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Why Many People are Still Hesitant About P2P Lending

by Peter Renton on October 5, 2011

Hesitant to take the plunge into p2p lendingI have been following the conversations about p2p lending on a few popular personal finance blogs in the last month or so. In the comments section I have noticed that many people claim to like the idea of investing in p2p lending but still haven’t taken the plunge.

Lazy Man and Money gave an update on his Lending Club investments that brought in several comments from prospective investors. Sam from Financial Samurai wrote this article on the Yakezie blog that also garnered many comments. Other recent blog posts that have prompted some discussion include Beating Broke, Sweating the Big Stuff and Bible Money Matters.

What is holding prospective investors back from opening an account with Lending Club or Prosper? The objections from potential investors on these blogs typically fall into one of these five categories.

1. Borrowers will just default on their loans

There is a sentiment out there that goes something like this: I wouldn’t lend my money to a stranger I just met on the street so how is it any different lending money to a stranger online? It is very different. First, these borrowers have to submit to credit checks and they have to confirm their identity in a variety of ways. Then investors have to deem the borrower a good credit risk and invest in their loan. Even with all these factors there are still defaults, that is true. But default rates are relatively low and can be mitigated somewhat by spreading your risk among a large number of loans.

2. The returns sound too good to be true

My father used to say, “if an investment sounds too good to be true, it probably is too good to be true.” In today’s investment environment people see returns of 10% and think there must be some catch, that no one can earn those kinds of returns without taking on substantial risk. Whether or not the risks of p2p lending are substantial is a subjective matter, but there certainly are risks. But with some best practices people can minimize their downside risks and quite possibly achieve double digit returns.

3. It is too time consuming

Many people hear about the need to diversify into many loans, possibly hundreds of loans, in order to protect their investment. They think they can’t possibly read and consider hundreds of loans and then keep track of them all once they are invested. I would agree with that statement. Even though I am invested in over 2,000 loans total, I can check on the status of all my existing loans as well as invest in new loans using the online tools in just a few minutes a week. Now, there was some work involved in getting to this point but the truth is you don’t have to spend a lot of time on your p2p investments unless you want to.

4. These companies aren’t making any money

This is a valid concern and one that has been discussed at length on this blog before. It is true that both Lending Club and Prosper are not profitable yet but they are growing fast and have plenty of cash on hand. Having said that, they may need further venture capital investments (this is highly likely in Prosper’s case) in order to stay in business so there is a risk that these companies may run out of cash. Now, I don’t believe that is likely – but it is a concern that potential investors need to take into consideration.

5. I am going to wait and see what happens

The wait and see approach is very common. I see many comments from people (and these are people who read personal finance blogs so they have at least a passing interest in investing) who say they keep hearing about p2p lending but they want to stay on the sidelines for now. That is fine – meanwhile these investors have to deal with stock market fluctuations and interest rates on CDs and money market accounts that are very close to zero. One day they may come back and revisit p2p lending.

I am sure there are other excuses so I would be interested to hear from readers on this one. What do you hear from your friends and family when you tell them about p2p lending? Please share in the comments.

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{ 56 comments… read them below or add one }

Peter Renton January 27, 2012 at 10:43 pm

@Michael, No. It is not that they will be profitable. I can almost guarantee that it is because they will have passed $500 million in total loans originated. A major milestone.

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Dan B January 28, 2012 at 9:03 pm

Peter’s correct. The milestone will be breached on Fen 2nd…………..after lunch.

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dennis nash March 25, 2012 at 6:33 am

Hi Peter,
I just want to say that P2P lending has been an excellent source when it comes to investing and most of all, a real way to accumulate wealth in the long run without losing you’re shirt. Let me explain.
I was a trader and investor in both stocks, ETF’s, mutual funds and bonds for the past ten years. In that time, I made money but I lost money as well. If you have noticed like many have, the markets are very shakey right now. Really unsecure but many brokers aren’t allowed to talk about it. Now more than ever, many investors have pulled their mutual funds as well as their stocks from online investment services as well as their 401K’s and cancelled their IRA’s well. Why? I’ll tell you now.
It’s all smoke and mirrors. Let’s say, Mc Donalds which makes millions of dollars a week need you to invest $90.65 a share only to get 0.70 a share dividend in return? Mind you that you have just coughed up $75,000 in that account only to see your investment lose $ 7,000 and up if the market drops any given day. In May of 2011, the market dropped 600 pts in one day. Millions of investors money was lost. That was one example. Another is ETF’s. Do you know that not one fund manager that currently oversees these ETF’s has not one dime invested in them? Ask around. You’ll see. Bonds? Gone. That’s why I got out of the stock, mutual fund and other shell game that I stated above. I went over to the world of P2P in 02/12 and I haven’t looked back at all. Since that time, I’ve accumulated growth, and I’m really happy to tell everyone about it. P2P lending is really simple and to master this investment, all it takes is to diversify wisely in small numbers in A and B loans.
I say this to all of the critics of p2p lending by the way…go ahead, invest with stocks, mutual funds and ETF’s now that the market is”doing nicely”. Something will happen to the market like it does every two weeks and you’re money is gone. Go ahead. Oh by the way to all of the critics also…Jim Cramer of CNBC said it best on air in 2011 ” The market is the biggest racket”. He should know. Be wise…go with p2p lending.

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Peter Renton March 25, 2012 at 11:37 pm

@Dennis, I remember reading somewhere that the median amount of time a stock is held on the major exchanges here is something like two minutes. There are a handful of very powerful players using complex algorithms to place lightning quick trades. But the stock market has something that people have found tantalizing for decades – the ability to substantially increase your money in a short period of time. P2P lending simply cannot offer that.

Of course, I am continuing to take money out of traditional investments like the stock and bond markets and into p2p lending because I don’t think you can find a better investment vehicle for long term growth. I will give up the possibility of doubling my money in six months for a steady 8-10% return.

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Erin K June 11, 2012 at 11:32 am

Peter, what online tools do you use that allows you to check the status of your loans in just a few minutes a week?

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Peter Renton June 11, 2012 at 10:15 pm

@Erin, I have an Excel macro written that helps me invest in LC notes very quickly and easily. I use the tools at Nickelsteamroller.com and Lendstats.com to check the status of all my loans. It is a simple case of downloading the CSV file of all your notes and then uploaded. For Prosper, I use Lendstats to keep a track of my investments there.

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