Your guide to peer to peer lending

Is a Bull Market for Stocks Bad for P2P Lending?

by Peter Renton on March 3, 2011

NYC - Bowling Green: Charging Bull

Today the Dow Jones Industrial Average was up another 200 points, continuing its almost constant move upwards over the last six months. It is up about 18.5% in the last six months alone, a pretty nice return. But this pales in comparison with the two year return. The Dow is up a staggering 87% since its low of 6,547 reached on March 9, 2009. You certainly will never get a return like that with peer to peer lending. Which brings me to the question, is a bull market for stocks bad for p2p lending?

Before we answer that question let’s take a look at some more numbers. In March 2009, Lending Club did roughly $3 million in new loan volume (Prosper was in their quiet period then). Last month (in the shortest month of the year) Lending Club did $14.6 million in new loans, about 500% more. So it doesn’t look like the bull market in stocks has had any impact on the popularity of p2p lending.

This makes sense when you think about it. Peer to peer lending is still so new that more people are discovering it all the time. As word spreads and more people hear about p2p lending, more money comes in. Then, of course, there are existing investors, many of whom put in more money or at least reinvest their interest and principle repayments. I don’t think anyone sees these short term gains in the stock market and decides to move their money out of p2p lending and back into the market.

As a rule, I don’t think people take their money out of the stock market and put it into p2p lending either. Most investors, I believe, take their money out of cash, CD’s or some other fixed income instrument. Others will leave their money where it is and put only new cash to work in p2p lending.

As for me, some of the money I have invested came from money market accounts. A large portion was rolled over from corporate 401k accounts that were invested in a mix of asset classes, primarily stocks and bonds. What about others? Where have you diverted money from to invest in peer to peer lending?

Photo of the NYC bull courtesy of wallyg

{ 8 comments… read them below or add one }

Mike March 4, 2011 at 7:36 am

Funding for my taxable and IRA Lending Club accounts came from (very) idle cash, earning a paltry 1.3% @ ING Direct. These funds represent only about 2% of my total portfolio, which is heavily invested in stocks. I don’t expect LC, or any P2P lender to match my long term gains in the market. On the other hand, I think you shouldn’t compare your returns to what you would get in a bank or CD, as those are FDIC-guaranteed investments. I see my LC loans as low grade junk bonds, where I am willing to take some default risk in exchange for a decent ROI. For some reason, though, I get bothered more by my LC defaults than when I lose 15k in a down day in the stock market. Anybody else take their defaults ‘personally’? Getting back to your point, I feel that if the stock market returns 8-10% or more annually, P2P will have a tougher time attracting new money. I also believe that as these loans mature and the true default rate becomes clearer, that will be another hurdle for these types of companies to overcome.

Peter Renton March 4, 2011 at 12:16 pm

@Mike, I agree a default in p2p lending hurts more. I think with bonds there is no real personal connection to your investment. You are either invested in a corporation or with a mutual fund in a bunch of corporations. But with p2p lending you are investing in individuals, people who you expect to honor their obligations.

As for the stock market, I don’t think it is the biggest concern for the p2p lending companies. I would be more worried about interest rates. Right now even 5% looks like a decent return, but when you can get an FDIC insured savings account paying 5%, p2p lending will need to be several points higher than that to have appeal. The easy money for Lending Club and Prosper is now, as I am sure they realize.

Dan B March 4, 2011 at 5:06 pm

When I first started with LC I actually read the prospectus. I’m not kidding. I used to spend time on each note, ask questions, wait for their reply & read all the other questions/answers etc. This is after I already put all the notes through my “filters”. I don’t think it’s an exaggeration to say that I used to spend at least 3-4 minutes on each potential note investment & all for a $25 investment. At the time I didn’t mind it as it was all very new to me, a learning experience etc etc. And yes I used to take every “late” personally…………… say nothing of defaults! After they defaulted I must have read & reread the original loan application of each of my 4 defaults 5-6 times. What did I learn? Nothing at all.

I’ve come to believe that it’s pointless to look for patterns if you’re outperforming the averages by a big margin in terms of defaults.

Nowadays things are different. I still look at the notes, but unless it looks unusual in some way, I don’t spend even half the time that I used to. I rarely ask questions & rarely look at the questions/answers as they all look the same to me nowadays. …………….

Aaron March 4, 2011 at 9:24 pm

Ditto to Dan’s entire comment, but with Prosper.

I’ve never really liked comparing investments in the terms stated above. If you actually think about it, the stocks are nothing like any other investment vehicle. When they say the DOW is up 87%, you really haven’t made any money at all. All that has happened is the “percieved value” of the stock is 87% higher. To actually say that you made money you would have to SELL the stock at 87% higher value than when you bought it. As we have clearly seen in the past, the “percieved value” of a stock is completely dependent on the demand for it. If no one wants to buy it, the value goes to zero. And this can happen in an instant. If you think in terms of a stock’s percieved value as an actual “gain”, then the potential gains are actually infinite.

P2P is largely different because you know what the ceiling of your investment is. I know I will never make anymore than 11.6% (my wieghted average.) Plus, what your investment is “worth” is listed right on the priciple value. (I’m talking per investment) The value can never go up, (unless you sell to a noob on the trading platform) it can only drop straight to zero.

Aaron March 4, 2011 at 9:27 pm

I should also mention that the money I put into P2P is all “new cash”. I don’t want to commit anything that I have working in other investments just yet.

Peter Renton March 5, 2011 at 10:03 pm

@Dan, I thing you can drive yourself batty trying to look at what went wrong with defaults. I still think it is useful to review them, but I look at some of them and think I would invest in that note again.

@Aaron, Obviously we all have many places to invest our money, I include the stock market as a comparison merely because it is a very popular place to invest and the benchmark with which most investments are compared. But you are right, they are very different animals. In the stock market, there is virtually no limit to the upside on your investment, but with p2p lending the opposite is true. As you point out, you will earn something less than your weighted average percentage.

Dan B March 6, 2011 at 3:07 am

Actually there is a way to earn more than your weighted average rate. I’ve easily beaten mine for the past 3 months as I’ve sold 200+ notes at an average 2% premium…………..And the kicker was that these were notes with a dropping or neutral credit score that I’d held for anywhere from just 6 months to a year.
I know, it does sound like a load of BS……….but it’s not.

Peter Renton March 6, 2011 at 8:38 pm

Good point. You have found the loophole. The secondary market is not something I have used much. I am going to be looking into it more in the next week or two. I know there are a lot of people on there from the states where Lending Club & Prosper don’t allow investors. I suspect these are the people buying your notes at a premium.

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