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Another P2P Lending Convert from Mainstream Investing

by Peter Renton on May 25, 2012

Seeking Alpha is one of the leading websites for news on investing. I have been receiving their stock market alerts and free newsletters for some time. That is why I was very pleased to read this article there earlier this week by Zack Miller, an author, blogger and the managing director at a boutique investment firm.

Now, normally I would just mention this article in my weekly news roundup but I wanted to highlight it in a separate post for a couple of reasons. First, the author provides details of the journey that took him from p2p lending skeptic to convert. Second, Seeking Alpha is the kind of publication that many mainstream investors read who have never even considered p2p lending.

Lower Defaults Than Corporate Bonds

I learned a great deal from this article. I had no idea that default rates were so high on some corporate bonds. High risk corporations appear to default at a much higher rate than even the least creditworthy borrowers at Lending Club or Prosper.

If you’re investing in junk bonds (where there is still a little yield), as time goes by, you have almost 50% chance of getting defaulted on. We haven’t seen, nor are seeing those numbers in the p2p loan market.

Here is the money quote that I hope all investors pay attention to:

So, higher returns, lower defaults. That looks pretty good and may deserve to be a new asset class in your allocation or your clients’ allocations.

Go read the article and send the link to all your friends who are still skeptical about p2p lending.

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{ 2 comments… read them below or add one }

Lou lamoureux May 25, 2012 at 7:24 am

I would have preferred some sort of rate translation between the bonds and P2P. I have no clue what a BB rate bond is issued at, so should I be comparing that to an A rated LC loan or a G? junk bonds may default at A 50% rate, but that might be like a borrower on LC with a FICO of 550 (which we’ll never see).
Lou

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Peter Renton May 26, 2012 at 12:57 am

@Lou, While it is difficult to compare corporations with individual entities I think you will find that on the whole bonds offer investors much lower interest rates for the default risk. Looking at the Vanguard High Yield Corporate Bond Fund, which I have owned in the past, it has a yield of around 5.7% right now with a BB average credit quality (average duration is just under 5 years) which is slightly lower than the BBB rated bonds quoted in this article. We know that BBB have a default rate of 10% so BB would be likely higher than that. This would equate to roughly a B-grade note on Lending Club paying around 11% – double the interest rates from an equivalent corporate bond.

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