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How Did You Fund Your P2P Lending Investments?

by Peter Renton on March 28, 2012

If you are a p2p investor the chances are this is not the only investment you have. If it is then you are likely in violation of the guidelines set forth by Lending Club and Prosper.

Presumably when you opened your p2p lending account you used money that you had elsewhere. Where did that money come from?

Today we are going to do something a bit different. I am running a poll to see where people have taken money from when they started investing at Lending Club or Prosper.

I can tell you where my money has come from. I have been moving money from a combination of the stock market and bond market. I will continue to take money out of these until I have at least $100,000 invested at both Lending Club and Prosper.

Vote in the poll below and leave more details about your choice in the comments. If you investment has come from multiple sources you can vote for more than one choice.

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{ 18 comments… read them below or add one }

Danny S March 28, 2012 at 8:47 pm

A good poll, will be interesting to see the results.

For me, its a combination of stocks, and a number of long term CD’s I had which have been gradually expiring

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Brady March 28, 2012 at 9:19 pm

So, if your goal is to have $100k invested in LC and Prosper, I’d imagine you’re also shooting for a monthly interest income from those investments of ~$1,000.

(100,000*12%)/12 months

Not bad at all.

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Peter Renton March 29, 2012 at 3:13 am

@Danny, It already is interesting to see that the vast majority of people are using money form a checking or savings account to move into p2p lending. I would have expected more money from the stock market.

@Brady, My goal is actually double that, because I intend to have $100K each in both Prosper and Lending Club. I am already there with Lending Club, spread over four accounts and I will get there with Prosper by the end of the year. I am shooting for a 12% return on Lending Club and a bit higher than that on Prosper.

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Bilgefisher March 29, 2012 at 7:24 am

My money goes in and out of real estate. Its my holding account between property purchases. I don’t need to move the money quickly, that’s what I my bank account reserves for. I am looking at doing the same thing for personal reserves, but other secured options are tempting me. The fact that the notes on p2p sites are not secured has me limiting my investment somewhat.

Jason

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Charlie H March 29, 2012 at 10:19 am

1: debt free other then morgage
2: Maxed 401k Contribution
3: 6 month reserve of emergency savings

Remaining cash is split 50:50 between lending club and high yield stocks/ETF. (KMP, COP, INTC, T, SDY, IDV)

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Michael March 29, 2012 at 10:49 am

@Peter

I’ve found most people feel that p2p is more risky that stocks so they are unwilling to sell stocks to fund a p2p account. I’m basically aiming to do what Charlie does. I have a large degree of confidence in both Prosper and Lending Club to produce returns for the long run that will outperform 30 year treasuries or even the stock market. Of course there is a large degree to inflation risk but I know both platforms can adapt fairly quickly to this.

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Peter Renton March 29, 2012 at 2:12 pm

@Bilgefisher, I think most of us would put more money to work here if there was some kind of secured backstop in place. Even a reserve fund like Ratesetter in the UK would be helpful. Maybe one day Lending Club or Prosper will get a banking license and they could have an FDIC insured option :-) .

@Charlie, Before I sold my business I had pretty much the exact same strategy as you. I believe the first thing you should do is max out your 401(k), particularly if there is a match involved. I also have a good chunk of money in high dividend stocks and I love the MLP’s like KMP.

@Michael, With this survey I am finding that to be true. I expected more people would say they are selling stocks (particularly with the current bull market we have) but that is not the case. I have had a some stocks that hit all time highs recently that I have sold and deposited that money in p2p. But I guess I am in the minority there.

You hit on an excellent point here that is probably worthy of a whole blog post. I also believe that Prosper and Lending Club will both outperform treasuries and other fixed income investments over the long haul. And probably the stock market as well although it is too soon to make a confident call on that one.

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RJL March 29, 2012 at 3:03 pm

Interesting discussion. My Prosper money comes from savings that would normally go to stocks or other investments. Like most, I was skeptical at first but the results have caused me to allocate more money.

This is somewhat off topic but related to your previous discussion of limiting P2P to 10% of investments or net worth (although, as previously noted, some states have no limitations for Prosper). I have several different types of investments but I could envision the Prosper account growing to more than 10% if I do make 10%+ in interest consistently and reinvest the gains. Remember, that 10% does not include one’s home or vehicles (according to Prosper).

The question then becomes how big is too big? I’m not as worried about defaults (that risk can be managed) as much as the structural viability of the marketplace itself. In other words, do I trust that Prosper will continue to exist or, if it doesn’t, to protect my loans throughout a bankruptcy? I think this is the big hurdle for the P2P companies to overcome. Investors want something rock solid, not “While we believe these safeguards will protect lender members against the main risks relating to our bankruptcy, the matter isn’t free from doubt.” (from the Prosper website) For those of you with substantial amounts of money invested, how much does this worry you??

However, I’m not sure a large investment in Prosper is any more foolish than putting over 50% of one’s retirement savings into the stock market. The only difference between the two in my mind is that the mutual fund / brokerage industry has a history of selling people on equities while social lending is new. Go back 50 years and most people would not have dreamed of putting their life savings into the stock market.

Apologies for the ramble, but the bottom line is I know I’m taking a risk and I’m ok with that if the potential reward is double digit returns. At the same time I’d like to see Prosper work to remove the doubt from their safeguards.

Nice blog!

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Leonard March 30, 2012 at 3:14 am

I am from Taiwan. I’ve read your ebook P2P Lending and I am very interesting about it. However, when I register an account in Lending Club, I found they didn’t accept registration from non-US residents.

Are there any ways to participate in P2P Lending in Asia?

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Charlie H March 30, 2012 at 10:46 am

@RJL This comes back to what kind of asset class you think LC/P notes are. I look at them like they are high yield bonds. Other look at them like CDs (yikes!)

LC makes up about 6% of my net worth but about 25% of my total bond allocation.

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Bryce M. March 30, 2012 at 12:18 pm

Besides my $10k investment in LC, I am all cash. Even my 403b is treasury/money market. I simply do not invest in something I don’t understand. How can I win when I’m competing against Goldman Sachs? Emotion, “technical” analysis voodoo. It’s all bullshit. I’ll stay away and invest in debt. Much easier to comprehend and predict.

I agree with the poster above that the big issue is the viability of the platform itself. Even if they do become profitable, how does one protect against an Enron scandal?

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Michael March 30, 2012 at 1:20 pm

@Bryce M.
I’m in total agreement with you on sticking to debt. In fact, I’d love to discus some thoughts via email at some point.

However, we’ve had this conversation many times about P2P platforms engaging in scams and they all seem to be more like conspiracy theory than anything else. Besides the fact all cash is kept in a custodial account, you realize the entire company would have to be in on the scam? There are intrinsic checks and balances to the p2p platform ranging from the engineering team to the underwriting team.

The instant they issue a loan they send the money to someone else. The instant most accounts have enough money they reinvest and then that money is sent out to a new borrower. Really the only place they could steal is idle cash, but once they make a loan they money is needed again and sent out. This isn’t stocks where all you have in essence is a piece of paper to indicate your purchase, they are loans, and the money needs to flow out. The bernie madoff relied on NO money going out to work and making up fictitious gains. With both platforms money is constantly flowing out and it needs to be produced to the borrower, unless literally the entire company is in the scam producing fake loans and then defaulting them.

I’ve been to both companies, these aren’t 5 people sitting in a room. These are companies that occupy entire floors of downtown SF financial district buildings. As you said, bonds are easy to understand compared to equities or of that fact a company’s balance sheet and GAAP standards seem to be a moving target at best when you factor in “interpretation”. I think that works to our advantage too in understanding how money flow through their system.

I’m meeting with Prosper today, I’m currently sitting in an office in downtown SF. I flew out here from Wisconsin because I feel compelled to meet with the teams from both companies. If I am going to make a blog about P2P lending I better know full well what I publishing is correct and honest. I really can’t offer you an assurance in writing these are not Enron-type companies but this is the third time now on my own dime I have flown here with meet with management. I’ve spent hours with both teams, talking about the same things you mention. I believe both companies have your best interest and borrowers at heart.

You have people from the P2P lending community that are also acting as 3rd party watch dogs. From LendStats or Social Lending to Nickel Steamroller and others. There are a lot of people watching the data, and if anything shady comes up the community will be sure to post it. I monitor both platforms for notes that are removed. If a loan id does not exist on an import than I am expecting I am notified immediately. I have my own checks and balances in NSR that watch for integrity issues.

I hope this helps ease some concern.

On that note, the only missing item I think should be exported on the the platforms is the collection logs. If anything shady is going on I believe the collection logs would be the key. I believe redacted codes should be assigned to people that do the skip trace and or collections and be available for export.

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Dan B March 30, 2012 at 6:13 pm

I agree with Michael. Also it’d be prudent to point out that the reality in today’s world is that there is no such thing as a foolproof guarantee anymore. I hate to make the comparison, but in todays rate environment a FDIC CD or savings account insurance guarantees not only that your money is safe, but also that your money will LOSE anywhere from 1-3% annually in purchasing power. Those figures assume that you believe the governments’ other worldly official 3-4% inflation figure. ………… since the method used to compute that number has been “massaged” so many times over the years that it’s not even funny. But I digress.

The main point I’m trying to make is that, as Michael has pointed out, p2p doesn’t function in a vacuum. Some of us watch it closely & watch it daily.
Also I think it’s actually a good thing that p2p doesn’t issue the actual loans. The fact that an outside bank does it adds a layer of verifiable safety to the process.

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RJL March 30, 2012 at 6:30 pm

Michael / Dan,

Thanks for your insights — your comments are reassuring to those of us relatively new to P2P.

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Peter Renton March 30, 2012 at 8:13 pm

Great comments everyone. The viability of the platform is probably the biggest concern the average investor has. But as Michael so eloquently described above the chance that there could be an Enron or Madoff type scam is remote at best. I have also visited both Prosper and Lending Club several times and spoken with the senior management at both companies at both companies about this very issue. While fraud is not impossible, there are so many moving parts with so many checks and balances including third party audits that it would take dozens of people acting together to pull off any fraud. This is not something I worry about at all.

@RJL, The 10% limit is really just a guideline and not an enforceable limitation. They simply don’t want an unsophisticated investor to put their $20,000 in life savings into one loan then have that loan default. But I know many p2p investors who are in for more than 10% of their liquid assets.

@Leonard, There are no p2p lending services that I know of in Taiwan but there are at least two in China. Not sure if that is an option for you but if so you could check out CreditEase.cn or ppdai.com.

@Charlie, I like to think of p2p lending as its own asset class of consumer debt. While it is fixed income I don’t know how much it has in common with a corporate bond as far as correlation is concerned.

@Bryce, I like Warren Buffet’s criteria for investing: if you can’t explain the business to a six year old then he likes to avoid it. But he seems to have diverged a little from that in the last few years with investments in Goldman Sachs ans GE.

Now, having said that I do invest in the stock market in companies I do not completely understand and sometimes I do well and sometimes not so well. The returns are certainly not as predictable as p2p lending which I why I continue to move more money into Lending Club and Prosper.

@Michael, Thanks for chiming in with such a detailed response. I trust your visit went well. I hope you do a blog post about some of the things you learned because I am certainly interested to know.

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Dennis March 31, 2012 at 1:20 am

Peter,

Great discussion here, some really impressive comments.

The money I invest with Lending Club and Prosper has come primarily from savings, checking, and current earnings – so far. I did however just open an IRA with Lending Club, financed totally from my brokerage account which is where my current earnings surplus usually goes (actually used to go). I will max out the 2011 and 2012 contribution limit in a ROTH IRA with Lending Club.

I have traded stocks for 12+ years with somewhat unsatisfactory results vs. time investment. P2P has allowed me a far less stress investment strategy than trading stocks, with better returns. I completely agree with Bryce, the small stock investor has little chance competing in a rigged system that favors the mega institutional players (Goldman Sachs, JP Morgan/Chase, BOA, etc.). SEC oversight of these institutions has been pathetic, I believe by design. I no longer have one penny in stocks and have been searching for alternative investments. P2P has so far been working great for me. I’ve only been doing it for 7 months though, but so far I am very impressed. I hope to be with Peter one day, in reaching $100,000 on both platforms (Lending Club and Prosper). I still have a long ways to go though, I believe slow is the way to go with something like this.

Thanks to all here who have posted some very informative and intelligent discussion. This platform has helped me tremendously (thank you Peter) with the confidence I needed to invest in P2P.

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Peter Renton April 2, 2012 at 1:40 pm

@Dennis, You are welcome. I am always glad to hear from committed p2p investors. I don’t think you will regret your decision to more money to p2p lending. I expect over the next decade here will beat the stock market and bond market for the average investor. And no more worries about the big market swings that seem to happen on a regular basis. Having said that, I still have money in the stock market but have been slowly reducing my exposure there and moving new money to p2p lending.

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DT April 4, 2012 at 2:23 pm

I funded my Prosper account with funds taken from stocks, bonds and savings. P2P investing is by far my favorite category of investing. I have been investing in stocks and bonds for over 20 years and still keep this asset class, mainly for diversification. I have set a dollar goal or limit for my Prosper account several times, but keep increasing the amount over time. I am extremely pleased with the Prosper returns received since July 2009. Cannot say the same for 2007 – black out period. I was very concerned about the viability of the platform for years and talked with Prosper executives about his. I am happy with what I consider a big reduction in risk about the platform. Rambled more than planned, but that’s my 2 cents.

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