Why I Said "No" to Peer-to-Peer Lending

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Topic Author
NoRoboGuy
Posts: 733
Joined: Fri Apr 01, 2011 11:07 pm
Location: Just west of Austin TX

Why I Said "No" to Peer-to-Peer Lending

Post by NoRoboGuy » Wed Jul 22, 2015 8:37 am

Peer-to-Peer (P2P) lending is a high-cost investment with single-party risk.

Why I Said "No" to Peer-to-Peer Lending

I do not consider this to be a Boglehead investment, but for those who do, here are all the risks and benefits.
There is no free lunch.

User avatar
nisiprius
Advisory Board
Posts: 39750
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Why I Said "No" to Peer-to-Peer Lending

Post by nisiprius » Wed Jul 22, 2015 8:58 am

Benefits
The personal loan segment is a recently-available segment for retail investors...
That, to me, is an excellent reason to avoid it.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

fishingmn
Posts: 59
Joined: Thu Mar 08, 2012 1:21 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by fishingmn » Wed Jul 22, 2015 9:03 am

I put $10k into Lending Club 18 months ago - all in $25 loan segments. It didn't take too long to identify loans once you set up parameters.

I've been pulling it all out as I get payments. Even though I am still showing a 11%+ return I just don't like how 20 of them have defaulted. My biggest worry is if the economy has another hiccup that the default rate will skyrocket.

denovo
Posts: 4423
Joined: Sun Oct 13, 2013 1:04 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by denovo » Wed Jul 22, 2015 9:10 am

The way I think about it is , I am not a banker, I have no experience in the science of lending from the lender's side. People who come on this site are likely people who have been shunned by the conventional lending industry for various reasons. There's already many ways for most "responsible" consumers to get cheap debt, whether through home loans, equity, auto financing, and 0 percent 12 month credit offers. Do I really think I am smarter than banks who have years of institutional knowledge?

Yes, this critique could also apply to hard-money lending.
"Don't trust everything you read on the Internet"- Abraham Lincoln

User avatar
Rob5TCP
Posts: 3408
Joined: Tue Jun 05, 2007 7:34 pm
Location: New York, NY

Re: Why I Said "No" to Peer-to-Peer Lending

Post by Rob5TCP » Wed Jul 22, 2015 10:48 am

What I found interesting, in the article, he stated he could get 4% at Consumers Union. I went to Consumers Union FCU and the 5 year rate was 2.35%.
I was curious where that number came from?

Maverick3320
Posts: 530
Joined: Tue May 12, 2015 2:59 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by Maverick3320 » Wed Jul 22, 2015 11:01 am

denovo wrote:The way I think about it is , I am not a banker, I have no experience in the science of lending from the lender's side. People who come on this site are likely people who have been shunned by the conventional lending industry for various reasons. There's already many ways for most "responsible" consumers to get cheap debt, whether through home loans, equity, auto financing, and 0 percent 12 month credit offers. Do I really think I am smarter than banks who have years of institutional knowledge?

Yes, this critique could also apply to hard-money lending.
I can't speak for all peer-to-peer lenders, but I do know that LendingClub does some of this work for their investors, so it's not really being "smarter" than a bank. In theory, they have a legitimate way to pass cost savings over traditional banks onto retail investors. The fact that institutional investors are starting to pile into peer-to-peer lending should reinforce the legitimacy.

From personal experience, my returns have been around 11% over the last few years. I think if one takes the proper precautions - diversify the notes within the portfolio, and, as mentioned in the original article, keep peer-to-peer lending a small percentage of your overall portfolio - it can be a worthwhile investment. Not to mention it's a bit more "fun" than watching my Vanguard and TSP statements, as well as the positive feeling of lending to real people at a lower rate than they could get elsewhere, while still providing a positive return.

"Applications are approved based on stringent credit criteria designed to focus on the most creditworthy borrowers..."
"Lending Club assigns a grade (from A to G) to each loan based on the credit quality and underlying risk of the borrowers..."

https://www.lendingclub.com/public/stea ... rns.action

EDIT: Like others, I'm having a bit of difficulty finding a 4% risk-free rate of return, as stated in the original article. If someone can find this, please let me know!

User avatar
abuss368
Posts: 17082
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Why I Said "No" to Peer-to-Peer Lending

Post by abuss368 » Wed Jul 22, 2015 11:08 am

louis c wrote:Peer-to-Peer (P2P) lending is a high-cost investment with single-party risk.

Why I Said "No" to Peer-to-Peer Lending

I do not consider this to be a Boglehead investment, but for those who do, here are all the risks and benefits.
Hi Louis c,

I would agree with your excellent conclusion. We will stay the course and collect interest from our Vanguard Total Bond Market Index Fund.

Keep investing simple.

Best.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

Grt2bOutdoors
Posts: 21747
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Why I Said "No" to Peer-to-Peer Lending

Post by Grt2bOutdoors » Wed Jul 22, 2015 11:12 am

fishingmn wrote:I put $10k into Lending Club 18 months ago - all in $25 loan segments. It didn't take too long to identify loans once you set up parameters.

I've been pulling it all out as I get payments. Even though I am still showing a 11%+ return I just don't like how 20 of them have defaulted. My biggest worry is if the economy has another hiccup that the default rate will skyrocket.
If you really want to give away $500, let me give you my routing and bank account information. When can I expect the money? :twisted:
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

User avatar
Topic Author
NoRoboGuy
Posts: 733
Joined: Fri Apr 01, 2011 11:07 pm
Location: Just west of Austin TX

Re: Why I Said "No" to Peer-to-Peer Lending

Post by NoRoboGuy » Wed Jul 22, 2015 11:17 am

Rob5TCP wrote:What I found interesting, in the article, he stated he could get 4% at Consumers Union. I went to Consumers Union FCU and the 5 year rate was 2.35%.
I was curious where that number came from?
Consumers Union rewards checking.

There are rules, of course, to get these high rates.

BTW, their website is down right now (check later), but you can get as much as 5%. I think getting the 4% is easiest.
There is no free lunch.

denovo
Posts: 4423
Joined: Sun Oct 13, 2013 1:04 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by denovo » Wed Jul 22, 2015 11:23 am

Maverick3320 wrote:
denovo wrote:The way I think about it is , I am not a banker, I have no experience in the science of lending from the lender's side. People who come on this site are likely people who have been shunned by the conventional lending industry for various reasons. There's already many ways for most "responsible" consumers to get cheap debt, whether through home loans, equity, auto financing, and 0 percent 12 month credit offers. Do I really think I am smarter than banks who have years of institutional knowledge?

Yes, this critique could also apply to hard-money lending.
(1)I can't speak for all peer-to-peer lenders, but I do know that LendingClub does some of this work for their investors, so it's not really being "smarter" than a bank. (2) The fact that institutional investors are starting to pile into peer-to-peer lending should reinforce the legitimacy.

(3) Not to mention it's a bit more "fun" than watching my Vanguard and TSP statements, as well as the positive feeling of lending to real people at a lower rate than they could get elsewhere, while still providing a positive return.
I curated your post to respond to 3 points.

1. It still is even if LC does the legwork. People will only come on this site to receive a more favorable rate or perhaps any financing at all after being rejected by banks. The assumption behind LC is that you and LC understand risk better than institutional lenders

2. Not to me. A lot of institutional investors invest in hedge funds, a lot of them chased after mortgage backed securities in the aughts. How soon we forget.

3. Once we start mixing fun with investing is when I get really nervous. I want my investments to be boring as staring at a wall.
"Don't trust everything you read on the Internet"- Abraham Lincoln

User avatar
Topic Author
NoRoboGuy
Posts: 733
Joined: Fri Apr 01, 2011 11:07 pm
Location: Just west of Austin TX

Re: Why I Said "No" to Peer-to-Peer Lending

Post by NoRoboGuy » Wed Jul 22, 2015 11:25 am

Maverick3320 wrote: EDIT: Like others, I'm having a bit of difficulty finding a 4% risk-free rate of return, as stated in the original article. If someone can find this, please let me know!
There are several sites with high interest checking ideas. See this article at No-Robo Investor, this thread at Fatwallet, and this page at Doctor of Credit.
There is no free lunch.

lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 11:55 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by lack_ey » Wed Jul 22, 2015 11:25 am

denovo wrote:The way I think about it is , I am not a banker, I have no experience in the science of lending from the lender's side. People who come on this site are likely people who have been shunned by the conventional lending industry for various reasons. There's already many ways for most "responsible" consumers to get cheap debt, whether through home loans, equity, auto financing, and 0 percent 12 month credit offers. Do I really think I am smarter than banks who have years of institutional knowledge?

Yes, this critique could also apply to hard-money lending.
Not necessarily. The rates are fairly low for borrowers in the grand scheme of things and the application simple and quick to process. A lot of applicants are looking for convenience and/or may be younger and trust peers and an Internet company more than they do banks.

Returns seem to be at least around 6% for investors in the long term accounting for defaults unless the default rate really spikes. The average returns seen in the last few years seems to be better than that, though with friendly economic conditions. You'll have good years and bad years, obviously. The risk/return looks favorable compared to junk bonds if the platform doesn't go under and if you don't mind the illiquidity. How much you discount the rates for the inconvenience factor, illiquidity, and 3rd-party risks is up to you, but for an investor seeking risks and sources of return outside of equities this looks pretty reasonable for a small slice of the portfolio (once high interest checking and so on has been tapped out, or in a high tax bracket in an IRA).

New notes are pretty illiquid, though, and require effort and a steep haircut to sell, so it's not all that amazing for being able to shuffle around money and rebalance.

tim1999
Posts: 3635
Joined: Tue Dec 16, 2008 7:16 am

Re: Why I Said "No" to Peer-to-Peer Lending

Post by tim1999 » Wed Jul 22, 2015 11:26 am

After being a landlord on some low-end rentals, I vowed never again to put myself in a situation where people with not a lot of money and/or bad credit owe me money.

Jebediah
Posts: 579
Joined: Tue Aug 28, 2012 9:19 pm
Location: Austin TX

Re: Why I Said "No" to Peer-to-Peer Lending

Post by Jebediah » Wed Jul 22, 2015 11:31 am

Isn't this the noise we should be tuning out? How is the ramblings of a random blogger actionable or relevant?

User avatar
tyrion
Posts: 1217
Joined: Fri Feb 08, 2008 3:33 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by tyrion » Wed Jul 22, 2015 11:41 am

fishingmn wrote:I put $10k into Lending Club 18 months ago - all in $25 loan segments. It didn't take too long to identify loans once you set up parameters.

I've been pulling it all out as I get payments. Even though I am still showing a 11%+ return I just don't like how 20 of them have defaulted. My biggest worry is if the economy has another hiccup that the default rate will skyrocket.
I tried it with $1000 to test the waters and have had the same experience. The defaults in this mainly positive environment are concerning, so I am pulling out money as the interest accrues rather than reinvesting it.

lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 11:55 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by lack_ey » Wed Jul 22, 2015 11:50 am

Cherokee8215 wrote:After being a landlord on some low-end rentals, I vowed never again to put myself in a situation where people with not a lot of money and/or bad credit owe me money.
You can screen out FICO scores under 750 if you really want, and other such factors.

But the point here is diversification and assuming that you will see defaults. It's like junk bonds (or even stocks). You know a nontrivial number of them are going to be bad investments, but nevertheless you'll still net money, and quite possibly more money than in safer investments. A platform like this does all the dirty work for collections (they also take a cut of every transaction, naturally). Unlike rentals, you're not dealing with the underdiversified specific risks of individuals and properties. With hundreds or thousands of loans, it's a different experience.

Defaults don't mean that you'll get none of the owed money back, and they don't mean that the loans didn't pay you interest in the meantime. They're natural and part of the process.

If returns are in the range of 8-9% in good years, bad years would have to be awful to make the long-term rate of return worse than most other fixed income.

corpgator
Posts: 23
Joined: Wed Jul 22, 2015 12:00 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by corpgator » Wed Jul 22, 2015 12:14 pm

For my master's degree stat. Data mining course, we used lendingclub as our data for our class project and came to the conclusion that it is a bad investment. The categories that lendingclub assigns are pretty well correlated with defaults, higher categories with lower returns had fewer defaults. All categories besides the lowest two provided about the same rates of return when factoring in defaults.

The only correlation to positive returns were defaults, but the information to identify who will default is not provided up front by lendingclub. Our historical data did have more info such as defaults prior to lending club and other credit report info not provided beforehand, but even with those, we could not identify who would default using models that were trained on subsets of the data and applied to the rest or through any other method.

That of course makes since because banks have a hard time with huge teams in identifying who will default. Lendingclub doesn't care since they take a portion of each loan up front amd always make their money.

The only strategy we found that works is to immediately sell any loan on the secondary market that misses a payment. Some states don't allow you to make loans directly but you are allowed to buy from others, so you can pawn off that going bad loan on some other poor sucker and at least recoup some of your principal invested. That takes a lot of active management, though.

JamesNYC
Posts: 72
Joined: Wed Jul 15, 2015 1:26 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by JamesNYC » Wed Jul 22, 2015 12:31 pm

Credit-bureaus treat peer to peer lending sites as "high risk" sources of credit, and for this reason this reduces your credit-score to use Lending Club and Prosper. I think this factor could deter folks with good credit from using these sites, and something that contributes to a higher-risk pool of people taking loans.

I know this because I have used Lending Club to take out three separate loans (at different times, only 1 loan is allowed per person at any given time) for over $20k+ each. Because I do not own a home and banks shy away from offering unsecured credit-lines, I found that Lending Club offered me the best rate. Because I have great credit I was always able to get a loan for around 8-9%, which may not be as low as a HELOC, is way better than unsecured credit-lines through a bank or credit-card debt.

I actually wound up paying each loan off quite early which lowered my effective interest quite a bit.

As a side-note, pre-paying your loans cuts into the return the lenders get, since there are no prepayment penalties (There is a portion of fixed interest paid at loan origination that mitigates this a bit.) This is another reason lenders may wind up needing to loan to riskier borrowers to seek a return.

Overall, it's good these services exists, but strictly from a Boglehead standpoint they are noise; I wouldn't consider investing through these services unless it was for entertainment/gambling/fun.
Last edited by JamesNYC on Wed Jul 22, 2015 12:50 pm, edited 1 time in total.

rca1824
Posts: 719
Joined: Tue Jun 03, 2014 9:33 am

Re: Why I Said "No" to Peer-to-Peer Lending

Post by rca1824 » Wed Jul 22, 2015 12:34 pm

denovo wrote:The way I think about it is , I am not a banker, I have no experience in the science of lending from the lender's side. People who come on this site are likely people who have been shunned by the conventional lending industry for various reasons. There's already many ways for most "responsible" consumers to get cheap debt, whether through home loans, equity, auto financing, and 0 percent 12 month credit offers. Do I really think I am smarter than banks who have years of institutional knowledge?

Yes, this critique could also apply to hard-money lending.
That kind of thinking assumes that bankers are perfect at screening borrowers and that any borrower shunned by a bank is not worth lending to. It is possible that banks make mistakes. It is possible that banks are too conservative, passing up positive-expected-return borrowers because of the risk, perhaps due to some mandate from ownership or the government to have certain risk controls. It is possible that the borrower for whatever reason doesn't want to go to a bank and prefers to use the internet instead for a direct loan. There are a thousand possible reasons. Banks are not perfect. There are always margins that can be competed along. No single firm can satisfy every customer perfectly -- some are always going to slip through the cracks and that is precisely what competition is for, as people have alternatives.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

Spirit Rider
Posts: 12239
Joined: Fri Mar 02, 2007 2:39 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by Spirit Rider » Wed Jul 22, 2015 12:50 pm

Cherokee8215 wrote:If returns are in the range of 8-9% in good years, bad years would have to be awful to make the long-term rate of return worse than most other fixed income.
Tell that to people who made Prosper and Lending Club loans 2007 - 2009. Many of them ultimately had greater than half of their loans in default. Their average default rates in that period were often > 25%. It doesn't take losses like that, long to wipe out your return.

Now it is true they both have tightened up lending standards and it is no longer the wild wild west of peer-to-peer lending.

However, can you really call it peer-to-per lending now, when 80% - 90% of the capital is being provided by financial organizations.

JamesNYC
Posts: 72
Joined: Wed Jul 15, 2015 1:26 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by JamesNYC » Wed Jul 22, 2015 12:53 pm

That kind of thinking assumes that bankers are perfect at screening borrowers and that any borrower shunned by a bank is not worth lending to. It is possible that banks make mistakes. It is possible that banks are too conservative, passing up positive-expected-return borrowers because of the risk, perhaps due to some mandate from ownership or the government to have certain risk controls. It is possible that the borrower for whatever reason doesn't want to go to a bank and prefers to use the internet instead for a direct loan. There are a thousand possible reasons. Banks are not perfect. There are always margins that can be competed along. No single firm can satisfy every customer perfectly -- some are always going to slip through the cracks and that is precisely what competition is for, as people have alternatives.
I understand what you are saying here but I'm not sure this is accurate. Lending Club and Prosper only present the investor with the prospective-borrowers credit-score, as well as a generic "objective" for the money that is in no-way binding. This is likely the same criteria a bank uses to evaluate someone applying for an unsecured loan. The process for banks as well as P2P lending sites does not allow for personalized stories to sway the lender one way or the other; the prospective-borrower is purely a number.

JamesNYC
Posts: 72
Joined: Wed Jul 15, 2015 1:26 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by JamesNYC » Wed Jul 22, 2015 12:58 pm

The rates on P2P lending sites are competitive, but they aren't the best. It's unlikely a prospective borrower would turn to Lending Club or Prosper as the first-place for credit. This makes the pool of prospective borrowers riskier than they seem if you assume that a responsible borrower would explore credit first with a lower rate and turn to P2P lending only after exhausting over options.

This is said by somebody who's borrowed from Lending Club on 3 separate occasions; it certainly wasn't my first choice. For me, I only borrowed for a short-time and basically used it as a bridge. I wouldn't assume that is the case for most of the borrowers who come with good credit-scores.

User avatar
Maynard F. Speer
Posts: 2139
Joined: Wed Mar 18, 2015 10:31 am

Re: Why I Said "No" to Peer-to-Peer Lending

Post by Maynard F. Speer » Wed Jul 22, 2015 1:07 pm

I'm cautious about the sector, but you do have to see it in perspective ..

We've had P2P lending since (I believe) 2004 .. and its survived 2008 (about the best battle-test I could imagine) .. Of course it will come down to the protocols of the platform - so there's a fundamental incentive for them to accurately screen borrowers, as this is the difference between being sustainable and going bankrupt

Just as with bonds, the market sets its own rates based on risk and demand .. The difference with bonds and bank lending is a) governments haven't pumped $trillions into P2P lending to hammer rates down, and b) it's cheaper for both parties

Just as with stocks, diversification gets you closer to the market return .. I probably lend to over 10,000 businesses and individuals (I automate all my lending, otherwise it would be a part time job) .. Defaults are constantly priced into lending rates, as the efficiency of the system is constantly tracked and improved

When people get over the newness/fear of the sector, institutional managers will pile in, and I expect the headline rates will become a lot lower ... It's just a logical step towards a digital economy - banks in fact are starting their own P2P services to avoid obsolescence .. And I can tell you if I'd had enough defaults to flatten my returns so far this year, I'd sell out (re: bond fund performance)
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

randomguy
Posts: 8529
Joined: Wed Sep 17, 2014 9:00 am

Re: Why I Said "No" to Peer-to-Peer Lending

Post by randomguy » Wed Jul 22, 2015 2:00 pm

tyrion wrote:
fishingmn wrote:I put $10k into Lending Club 18 months ago - all in $25 loan segments. It didn't take too long to identify loans once you set up parameters.

I've been pulling it all out as I get payments. Even though I am still showing a 11%+ return I just don't like how 20 of them have defaulted. My biggest worry is if the economy has another hiccup that the default rate will skyrocket.
I tried it with $1000 to test the waters and have had the same experience. The defaults in this mainly positive environment are concerning, so I am pulling out money as the interest accrues rather than reinvesting it.
This is somewhat a psychological issue. When you loan out money at 15%+ you need to expect 20%+ of the loans to default and be able to ignore that. If you look at the lending tree stats, something like the E grade loans have an average interest rate of 20.63% but a return of 9.73%. Thats a lot of defaults. I am guessing that most people will find that hard as the defaults tend to happen early (first 3 payments) while the winners will take the full term to pay you back.

It is a bit of an tax nightmare if you are not doing this in a tax deferred account if you have a couple thousand loans (imagine you want to invest 100k but don't want more than 100 dollars in anyone loan).

For fun go to: https://www.lendingclub.com/info/demand ... ile.action. For loans issued in 2008-2008, the average return was 1.94%. That is less than treasuries were paying. Now the 2009+ numbers look a lot better (looks to me like somewhere in the 6-8% is likely depending on if there is a big default spike in the next couple of years.)

lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 11:55 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by lack_ey » Wed Jul 22, 2015 2:12 pm

corpgator wrote:For my master's degree stat. Data mining course, we used lendingclub as our data for our class project and came to the conclusion that it is a bad investment. The categories that lendingclub assigns are pretty well correlated with defaults, higher categories with lower returns had fewer defaults. All categories besides the lowest two provided about the same rates of return when factoring in defaults.

The only correlation to positive returns were defaults, but the information to identify who will default is not provided up front by lendingclub. Our historical data did have more info such as defaults prior to lending club and other credit report info not provided beforehand, but even with those, we could not identify who would default using models that were trained on subsets of the data and applied to the rest or through any other method.

That of course makes since because banks have a hard time with huge teams in identifying who will default. Lendingclub doesn't care since they take a portion of each loan up front amd always make their money.

The only strategy we found that works is to immediately sell any loan on the secondary market that misses a payment. Some states don't allow you to make loans directly but you are allowed to buy from others, so you can pawn off that going bad loan on some other poor sucker and at least recoup some of your principal invested. That takes a lot of active management, though.
Could you elaborate on the conclusion that it's a bad investment? In which sense? All of the information here is about factors for improving default rate prediction over the given ratings, with the conclusion that there aren't really any, except for the one example of quickly dumping any note that misses a payment. i.e. that there doesn't really seem to be a way to screen notes for superior risk/return characteristics, other than perhaps not using the lowest-rated ones (which have higher default rates, so higher uncertainty than medium-rated ones, but no higher expected returns). And maybe not using the highest-rated ones because of the lower expected returns, albeit with lower uncertainty.

To me, a bad investment means something with poor risk/return characteristics relative to others that are available, which is not something you mentioned. In other words, if you get average results on lendingclub, this is worse than stocks, bonds, etc.? Was this investigated, or did you not mean it in that way?

User avatar
Maynard F. Speer
Posts: 2139
Joined: Wed Mar 18, 2015 10:31 am

Re: Why I Said "No" to Peer-to-Peer Lending

Post by Maynard F. Speer » Wed Jul 22, 2015 2:15 pm

randomguy wrote:For fun go to: https://www.lendingclub.com/info/demand ... ile.action. For loans issued in 2008-2008, the average return was 1.94%. That is less than treasuries were paying. Now the 2009+ numbers look a lot better (looks to me like somewhere in the 6-8% is likely depending on if there is a big default spike in the next couple of years.)
See, a return of 1.94% (in a likely worst-case-scenario) is not necessarily that bad .. Is that about the same as VBMFX from 2014-15?
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

User avatar
White Coat Investor
Posts: 14336
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Why I Said "No" to Peer-to-Peer Lending

Post by White Coat Investor » Wed Jul 22, 2015 2:22 pm

Jebediah wrote:Isn't this the noise we should be tuning out? How is the ramblings of a random blogger actionable or relevant?
Good golly people. Quit calling for threads to close. That's ridiculous. He's blogging about investing in an asset class. It certainly belongs on this board. Give me a break. Nothing personal on you, I just see this multiple times a week. Meanwhile random threads about people's vacations etc etc are all over the place.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

User avatar
White Coat Investor
Posts: 14336
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Why I Said "No" to Peer-to-Peer Lending

Post by White Coat Investor » Wed Jul 22, 2015 2:26 pm

Lots of people on this thread poo-pooing P2PL. Meanwhile, I keep making 12% a year on it. After 3.5 years, I'm still at 11.97%.
"Why not invest in TBM?"
Because this pays a lot more.
"But it's not as safe!"
That's why it pays a lot more.

If you want to skip it, that's fine. But realize that growing your money at 0% real and growing it at 9% real takes you to very different destinations. I'm not saying you should put 30% of your portfolio into it, but high returns are high returns, where ever they come from.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

User avatar
White Coat Investor
Posts: 14336
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Why I Said "No" to Peer-to-Peer Lending

Post by White Coat Investor » Wed Jul 22, 2015 2:31 pm

The problem with the article is that it has a list of "benefits" but doesn't include the two greatest benefits. Here is the list in the article:
Benefits

The personal loan segment is a recently-available segment for retail investors, and provides a new way to add diversification within a fixed income portfolio.
Investors who wish to actively manage their fixed income investments can now do so with P2P notes, even with limited capital.
Given the small minimum investment per note ($25), a high level of loan diversification can be obtained.
While lending standards were initially loose for P2P platforms, today they are more stringent. Additionally, P2P providers update their performance records, including loan default rates and returns, on a regular basis.
You can filter loans by criteria that you choose, so you can “personalize” the risk characteristics for each individual loan you select. You can also select groups of notes that fit the amount of overall risk and return you prefer.
Personal loans, while risky, provide a high return and different risks than other fixed income investments. For example, personal loan notes are different than high yield corporate notes.
Some investors may find it fun to select the individual loans they wish to participate in, and cherry-pick certain loans to attempt “better returns.” There are differences to be found, even between identically graded loans.
Here are the real benefits and the reasons I invest in them.

1) High returns
2) Low correlation with the rest of my portfolio
3) Easily obtained diversification (far easier than syndicated real estate investments with their $5000-250,000 minimums)
4) Relatively easily automated
5) Active management actually works, unlike picking stocks

The downsides?

1) Single party risk- If LC or Prosper go under, it's going to be ugly.
2) There are lots of defaults.
3) It takes a long time to invest your money in the investment.
4) It can take a while to get out.
5) Relatively unproven.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

randomguy
Posts: 8529
Joined: Wed Sep 17, 2014 9:00 am

Re: Why I Said "No" to Peer-to-Peer Lending

Post by randomguy » Wed Jul 22, 2015 2:43 pm

Maynard F. Speer wrote:
randomguy wrote:For fun go to: https://www.lendingclub.com/info/demand ... ile.action. For loans issued in 2008-2008, the average return was 1.94%. That is less than treasuries were paying. Now the 2009+ numbers look a lot better (looks to me like somewhere in the 6-8% is likely depending on if there is a big default spike in the next couple of years.)
See, a return of 1.94% (in a likely worst-case-scenario) is not necessarily that bad .. Is that about the same as VBMFX from 2014-15?
It is the worst case on record. There is no way to know how close to the worst case that is. If the US government reacted the way Europe did and the recovery was a lot longer (call it 7 years instead of 3) and you can easily imagine much worse results. And if you look at the details, the people with low quality loans actually lost money. VBMFX has returned 5.76%(2014) and -.22%(2015 YTD) which is a better than 1.94%.

Note that for everyone like EmergDoc making 12%, there is going to be someone making less in order to get the site average down. Can you get average returns? Sure if you can generate a portfolio diversified across the various categories and the same geographic diversification (i.e. Wyoming might have a high default rate with the collapse of energy prices while some other state doesn't). Can you beat the average? Maybe. I wouldn't be shocked to learn the current market is a bit inefficient.

Maverick3320
Posts: 530
Joined: Tue May 12, 2015 2:59 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by Maverick3320 » Wed Jul 22, 2015 2:50 pm

I don't think anyone here is arguing that P2P lending should be 100% of your retirement portfolio. Yes, I would imagine a lot of people that couldn't get loans elsewhere turn to P2P lending...which is why their respective loans come with a correspondingly high rate. I've had quite a few defaults, but I've also had quite a few loans at 20-25% interest that didn't default (or haven't yet, anyway).

As someone who picks my own loans on LendingClub, I can say that there are an awful lot of borrowers with 750+ FICO scores, and incomes much, much higher than the average taking out loans. I would imagine these people came to lendingClub because they can simply get a lower rate on a loan due to P2P cutting out the middle man (a bank). Yes, the P2P platform takes a cut, but that also means they have skin in the game as well. If LendingClub starts seeing a high percentage of non-performing loans, the lenders (like me) start heading for the door. Better homework on their end leads to more lenders, which means higher profits for them.

Ultimately, it is just another asset class. Nothing less, nothing more.

User avatar
HomerJ
Posts: 13575
Joined: Fri Jun 06, 2008 12:50 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by HomerJ » Wed Jul 22, 2015 3:03 pm

Maverick3320 wrote:From personal experience, my returns have been around 11% over the last few years.
But the economy has been growing.

What happens when the next crash happens, and millions of people lose their jobs?

11%
11%
11%
11%
-80%

Jebediah
Posts: 579
Joined: Tue Aug 28, 2012 9:19 pm
Location: Austin TX

Re: Why I Said "No" to Peer-to-Peer Lending

Post by Jebediah » Wed Jul 22, 2015 3:14 pm

HomerJ wrote:
Maverick3320 wrote:From personal experience, my returns have been around 11% over the last few years.
But the economy has been growing.

What happens when the next crash happens, and millions of people lose their jobs?

11%
11%
11%
11%
-80%
You're talking about the stock market, right?

User avatar
HomerJ
Posts: 13575
Joined: Fri Jun 06, 2008 12:50 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by HomerJ » Wed Jul 22, 2015 3:19 pm

EmergDoc wrote:I'm not saying you should put 30% of your portfolio into it, but high returns are high returns, where ever they come from.
Why aren't you saying that? High returns are high returns, wherever they come from, right? Or does risk matter?

(Sorry to be sarcastic, but read what you're saying... "Woo-hoo! 11.97% a year after 3.5 years! I can't believe you guys are poo-pooing this!")

User avatar
HomerJ
Posts: 13575
Joined: Fri Jun 06, 2008 12:50 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by HomerJ » Wed Jul 22, 2015 3:19 pm

Jebediah wrote:
HomerJ wrote:
Maverick3320 wrote:From personal experience, my returns have been around 11% over the last few years.
But the economy has been growing.

What happens when the next crash happens, and millions of people lose their jobs?

11%
11%
11%
11%
-80%
You're talking about the stock market, right?
Yeah, but the stock market goes back up... If 80% of your loans default, they ain't coming back...

(But after reading more of this thread and seeing how things went in 2008, I will admit my example may be over-the-top)

lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 11:55 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by lack_ey » Wed Jul 22, 2015 3:28 pm

Performance in 2008-2009 has already been linked, but here it is again:
https://www.lendingclub.com/info/demand ... it-profile

Algorithms and selection were a bit different then, sure. They would claim for the better, after the initial rocky start.

Note that A loans have ranged between about 4% to 6% net, even through the Great Recession... Again, you need to do a lot of discounting and assume future returns are worse than seen through some pretty rough economic times to come up with a long-term return number and risk/reward characteristics that look clearly unfavorable compared to most fixed income on the market.

randomguy
Posts: 8529
Joined: Wed Sep 17, 2014 9:00 am

Re: Why I Said "No" to Peer-to-Peer Lending

Post by randomguy » Wed Jul 22, 2015 3:43 pm

HomerJ wrote:
EmergDoc wrote:I'm not saying you should put 30% of your portfolio into it, but high returns are high returns, where ever they come from.
Why aren't you saying that? High returns are high returns, wherever they come from, right? Or does risk matter?

(Sorry to be sarcastic, but read what you're saying... "Woo-hoo! 11.97% a year after 3.5 years! I can't believe you guys are poo-pooing this!")
It should be noted that over the last 3 years VTI returned a bit over 18% and the returns are much more tax advantaged. I will let you decide if your peer to peer loans are more like stocks or bonds in terms of expected volatilitity, risk, and how liquid they are. And if you think of them as bonds you have to decide if they are riskier than lets say Peurto Rico Munis (~10%), Russian Fed bonds (was as high as 16% looks more like 12%) or Greek bonds (10%+) as it is easy to get some nice looking yields if you are investing in risky assets. Most of those high yield assets will make people rich as the bad stuff being priced in will not happen. A couple of them though will cause people to go broke.

User avatar
Maynard F. Speer
Posts: 2139
Joined: Wed Mar 18, 2015 10:31 am

Re: Why I Said "No" to Peer-to-Peer Lending

Post by Maynard F. Speer » Wed Jul 22, 2015 4:14 pm

randomguy wrote:
Maynard F. Speer wrote:
randomguy wrote:For fun go to: https://www.lendingclub.com/info/demand ... ile.action. For loans issued in 2008-2008, the average return was 1.94%. That is less than treasuries were paying. Now the 2009+ numbers look a lot better (looks to me like somewhere in the 6-8% is likely depending on if there is a big default spike in the next couple of years.)
See, a return of 1.94% (in a likely worst-case-scenario) is not necessarily that bad .. Is that about the same as VBMFX from 2014-15?
It is the worst case on record. There is no way to know how close to the worst case that is. If the US government reacted the way Europe did and the recovery was a lot longer (call it 7 years instead of 3) and you can easily imagine much worse results. And if you look at the details, the people with low quality loans actually lost money. VBMFX has returned 5.76%(2014) and -.22%(2015 YTD) which is a better than 1.94%.

Note that for everyone like EmergDoc making 12%, there is going to be someone making less in order to get the site average down. Can you get average returns? Sure if you can generate a portfolio diversified across the various categories and the same geographic diversification (i.e. Wyoming might have a high default rate with the collapse of energy prices while some other state doesn't). Can you beat the average? Maybe. I wouldn't be shocked to learn the current market is a bit inefficient.
Well they're different risks, aren't they ... The risk to bonds (historically) has been inflation, but rising rates are the immediate problem .. Presumably the risk to P2P lending is another financial crisis, which stumps people/businesses' abilities to repay loans

I'm P2P lending in the UK (closer to Europe), and we got through 2008 with higher defaults, but still positive returns (I think in the same region of 1.9)

As for beating the market .. It's a meaningless concept to me .. It's supply and demand .. The market's essentially efficient - in that lenders set rates, and bad debt statistics are constantly tracked, and if rates are too high, borrowers will go elsewhere

These are my own lending rates against the market averages - so I aim for about 2% above, and avoid the highest risk band ... It's impatience and lack of experience that means other lenders are lending out at 2% below

Image

The beauty of lending out at higher rates is when you want to sell loans back to the market, they go in seconds - people who aren't aware of this just want to recycle their money quicker (it makes little sense to do so) .. Debt defaults often occur years into a loan, when much of the value's already paid back - so sometimes I draw down or sell back to the market for rebalancing, which means I'm often making the offer rate and missing the defaults (so this platform, I think I'm making about 16% this year - at least the way I calculate it, I've also reduced exposure) .. It's very easy to be passive and beat the market rate, but if you're a little active, it's like being a bond manager in a market full of 'mom & pop' investors

But a few years of despair in bond markets, and the sector will be flooded, and nowhere near as easy as it is today
Last edited by Maynard F. Speer on Wed Jul 22, 2015 4:19 pm, edited 2 times in total.
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

User avatar
White Coat Investor
Posts: 14336
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Why I Said "No" to Peer-to-Peer Lending

Post by White Coat Investor » Wed Jul 22, 2015 4:15 pm

randomguy wrote:
HomerJ wrote:
EmergDoc wrote:I'm not saying you should put 30% of your portfolio into it, but high returns are high returns, where ever they come from.
Why aren't you saying that? High returns are high returns, wherever they come from, right? Or does risk matter?

(Sorry to be sarcastic, but read what you're saying... "Woo-hoo! 11.97% a year after 3.5 years! I can't believe you guys are poo-pooing this!")
It should be noted that over the last 3 years VTI returned a bit over 18% and the returns are much more tax advantaged. I will let you decide if your peer to peer loans are more like stocks or bonds in terms of expected volatilitity, risk, and how liquid they are. And if you think of them as bonds you have to decide if they are riskier than lets say Peurto Rico Munis (~10%), Russian Fed bonds (was as high as 16% looks more like 12%) or Greek bonds (10%+) as it is easy to get some nice looking yields if you are investing in risky assets. Most of those high yield assets will make people rich as the bad stuff being priced in will not happen. A couple of them though will cause people to go broke.
Don't worry. I own VTI too. In fact, I have a lot more money in it than I have in P2P Loans. So if VTI does awesome and every P2PL in the world defaults, I'll still retire well.

It's not that P2PLs are stocks that should be compared to VTI, or bonds that should be compared to Puerto Rican Bonds. It's that they're different. They have low correlation to other stuff in my portfolio and high returns. That's why I added them. At any rate, I trust that the likelihood of complete default is far higher for the leadership of Puerto Rico, Russia, and Greece than for thousands of Americans who would rather pay 20% on their credit card debt than 30%. One of the exercises I did prior to jumping in to P2PLs was calculate just how many defaults I'd have to see to actually lose money. It was a ridiculously high percentage when the average yield is 20% or so. So in my view, my bigger risk is the single party risk with Lending Club, NOT the defaults.

My comment about returns is that it appears to me that there are many risk-averse investors who haven't actually calculated out the returns they need to meet their goals (or don't actually calculate their own returns.) I'm always surprised to see people holding a portfolio with an expected real return of -1 to 1%. That basically means you have to save everything you hope to spend later in retirement. I'd rather see my portfolio do some of the heavy lifting, so I've decided to take some risk with it. So far, that has been a great decision.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

User avatar
FelixTheCat
Posts: 1688
Joined: Sat Sep 24, 2011 12:39 am

Re: Why I Said "No" to Peer-to-Peer Lending

Post by FelixTheCat » Wed Jul 22, 2015 4:28 pm

Interesting article regarding single party risk.

How is P2P single party risk any different? Have people forgotten about Enron, Lehman Brothers, AIG, Worldcom and the multitude of bank failures? Those are some stocks that defaulted where people didn't get their money back. What about real estate? I remember people "Strategically Defaulting" and people unable to pay their notes and lost their real estate. How about the current bond market? Anyone own Greek bonds?
Felix is a wonderful, wonderful cat.

Jebediah
Posts: 579
Joined: Tue Aug 28, 2012 9:19 pm
Location: Austin TX

Re: Why I Said "No" to Peer-to-Peer Lending

Post by Jebediah » Wed Jul 22, 2015 4:28 pm

EmergDoc wrote: I'm always surprised to see people holding a portfolio with an expected real return of -1 to 1%. That basically means you have to save everything you hope to spend later in retirement. I'd rather see my portfolio do some of the heavy lifting, so I've decided to take some risk with it. So far, that has been a great decision.
Oh man, you came so close. I wish you'd have just gone ahead and said it: we can argue about our preference of parlor game but "investing" is gambling pure and simple, and we do it because we want (feel entitled to) more money than we can earn.

User avatar
White Coat Investor
Posts: 14336
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Why I Said "No" to Peer-to-Peer Lending

Post by White Coat Investor » Wed Jul 22, 2015 6:04 pm

Jebediah wrote:
EmergDoc wrote: I'm always surprised to see people holding a portfolio with an expected real return of -1 to 1%. That basically means you have to save everything you hope to spend later in retirement. I'd rather see my portfolio do some of the heavy lifting, so I've decided to take some risk with it. So far, that has been a great decision.
Oh man, you came so close. I wish you'd have just gone ahead and said it: we can argue about our preference of parlor game but "investing" is gambling pure and simple, and we do it because we want (feel entitled to) more money than we can earn.
I prefer Graham's definition:
Benjamin Graham, along with David Dodd, attempted a precise definition of investing and speculation in their seminal work Security Analysis (1934). “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

randomguy
Posts: 8529
Joined: Wed Sep 17, 2014 9:00 am

Re: Why I Said "No" to Peer-to-Peer Lending

Post by randomguy » Wed Jul 22, 2015 7:00 pm

EmergDoc wrote: Don't worry. I own VTI too. In fact, I have a lot more money in it than I have in P2P Loans. So if VTI does awesome and every P2PL in the world defaults, I'll still retire well.

It's not that P2PLs are stocks that should be compared to VTI, or bonds that should be compared to Puerto Rican Bonds. It's that they're different. They have low correlation to other stuff in my portfolio and high returns. That's why I added them. At any rate, I trust that the likelihood of complete default is far higher for the leadership of Puerto Rico, Russia, and Greece than for thousands of Americans who would rather pay 20% on their credit card debt than 30%. One of the exercises I did prior to jumping in to P2PLs was calculate just how many defaults I'd have to see to actually lose money. It was a ridiculously high percentage when the average yield is 20% or so. So in my view, my bigger risk is the single party risk with Lending Club, NOT the defaults.

My comment about returns is that it appears to me that there are many risk-averse investors who haven't actually calculated out the returns they need to meet their goals (or don't actually calculate their own returns.) I'm always surprised to see people holding a portfolio with an expected real return of -1 to 1%. That basically means you have to save everything you hope to spend later in retirement. I'd rather see my portfolio do some of the heavy lifting, so I've decided to take some risk with it. So far, that has been a great decision.
You can hold a bunch of these junky high yielding bonds and avoid some of the single party risk but yeah the odds of a 100% loss in one of them is higher. I have no clue what your actual returns will look like but the point is when you want to lend to people with poor credit, their are a lot of options out their in addition to P2P lending. As far as not losing money. From 2007-2008 D grade loans (something like 18%) and f+g (23%+) lost -.85% and 2.34% annually on lending tree. So it seems like that ridiculously high percentage can happen. FWIW The tier in the middle made 3%. Note we are talking tiny amounts of money (~6 million bucks) compared to today (3.5 billion in 2014) so the user base is probably drastically different now then back then. How that translates into returns is hard to say. Personally I expect lower in the future but it is just a guess.

ANd yeah there are a ton of people here that are too risk adverse which is going to require them to work longer and save more than they could. Most of them need to deal with their stock volatility phobia before thinking about things like lending tree. I am not sure those people would win by say taking 10% of their stock allocation and shoving into P2P lending. Now shoving 10% of their bonds (I am talking about the 30/70 club at 40 for a reference) might make sense. But I have a feeling they would lose sleep every time a loan went late or was charged off.

User avatar
Maynard F. Speer
Posts: 2139
Joined: Wed Mar 18, 2015 10:31 am

Re: Why I Said "No" to Peer-to-Peer Lending

Post by Maynard F. Speer » Wed Jul 22, 2015 8:01 pm

This is RateSetter (UK P2P platform) - showing, with diversification and an automated compensation fund, returns are as steady as cash (albeit more conservative than some of the other platforms) .. Trustnet gives it a risk rating of 1

The question would be: what kind of financial situation could trigger a level of bad debt the system wasn't built to manage, and what asset classes would be safe havens? .. Maybe it's just hammered into us that risk and return follow some kind of linear relationship - I'm not sure that's necessarily the case

Image
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

Grt2bOutdoors
Posts: 21747
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Why I Said "No" to Peer-to-Peer Lending

Post by Grt2bOutdoors » Wed Jul 22, 2015 8:10 pm

EmergDoc wrote:Lots of people on this thread poo-pooing P2PL. Meanwhile, I keep making 12% a year on it. After 3.5 years, I'm still at 11.97%.
"Why not invest in TBM?"
Because this pays a lot more.
"But it's not as safe!"
That's why it pays a lot more.

If you want to skip it, that's fine. But realize that growing your money at 0% real and growing it at 9% real takes you to very different destinations. I'm not saying you should put 30% of your portfolio into it, but high returns are high returns, where ever they come from.
Reversion to the mean, doc. What goes up, can come down, sometimes a bit harder than you might anticipate. I believe you may be experiencing a bit of "recency bias" in your good performance stats. :D You honestly believe, P2P is any safer than real-life banking? Come-on, now. BTW, as an aside, Wells Fargo is one of the backers of The Lending Club (who knew, a bank is behind it!) I'm sure they are making more than 12% though.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Day9
Posts: 825
Joined: Mon Jun 11, 2012 6:22 pm

Re: Why I Said "No" to Peer-to-Peer Lending

Post by Day9 » Wed Jul 22, 2015 8:25 pm

My gut feeling is that you are NOT COMPENSATED for the level of risk you are taking.

Shouldn't these borrowers be paying 20%-30%+ like some do on credit cards? But you only charge them 10%? What am I missing?
I'm just a fan of the person I got my user name from

User avatar
Maynard F. Speer
Posts: 2139
Joined: Wed Mar 18, 2015 10:31 am

Re: Why I Said "No" to Peer-to-Peer Lending

Post by Maynard F. Speer » Wed Jul 22, 2015 9:10 pm

Day9 wrote:My gut feeling is that you are NOT COMPENSATED for the level of risk you are taking.

Shouldn't these borrowers be paying 20%-30%+ like some do on credit cards? But you only charge them 10%? What am I missing?
The money banks make are lining much bigger pockets than P2P firms ... And banks clearly do better lending money than they do putting it in index funds

(My only fear is, if in 10 years time, we're all saying "Remember when P2P lending seemed like such a good idea?" ... Unknown unknowns .. The known knowns seem absolutely fine)
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

randomguy
Posts: 8529
Joined: Wed Sep 17, 2014 9:00 am

Re: Why I Said "No" to Peer-to-Peer Lending

Post by randomguy » Wed Jul 22, 2015 9:15 pm

Day9 wrote:My gut feeling is that you are NOT COMPENSATED for the level of risk you are taking.

Shouldn't these borrowers be paying 20%-30%+ like some do on credit cards? But you only charge them 10%? What am I missing?
You charge them 15-25%. After 20% of them default, your returns are in the 8-12% range.

User avatar
White Coat Investor
Posts: 14336
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Why I Said "No" to Peer-to-Peer Lending

Post by White Coat Investor » Wed Jul 22, 2015 10:07 pm

Day9 wrote:My gut feeling is that you are NOT COMPENSATED for the level of risk you are taking.

Shouldn't these borrowers be paying 20%-30%+ like some do on credit cards? But you only charge them 10%? What am I missing?
No, I charge them 20%. I make 12% after the defaults.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

User avatar
White Coat Investor
Posts: 14336
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Why I Said "No" to Peer-to-Peer Lending

Post by White Coat Investor » Wed Jul 22, 2015 10:13 pm

Day9 wrote:My gut feeling is that you are NOT COMPENSATED for the level of risk you are taking.

Shouldn't these borrowers be paying 20%-30%+ like some do on credit cards? But you only charge them 10%? What am I missing?
You might be right. Tell me, what are the expected returns on a well-selected, diversified P2PL portfolio? The fact is nobody knows. There simply isn't enough data. You can wait 100 years until there is, or you can take a chance that fewer than 40% of them will default on you over 3-5 years like I have.

I mean, run the numbers. Assume 1 out of 5 defaults on you on day one. Then you make 20% a year for 3 years on the rest of them. Where do you end up? 80% * 1.6 = 44% gain. Annualize it and it comes out to about 9%. Now, assume 40% default on day one. 60% * 1.6 = -4% (loss), which annualizes out to a loss of 1% a year. Now, what percent of loans have defaulted in the past? About 5% over 3 years. So 8+ times as many as have defaulted in the past can default and I'll still break even. I dunno, seems like pretty low-hanging fruit to me. If it wasn't for the single-party risk and the difficulty getting enough loans that meet my criteria I might bump it up from 5% to 10-15% of my portfolio.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

Post Reply