rather your agreement with Mike’s previous comment. I should have been more clear.

@Mike, I would like to see all the things you suggest as well. I talked with Scott Sanborn, the head marketing guy at Lending Club last week. I told him the NAR needs some serious work and he agreed. Apparently some changes around how our return data is presented are on the to-do list. I suggested why not show that and the real world return of your account. It would be an easy thing to do and might even encourage more people to reinvest their cash more quickly when they see the variance. I am also chatting with Renaud Laplanche, CEO of Lending Club, later today to voice my opinion about the utter lack of detail in the statistics section of Lending Club’s site. Be happy to pass on any specific requests.

Dan B February 28, 2011 at 12:18 pm

@Peter……….Apology accepted. I’m relieved to see that you know the difference between agreeing with someone else’s hypothetical scenario & supplying unsubstantiated negative propaganda.

We’re all investors here with money in these p2p companies. What do I have to gain by being negative?

Nevertheless, there are multiple & real problems here that need to be brought up until they are fixed. Here’s just one of them…………. I scroll up this page & I clearly see 2 Lending Club banners advertising a 9.6% return. I scroll up this same page & I see Rob G’s (one of the principals at LC) post referring to an account that returns 5.7% after 2 1/2 yrs……………& I quote “Your account seems to fall perfectly within the normal curve of returns”.

Now, the 2 statements above are extremely difficult, maybe impossible, to reconcile. In my opinion, it’s inevitable that someone or some entity will sooner rather than later, demand/force (or whatever other term you prefer) LC to withdraw/amend at least one of those 2 stated “facts”. I have no idea what type of fallout (if any) could come from something like that. Therefore, in my opinion, it’s sensible to deal with this now before the sh** has a chance to hit the fan.

Mike February 28, 2011 at 5:12 pm

Peter, I’m looking forward to what Scott and Renaud can add to our discussion. Thanks in advance for keeping us posted.

Peter Renton February 28, 2011 at 6:06 pm

@Dan, Thanks. I had my call with the CEO of Lending Club earlier today and he knows there is work to do here. As to your last point they about the claimed versus real returns, while he couldn’t tell me details (he can only share with me what is public information) he did say there were going to a lot of changes to NAR and the account summary screen this year to give more realistic expectations for investors.

Mike March 1, 2011 at 6:42 am

Recognizing that a problem exists is the first step in solving it. Thanks for the update, Peter. I hope we all see these changes sooner rather than later.

Ace March 6, 2011 at 7:52 pm

I have less experience than you guys but have taken a slightly different approach. I really like the way MicroFinance leverage local social pressure so me and some friends have focused on lending to people we know our own community. It leads to much higher concentration 10k over 3 loans (risk?) but I have a personal relationship with my borrowers despite the low rating. Plus I have insights (like insider trading?) into whats really going on with the borrower that isnt taken into account when some with a 750 credit score through the companies algorithm receives a high risk score. Average a 21% return over the last year. Showing my friends that kind of return has made it easy to spread the word now we have a group of folks spreading the word to borrowers and investors.

i think http://www.rebirthfinancial.com is going to present opportunities that leverage this local way of doing things.

Peter Renton March 7, 2011 at 11:40 am

@Ace, Thanks for your comment. You bring up two separate but interesting points. Local and social, both of which I see getting more commonplace as p2p lending grows in acceptance. Before local lending can really take off, though, it needs a much larger investor base or as in the case of Rebirth Financial, a real focus on the local community. (By the way, you can read my review of Rebirth Financial here: /news/new-peer-to-peer-lender-launches-rebirth-financial/)

As for social aspect, that is more tricky. Prosper started out with a large social component on its lending platform where people could join groups and interact with other group members. They no longer emphasize this kind of social connection and Lending Club has nothing of the kind. By combining the two, local and social, you do get the best of both worths from an investor perspective. I feel we are in the very early days of a paradigm shift in consumer credit. Both these will come to pass, I believe, by the end of the decade.

Leave a Comment

Notify me of followup comments via e-mail. You can also subscribe without commenting.

{ 1 trackback }

Previous post:

Next post: