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Does anyone have personal experience with lending on sites like

Do they have a handle yet on what the yield and default rates are? Last time I looked at it, they didn't have a ton of data because none of the loans had gone to term.

If it's really a great idea, it seems like a broker or investment bank would come in and securitize the loans - is this happening?

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Likely a duplicate of:… .. Perhaps re-word yours to be more specific to your other points, rather than just soliciting personal experience anecdotes? – Chris W. Rea Dec 2 '10 at 23:21
I was actually most interested in personal anecdotes. – John Shedletsky Dec 2 '10 at 23:47
Should this be a wiki if you are looking for anecdotes? – MrChrister Dec 3 '10 at 5:58
Dunno. Probably not? – John Shedletsky Dec 3 '10 at 17:28

7 Answers 7

up vote 16 down vote accepted

I experimented with Lending Club, lending a small amount of money in early 2008. (Nice timing right - the recession was December 2007 to June 2009.) I have a few loans still outstanding, but most have prepaid or defaulted by now. I did not reinvest as payments came in.

Based on my experience, one "catch" is lack of liquidity. It's like buying individual bonds rather than a mutual fund.

Your money is NOT just tied up for the 3-year loan term, because to get good returns you have to keep reinvesting as people pay off their loans. So you always have some just-reinvested money with the full 3 year term left, and that's how long it would take to get all your money back out. You can't just cash out when you feel like it.

They have a trading platform (which I did not try out) if you want your money sooner, but I would guess the spreads are wide and you have to take a hit when you sell loans. Again though I did not try the trading platform.

On the upside, the yields did seem fine. I got 19 eventual defaults from 81 loans, but many of the borrowers made a number of payments before defaulting so only part of the money was lost. The lower credit ratings default more often obviously, only one of 19 defaults had the top credit score. (I tried investing across a range of credit ratings.) The interest rates appear to cover the risk of default, at least on average. You can of course have varying luck.

I made only a slight profit over the 3 years, but I did not reinvest after the first couple months, and it was during a recession. So the claimed yields look plausible to me if you reinvest.

They do get people's credit scores, report nonpayment on people's credit reports, and even send people to collections. Seems like borrowers have a reason to pay the bill. In 2008 I think this was a difference compared to the other peer lending sites, but I don't know if that's still true.

Anyway, for what it's worth the site seemed to work fine and "as advertised" for me. I probably will not invest more money there for a couple reasons:

  • the liquidity issue
  • I feel like I'd have to do more due diligence and research, and I don't have time
  • I moved to a state where they only allow trading, not new loans

However as best I could tell from my experiment, it is a perfectly reasonable place to put a portion of your portfolio you might otherwise invest in something like high-yield bonds or some other sub-investment-grade fixed income.

Update: here's a useful NY Times article:

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+1 for "lack of liquidity" It's not a fact I've read much about when researching the P2P lending groups. – Alex B Dec 5 '10 at 0:45
I've invested in LC and due to defaults and pre-payments the rate I get seems to be quite pedestrian, even if limiting myself to A and B loans only (I actually have one E loan, which is fine, a number of B ones defaulted though). – StasM Dec 5 '10 at 23:46
Average performance of lending club loans during the recession was around around -3% to 0%, compare that to the stock market! Really the big downside is the lack of liquidity, but it isn't much different from a CD ladder in that regard. – MHH Feb 6 at 16:46
Have you compared your returns with alternative (by risk-liquidity-returns) instruments? PS: As I know, Prosper rewrote their underwriting model after 2009 and came up with reasonable default rates. – Anton Tarasenko Jun 17 at 21:34

I've been a P2P Lending investor for ~18 months now with Lending Club with no complaints.

Money wise, I'm making a 15.6% NAR w/ ~270 notes. I've had a few late payers, and one couple (oddly enough in both are in law enforcement) declare Ch.13 Bankruptcy, but b/c I've invested as little money as possible into each note ($25/note), my diversification helps reduce volatility and risk to capital.

Having tough underwriting standards is very important, but I think it all comes down to loaning only to those you think will pay you back, not someone with a sob story or a long history of defaults. That might sound like a no-brainer, but if you're a bit of a cynic and have really tough screening criteria, it's possible to lower your default rate if you're patient and deploy your money slowly over time. At least, my returns and default rate of zero would imply it's possible so far.

I blog about it quite a bit, so if anyone wants to check out my Lending Club investments thus far, please check it out. (Apologies if this is considered spam since I'm a new member of the site, but thought it relevant to the discussion.)

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I invested in loans. I'm getting out. I only have about $37 left, and as the principal is doled back to me, I withdraw the money.

The default rate I experienced was over 30%. Only six of the 53 loans I invested in were with borrowers whose credit rating was less than "A." Borrowers with a rating of "A" and "AA" had a higher proportion of defaults that those below "A".

Some of my blogging colleagues were wise enough not to start this game.

Some who invest in other P2P lending are almost certainly doing it with "found money." They post articles with affiliate links. As people sign up, they get the commissions deposited in their accounts, which they invest. As they update their blogs with the returns on their portfolio, it serves to encourage more signups, and the machine continues on. Even if they lose money on the invested loans, they're still ahead. To paraphrase John Chow's tagline: They make money with Lending Club by telling people how much money they're making with Lending Club. It's almost like investing with the house's money.

My high default rate might be because I started earlier in the game. Borrower screening and criteria have gotten tighter with time.

I don't recommend investing in P2P loans. My experience has been that a large percentage of borrowers requesting loans on these sites have run out of options, which the credit reporting doesn't reflect accurately enough.

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Lending Club hasn't had as high a default rate it looks like: ... though my midst-of-recession Lending Club account did worse than average, at around 25% of loans eventually defaulting (most after partial payment), I still didn't lose money overall. The interest rates cover a fair number of defaults. There are definitely risks, but not clear the risks are higher than other risky investments e.g. stocks - they are just different. Different risk can be good for diversification. – Havoc P Dec 3 '10 at 4:40
Did you really expect anything different with only 53 notes. Even the P2P companies themselves say not to invest in less than 200 loans because of variability in default rates. It's a catch 22, those who don't want to risk big money are those who are likely to fail. Kind of unfortunate. – MHH Feb 6 at 16:52
Also, if they have "run out of options", they'd have inquiries, and you can choose to avoid those notes. – MHH Feb 6 at 19:34

I invested a small amount of money with Prosper, and later with Lending Club. I don't know why there is such a discrepancy, but over half of my Prosper loans defaulted, while only 1 of my Lending Club loans has defaulted so far.

I think that P2P lending is for "early adopters" right now. There are regulation issues, transparency issues, legal issues, etc. Once all of those issues get worked out, I think that P2P lending will eventually overtake conventional lending, and it will be more profitable for both the lender and the borrower.

The Internet is simply eroding the value that banks are adding to the process (primarily aggregation of funds), and the system has to change.

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It is so easy to get money in the developed world. Why anyone would want to borrow money from a P2P lending site if a traditional bank/credit union is so readily available on similar terms?

Something like Kiva makes more sense to me, since getting money is a much more difficult proposition in the developing world. I'd see it as more as a charitable contribution than a money-making scheme.

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What? This comment is just pure wrong (I think you are basing your claim on pre-2008 lending practices), unless you are referring to credit cards. Banks don't give unsecured personal loans like they used to. Just try walking into a bank and saying you want a loan to pay for your wedding or moving expenses, even with a reasonable credit score. I've tried with a credit score well above 750. It is impossible. Of course you can find a secured loan, to say finance a car or house, but that isn't who is using lending club. – MHH Feb 6 at 16:58
The rates difference, for example. Banks charge more for credit cards than P2P lenders for debt consolidation service. – Anton Tarasenko Jun 17 at 21:31
Whether one agrees with the first paragraph or not, the second is worth considering. Microloan organization as charities are interesting even if you aren't ready to do peer-to-peer. – keshlam Oct 4 at 14:20

I was active in Prosper when it started up. It was very easy to get attracted to the high risk loans with big interest rates and I lost about 14% after all my loans ran their course. (There's 10 still active, but it won't change the figure by much). Prosper has wider standards than Lending club, so more borrowers with worse credit scores could ask for loans. Lenders could also set interest rates far lower, so they could end up having loans with rates lower than the risk implied. This was set up with the idea of a free market where anyone could ask to borrow and anyone could loan money at whatever interest rate they wanted, It turns out a lot of lenders were not as smart as they thought they were. (Aside: it's funny how people will clamor for a free market, but when they lose money will suddenly be against the free market they said they wanted, this seems to apply to both individual p2p lenders up to massive multinational banks.). Since then Prosper has tightened their standards on who can borrow and the interest rates are now fixed. So I expect going forward it will be less easy to lose a bunch of money. The key is that one bad loan will erase the return of many good ones. So it's best to examine the loans carefully and stick with the high quality.

Simplified Example If you have 10 1 yr loans of $100 each paying 10% interest/year, you get 10% return at the end of the year, so $100 (10% of $1000.). BUT if one loan goes bad at the start, you have lost money. So a 90% success rate in picking borrowers leads to a loss.
You want to diversity over quite a few loans and you want to fund quality loans. I think really enjoyed investing through Prosper, because it gave me an insight into lending and loss ratios that I had not had before. It also caused me to look at the banks with even more incredulity when the case of the no-doc loans and neg-am loans came to light.

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I had the same experience as Jeremy: made investments in both Prosper and Lending Club and got a much better returns with Lending Club, although in my cases both investments were ok: after 18 months i made 4-5% on prosper and 11-12% on Lending Club. I think they just have better underwriting standards.

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